Communities and Local Government Committee

Oral evidence: DCLG Annual Report 2014-15, HC 531
Monday 11 January 2016

Ordered by the House of Commons to be published on 11 January 2016.

Members present: Mr Clive Betts (Chair); Bob Blackman; Helen Hayes; Kevin Hollinrake; Liz Kendall; Julian Knight; David Mackintosh; Mr Mark Prisk; Mary Robinson; Alison Thewliss.

Watch the session

Evidence from witnesses:

Questions 1 – 118

Witnesses: Melanie Dawes CB, Permanent Secretary, Peter Schofield, Director‑General, Housing and Planning, and Jacinda Humphry, Director of Finance, Department for Communities and Local Government, gave evidence.

Q1    Chair: Good afternoon and welcome to our first Committee meeting of the new year. Happy new year to everyone: to the witnesses, to the members and to everyone who has come to listen to our proceedings today. This is the first of two evidence sessions we will be taking on the DCLG’s Annual Report. First of all, just for the record, Committee members should express any interests that they may have and want to draw attention to. I am a vice president of the Local Government Association.

Helen Hayes: I declare that I am still a councillor in the London Borough of Southwark and I employ a councillor in my Parliamentary team.

David Mackintosh: I am a Northamptonshire county councillor.

Julian Knight: I employ a councillor on my staff.

Chair: Those are the interests we have to declare. Again, just for our records, it would be very helpful if you could say who you are and your positions, so we can be clear whom we are taking evidence from.

Melanie Dawes: Thank you very much, Mr Chairman. I am Melanie Dawes; I am the Permanent Secretary at the Department for Communities and Local Government.

Peter Schofield: I am Peter Schofield, Director‑General for Housing and Planning

Jacinda Humphry: I am Jacinda Humphry, Finance Director for the Department for Communities and Local Government.

Q2    Chair: Thank you very much for coming. Some of the issues that we want to raise are probably issues that we have raised before with your predecessors when they came to us. When we had the session last year, the National Audit Office had just produced a very strongly critical report about what they called the Department’s “limited understanding of the financial sustainability of local authorities and the extent to which they may be at risk of financial failure”. Your predecessor told us that we really had nothing to worry about, it was all in hand and the NAO’s criticism was somewhat unfair. Would you still hold that position or have you improved things since last year? Do you actually now know what is going on in local councils and what their financial problems are?

Melanie Dawes: Thank you very much for inviting us. First of all, I should add, it is absolutely at the heart of the Department’s responsibilities to make sure we do understand what is going on in local government, and I take my responsibility as accounting officer for making sure that we have good oversight of the system very seriously.

In the last year, we have listened to what the NAO and the Public Accounts Committee said. We have put a lot of effort into drawing together all the evidence we have of services and of finances across local government, looking at the system as a whole and the big factors that lie behind the sustainability, or otherwise, of the system. We have also been making sure that we have an understanding of how the distribution works and of any issues for individual councils.

We brought that analysis to bear particularly in the context of the recent spending review, and, in fact, a lot of the work we did with the Department of Health showed that there was a particular need and pressure on social care, which was reflected in the decisions that were made. I think we have improved in how we are bringing all that analysis to bear. I would never say that we cannot continue to improve, and we take the need to have good data and really good engagement with local government very seriously.

Q3    Chair: So, if any member around this table now were to ask, “What do you and the Department know about my local authority”, you would be able to give an immediate response, or get someone to give an immediate response, about how you thought their financial sustainability was going at present?

Melanie Dawes: I should be clear that we are not responsible for any individual local authority’s financial position; that is their responsibility, and that is a legal job that they have. But I would hope that, if anyone were to raise any material issue, we would be aware of that in the Department, at least in broad terms. Certainly if you were to say, for example, that there are particular issues regarding flood authorities or social care authorities, we would have an understanding of those broader pressures, and, I would hope, would have had some engagement with any particular council. We may or may not agree with the analysis, of course, but we would have a familiarity with the issues.

Q4    Chair: In the end, you are not responsible for running councils on a day‑to‑day basis, but you have some responsibility to Parliament to be aware of any council that was getting into difficulties. How do you go about monitoring individual councils so that you would be aware, in advance of a financial collapse, that they were heading in the wrong direction?

Melanie Dawes: In the first instance, we would expect the council themselves to make sure that they were flagging any risks. Section 151 officers have responsibility to flag if they think there is a concern; for example, that they may not be able to set a balanced budget. We would normally expect any council in that situation to come and talk to us as part of the conversations that they would also be having with their own members locally. Indeed, sometimes those conversations do happen and particular pressures are brought to our attention.

Similarly, if it is an issue of a particular service pressure, we keep in very close contact with the Department for Education and the Department of Health, in particular, on children’s services and social care, making sure that we are abreast of any issues around particular services. We bring that analysis to bear quite systematically in the Department, so that we are aware of any particular areas of concern, and we, with the Local Government Association, will sometimes raise those issues with councils if we feel we need to.

Q5    Chair: But, coming back to the financial point, you were indicating there that your Department would be alerted to problems via the council itself and the monitoring officer. If the monitoring officer is not doing their job—and if the council is failing, it might just be that the monitoring officer is failing in their duties as well—how would you know about that as a Department?

Melanie Dawes: We would expect to pick that up. If somebody is failing in their job, that is a serious concern. If a Section 151 officer is not, for whatever reason, able to discharge their responsibilities, we would expect to know about that.

Q6    Chair: How?

Melanie Dawes: We would know, because we have very regular conversations with all councils, and we also discuss those sorts of issues with the Local Government Association, who themselves do work with us. We would expect to know what was going on.

Q7    Chair: Would the LGA necessarily know, in those cases?

Melanie Dawes: I would expect so.

Q8    Chair: So we are relying on the LGA to tell the Department what is going on.

Melanie Dawes: That is one of the forms of intelligence; it is not the only one. It may or may not be something that comes up through data. That is another possible source. We may well know through, for example, particular service pressures, which is often one of the ways in which any pressures show themselves: Ofsted, the Care Quality Commission or others may already have picked up a concern about delivery and quality. It is very rare that a financial issue is going to occur in isolation. We are drawing on a range of information and, as I said, often on conversations that we are having.

Q9    Chair: You have not mentioned the word “auditor” once in that reply. The district auditor within the Audit Commission would presumably be alive to these matters. Has that link with the Department now broken down?

Melanie Dawes: No. Audit, in the end, at a local level, is an important part of flagging any risks, and that is another thing that we may look at. We do not produce reports of audit findings, but we do track data broadly on what the auditors are saying.

Q10    Chair: So there is no chance at all of the Department being surprised by any financial collapse or real difficulties of a local authority.

Melanie Dawes: I cannot say that we always know every single thing that is going on in every authority, but I would be surprised if a council was, for example, very close to not being able to set a budget for next year, and that we were not aware that they had real, substantive concerns that that was likely.

Q11    Chair: If you therefore became aware of those sorts of real concerns, what would the Department’s plan of action be?

Melanie Dawes: There are a number of things that we could do. As I said, sometimes it is about a particular service and a particular area. That may or may not be associated with, for example, particular concerns from Ofsted around children’s services; that has been the case with some councils. Then we would want to make sure that a conversation had happened about any funding needs that had arisen. For example, if the DfE wanted to set up a trust for children’s services, we would want to make sure that that had happened, because that is a possible cause of a funding gap.

If it is an issue—as, again, it sometimes is—around leadership, this is where the LGA’s peer review process can be particularly helpful in supporting a council through any changes that they might need to make, or any development that they might need to go through. If it is purely a question of finances, we would want to understand the root of the problem and act accordingly.

Q12    Chair: If it got to January or February and a council was in a position where it could not set a properly balanced budget and meet its statutory requirements, what would you do?

Melanie Dawes: It would depend on some of the things I have just mentioned. In the end, it is their responsibility locally to think about what they can do in those circumstances, and it is up to the members and the officers to work those options through. The primary support we would be giving would be in facilitating that.

Q13    Chair: Not stepping in?

Melanie Dawes: It would depend. As you know, we have the statutory ability to investigate and, in the end, to appoint commissioners if the Secretary of State feels that that is necessary. There is a high bar on that, for good reason. Typically this is, as you know, going to relate to a wider set of service issues and not just a financial issue.

Q14    Liz Kendall: Are there any councils that are currently at risk of financial failure?

Melanie Dawes: I would be surprised if any council was not able to set a budget for next year, which is, in the end, the primary concern that we would have, certainly when it comes to next year. Of course, we are in the middle of the consultation on the local government settlement for next year and beyond, so it is still subject to that settlement, but that would be my judgment.

Q15    Liz Kendall: Does the Department look at what the Government have set out over the course of the next Parliament, in terms of the spending review? Have you done any analysis of how many might be at risk over the Parliament?

Melanie Dawes: We have done a pretty thorough analysis of the overall pattern for local government. As part of the spending review, we looked at all the individual services, and particularly the ones that are increasingly dominant in terms of spending for upper‑tier authorities: children’s services and social care services. We also looked at the distribution and made sure that we understood how different patterns of spending allocations would affect different types of council, and we made adjustments in the settlement to reflect all of that. For individual councils, that really goes back to what I was saying to the Chairman regarding how we use our engagement with councils to get a feel for where the issues may lie.

Q16    Kevin Hollinrake: My local authority, North Yorkshire County Council, is faced with about £7 million more savings than expected, based on the proposed formula, and that is to be delivered over a very short timescale. In the future, are we going to move towards longer‑term settlements, where people can look into the future and plan with confidence, rather than having to plan from year to year?

Melanie Dawes: Yes. You raise a good point: the spending review, and then subsequently the settlement on which we are currently consulting, offers the prospect of a four‑year budget in exchange for an efficiency plan, and we have to work out how that efficiency plan needs to work. We do not want this to be some kind of bureaucratic exercise. But, subject to that, we hope that many councils will want to take up that offer. Councils said to us that that would be helpful: it would help them to manage their reserves more effectively, it would help them to plan transformation that they need, and it would allow them to spend up front with more confidence that they know what they are aiming at later.

Q17    Kevin Hollinrake: After the four years, what might we expect in terms of long‑term settlements?

Melanie Dawes: After the four years, we will then be moving into 100% business rates retention, and that will be a different—and potentially quite exciting—world for local government. We will be starting the consultation on that very shortly. But it will involve more services being delivered by local government in order to, if you like, frank the income that they receive from business rates, which they currently return to central Government. It is an opportunity to have quite a holistic look at a broader range of services that local government could take on that would actually make sense, given what they currently do, but we are just starting that thinking now.

Q18    Liz Kendall: One of the key achievements in your Annual Report and Accounts is having successfully encouraged local councils to freeze their council tax throughout the last Parliament, but the spending review assumes that all authorities are going to have maximum raises in council tax over the next five years. Have you changed your policy on council tax?

Melanie Dawes: That is a policy question, but the referendum principle is still there. On social care and the social care precept, councils suggested to us in the early autumn that they would like the flexibility to increase council tax, particularly to cover social care pressures, and that is something that Ministers agreed to, so that explains that specific change. It is a slightly different balance, reflecting the overall spending review pattern, but still with that referendum principle quite clearly part of the system.

Q19    Liz Kendall: What is the evidence on which you think all councils will use that maximum rise?

Melanie Dawes: We have not factored into our calculations—and this is only for the purposes of our own calculations—that everybody goes up to the maximum under the referendum principle, but we have assumed, in line with what has happened in the past, that the first 2%, councils increase in line with inflation, rather than to the full 2%. We have factored in that the whole social care precept is taken up, but those are just assumptions that lie behind our spending power calculations. They are not a request of local government; that will be very much for local councils to determine.

Q20    Liz Kendall: What happens if those assumptions are wrong?

Melanie Dawes: That will be a decision that individual councils will be taking. They have that opportunity to set that balance between what they want to spend, what they need to spend, and what they want to do in terms of council tax.

Q21    Liz Kendall: But the basis on which you are working, and Ministers are working, is that all councils will raise it to the maximum level. If they do not, what impact does that have on local services?

Melanie Dawes: We would assume that councils will factor that in when they make that decision. In the end, if the council chooses not to take up that flexibility, that will be a matter for them, and they will be doing that. They are, in the end, accountable to their local electorates. It is not something that we particularly feel we need to be requiring of them. It is an assumption behind our figures. We had to make some kind of assumption; we wanted to be clear what that was, but it is not, in any way, a request of local government. I think it is a reasonable assumption.

Q22    Mr Prisk: Turning to business rates, if I may, and the financial impact of any changes proposed, looking at the accounts for this financial year—2015 to 2016—it appears that there is something like a £700 million gap between the total local government resource DEL and the central share of business rates; I think it is 11.3 plays 10.6. What is the difference being spent on?

Melanie Dawes: You are right; this is the first year in which the local government DEL is less than the retained share. By law, we are required to make sure that the whole of business rates is spent on local government spending. There is not a specific grant that goes with that excess, but, overall, we can say that, when you take into account other money that is spent through local government—including things like, for example, the public health grant—the overall amount is still higher than the business rate number.

Q23    Mr Prisk: So is the £700 million compensating for Department of Health changes?

Melanie Dawes: More than the £700 million. Half of the £23 billion total, there or thereabouts, collected through business rates, is retained by local government; the other half is returned to central Government. You are right: in the past, all of that went straight back out again in the form of the revenue support grant. Now, as that grant is reduced, there is a gap, but it is more than made up for by the fact that there are other grants going out to local government, as is required by the Act. That includes the public health grant. There is not a hypothecated set of numbers in any formal sense here, but we are very confident that the overall numbers do add up.

Q24    Mr Prisk: So no one is losing out due to the gap.

Melanie Dawes: No, local government is still getting all of that £23 billion, one way or another, to spend, but they are getting it through slightly different routes.

Q25    Mr Prisk: Just looking at the shift over the next few years, you rightly described it as being an exciting shift, and it is also a challenging shift in many senses. Once we get to that point where central Government are not providing any central Government grants, and we are looking at a world in which the business rates and council tax money that is generated is spent locally, how is the Department going to control local authorities’ spending if you are not offering them any grants in the first place?

Melanie Dawes: I should say up front that we do not necessarily want to control their spending. We want to devolve more to them and give them more freedom than perhaps has been the case in the past, and with fewer strings attached as well. My experience is that when we talk to local government in a really constructive way about wanting to achieve something together, it is a really good conversation, whether that is about how to strike a deal on devolution, or whether it is, as we have found recently, to tackle the issues of the floods in Cumbria, Yorkshire and elsewhere together.

A strong, positive, collaborative relationship is a very good basis for getting things done together. We still have a lot more to do to improve on that, and there are areas such as health and care integration and the whole range of economic policies around devolution where there is still a lot more to do: to take the deals, for example, and really make a reality of that, working across central Government with local government. But there is no lack of willingness to work together, and, in the end, if there is a difference of view and local government chooses to make a different decision, then maybe that is the right thing; maybe Whitehall does not always know best.

Q26    Mr Prisk: Do you feel that the change in the business rate allocation reduces your obligation to provide oversight?

Melanie Dawes: No. We will have to work this through, in terms of exactly how it works, but my expectation is that, even with full business rate retention, there will still be some redistribution required among councils. I am sure that we will still have an accountability, in central Government and in my Department, for how that works, for overseeing that system and ensuring that those distribution formulae are appropriate, and so on. But it will be a slightly different relationship.

Q27    Mr Prisk: That is a more limited role, and it is interesting that you describe the redistribution of business rates as a possible lever. Clearly, Government Departments providing a local authority with a grant is an important lever as part of a wider financial oversight in that sense. Let us say that there is a need to reduce spending, either in a particular authority or in a group of authorities. How exactly do you implement that, if you have lost your grant‑making capability?

Melanie Dawes: It is going to vary a little bit by different policies. We have yet to determine what additional functions we will want to devolve to local government, or indeed local government might want to have devolved to them as part of the business rate retention. But as we then implement any changes, there will be really important questions about how far there is a national standard and what kind of statutory responsibility is on local government for how flexible the service needs to be. I am sure that there will be standards set out as to what is required, particularly when it comes to services for vulnerable people, perhaps, but that has yet to be determined. It is a good and open question at this stage, to be honest, as to how far that needs to be set at a national level and how far it is appropriate to let it be locally determined.

Q28    Mr Prisk: So you are content with the idea that, while oversight may operate in the strict financial sense, Government’s ability to control direct spending will be lessened.

Melanie Dawes: I am very comfortable with having a very open debate about this at this stage. I am under no illusions: given the large sums that will be raised by business rates, in the end, through national legislation, there will be huge interest in how that money is spent. There will clearly be very important accountability questions about it, and I am sure that there will be statutory responsibilities that go alongside that. But we have an open mind at this stage regarding precisely how tightly those are determined and precisely how much control the Government want to have.

Q29    Julian Knight: Your Department has cut 60% of its staff in the past five years, I believe. You have been asked to remove another 20% from your pay bill. How are you going to achieve that?

Melanie Dawes: I should clarify that the 60% includes the Government offices and the regional development agencies, so the reduction in the core Department was just under 40% on a like‑for‑like basis. But you are quite right: that was a substantial sum, achieved through quite a substantial restructuring. There was a big restructuring of the arm’s-length bodies, and so on. This time around, we put together some plans during the summer and the autumn, and we said to the Treasury and to our Ministers that we believed we could take a further 20% reduction to our pay bill.

Q30    Julian Knight: So you offered the 20%.

Melanie Dawes: We think that is achievable, yes.

Q31    Julian Knight: But did you offer it? You said, “That is what we are going for.”

Melanie Dawes: We were asked to come forward with some proposals; we were asked to look at up to 40%, and we said we thought we could do 20%. That is challenging, but we think it is achievable. We can say a little bit more about the areas. Jacinda might want to come in on this, but we are looking, for example, at our corporate functions across the group. We are looking at various non‑pay‑bill ideas, such as how to use our estates better, and we are also looking at getting more efficient, smarter and quicker in how we run our policy work with Ministers.

Q32    Julian Knight: You just said there that the estates are non‑pay‑bill.

Melanie Dawes: Yes, that is non‑pay‑bill.

Q33    Julian Knight: Is that included in the 20%?

Melanie Dawes: No, that is in addition. It is the non‑pay‑bill savings on top that allow us to get to an overall figure that is larger than 20%.

Q34    Julian Knight: So the pay bill will not be reducing by 20%. You are going to make some of that up with estates.

Melanie Dawes: No, I am sorry if I have not been clear: it is 20% off the pay bill, and then, in addition to that, we think we can make some savings on non‑pay‑bill.

Q35    Julian Knight: What will you stop doing; or will you just do the same things, but less well?

Melanie Dawes: At the moment, as we put together our plan for our policy outcomes for the Parliament—the phrase that the Government are using is the “single departmental plan”—we are looking at which teams we need in the Department to deliver on that. We are reviewing how we organise our resources, our people, our teams, and how we put our effort together—both in the core Department and across our arm’s‑length bodies—to make sure that fits with the work that we have to do in this Parliament. That offers some opportunities to redirect our effort. One of the things we will also be doing is thinking about where we simply need to have flexible capacity, to surge, for example, in response to the recent flooding.

We are doing that, and that is part of the story; that is essentially about prioritisation. The other part is about efficiency and effectiveness. It is partly about performance management, but it is also about structures, particularly in relation to the corporate side, that we think can be more efficient across the group.

Q36    Julian Knight: Is devolution presenting any savings to you?

Melanie Dawes: I do not expect so, no. We have yet to work through how we will want to work with local government on housing, as we devolve more responsibilities with them, and it is possible that they will want us to second to them some of the experts that we have in housing delivery, for example.

Q37    Julian Knight: So you will put some of the pay bill on to the combined authorities?

Melanie Dawes: No, I would expect that we will have to work through with them whether they want to borrow, or have sent to them, our staff for a period of time, whether they want to pay for them or whether they do not want to pay for them. We have not yet worked that through. It is a question that we will be asking them.

Q38    Julian Knight: It sounds like you are lending them, basically, and therefore they will be on the pay bill.

Melanie Dawes: That might well be appropriate, particularly in the short term, as we have done with Manchester on the housing investment fund. We simply provided some teams to work with Manchester, to build their capability in the short term, and we did that for free; we made that offer to them, and then there comes a time when we would expect them to be able to go it alone.

Q39    Julian Knight: What percentage of the 20% do you envisage removing from your central employees and effectively shunting on to combined authorities and other devolved bodies?

Melanie Dawes: We have not made any assumptions at all about devolution saving us money or costing us money. Our assumption is that it is broadly neutral for us.

Q40    Julian Knight: So this would be in addition to the 20%.

Melanie Dawes: No. Sorry if I have not been making this clear enough. What we may well do is decide that some of our staff—either in the core Department, or in the Homes and Communities Agency—might be more effective if they moved to work inside the relevant local authorities for a period of time. We might feel that that is an offer we can make to local government that is neutral to us on cost grounds, but is part of devolving those functions to them. I would not want that, frankly, to be a cost‑saving measure for central Government; I would not be approaching it in that spirit. It might be, over the longer term, that it is, but that is not something we are banking on for now.

Q41    Julian Knight: I would not suggest that it would be a cost‑saving measure; it was just a question of whether or not that is factored into your costings.

Melanie Dawes: It is not factored in as a positive or a negative.

Q42    Julian Knight: Taking devolution, are you envisaging that your Department will have a lesser role in the future in that regard?

Melanie Dawes: I do not think we will have a lesser role.

Q43    Julian Knight: With 20% fewer staff?

Melanie Dawes: 20%, we believe, is something that will not reduce our ability to deliver for Ministers at all. We can do this by getting more efficient. Jacinda, do you perhaps want to say something about our corporate functions?

Jacinda Humphry: One of the things that we are looking at, which we think will deliver quite significant dividends, is that we have several large arm’s‑length bodies like the HCA and PINS where we replicate the corporate functions that we have currently in the core Department; for example, some of the finance functions, which are my functions, and IT and communications. One of our first areas when looking for further efficiencies is to bring those together into a single service for the Department, and we think that will deliver quite significant dividends. Those are the sorts of practical efficiencies that we are looking at in the Department before we turn to looking at efficiencies in policy areas, where we know we have a lot to do as a Department.

Q44    Julian Knight: Overall, your staff engagement level, I believe, is some 57%, which is below average for Whitehall; that is compared, I think, to a base of 59%. Considering you are now effectively going to be cutting the pay bill by 20%, what are you going to do to improve that staff engagement?

Melanie Dawes: We were very encouraged that, although we were very honest with our staff about the sorts of efficiencies we might be looking at, and we told them in September that 20% was broadly the number that we were discussing with the Treasury, we had an improvement in our staff survey results in October of four points, from 53% to 57%. That shows that good, strong, clear communications helped us to get the engagement and mean that our staff are not, at the moment, feeling any sense of real concern about the next four years in DCLG. I would say rather the opposite: there is quite a lot of enthusiasm for a more positive and clear role for the Department in this Parliament, coming out of our big housing priorities—which I am sure we are going to come on to—and the important role we have in devolution, for example.

When you look at our staff survey results in detail, it is very interesting for us that, if you look at the individual aspects, such as quality of leadership, quality of individual line manager and people’s feelings about their team and their work, we are in the top quartile in eight of the nine strands across Whitehall, which is a really great place to be. When you ask, “Are you proud to be in DCLG?”, we are not low, but we are not as high as you would expect given that strength in people’s general confidence in the Department.

Q45    Julian Knight: So you think it is that one question that effectively skews the results.

Melanie Dawes: Personally, I believe—having been in the Department for just under a year—there is no reason why anyone who works in DCLG should not be proud of the Department and its role. We feel, as a team, very confident that we can spread that view across the Department further, given the big plan that we have to deliver on.

Q46    Julian Knight: Still, how is that going to manifest itself for staff? You have stated there that, through 360‑degree assessments of engagement and that sort of thing, you feel as if they are appreciative of the communication. That is all well and good, but how is that actually going to manifest itself in terms of this improved engagement on a day‑to‑day basis?

Melanie Dawes: What people want to know when they come into work in the morning is that they are doing a job that is valued and that is enjoyable.

Q47    Julian Knight: But what are you doing about that?

Melanie Dawes: What are we doing about that? In the end, we are going to need to be really clear about what we have to achieve; we are trying to do that at the moment with our plan. We have to make sure that the Department’s changes, and our re‑prioritisation of all our effort, are clearly related to that plan and that we are doing that work in tandem with our staff. We have to make sure, in the end, that we have the right leadership and management capacity to manage in a more flexible way, with slightly fewer resources.

These are all, in a way, quite intangible things. A lot of them boil down to strong leadership and management, and so having a strong senior cadre in the Department is very important. Our senior Civil Service contains around 60 or 70 people who are really responsible for the leadership and management of the Department. We put a lot of effort, as a top team, into making sure that that is a good, strong bunch of people who know what we are trying to do, and how.

Peter Schofield: As somebody who has been in the Department for about three years and has seen the journey over a longer period, I would flag up a number of things. The first is, as Melanie says, the importance of engaging with the rest of our top team, and our engagement levels for members of the senior Civil Service are really incredibly high compared to other parts of Whitehall.

The second thing is the importance of very clear priorities, whether about housing, devolution or public service reform. Our people can see the importance of that in terms of the overall Government agenda. That has been one of the reasons why pride, although it is not nearly as high as we would want it to be, has been coming up over the last few years.

The third thing, which links back to your first question as to how we deliver some of the savings on the policy side, is really about embedding a much greater project management discipline, which means that staff are always moving on to another big project. We do not have standing armies just waiting; we have staff who know that, whatever the next big thing is, whether it be starter homes, estate regeneration or even mobilising to address the flooding issues, they can be there and ready for something really exciting.

Q48    Kevin Hollinrake: This is probably a question for the Director of Finance. You have done very well in the last five years; you have more or less halved your core administration expenses, which must have been very difficult, so well done for that. But for this forthcoming year, 2015‑16, that seems to be going up by £50 million, reversing some of the hard work that you have already put in place. Why is that?

Jacinda Humphry: I should start by saying that that looks as if it is going up by £50 million, rather than actually going up by £50 million. I will explain and talk you through the discrepancy between those two numbers, because, in fact, our headcount has remained fairly steady between 2014-15 and 2015-16. There were some accounting adjustments that we had to make, so, as Finance Director, I will take you through those accounting adjustments, if you do not mind. The first of those was a revaluation of our property, which gave us a one‑off boost in our admin budgets. That was a revaluation of the QE2 Conference Centre and of Burlington House. The second was a historic accrual of exit costs of £9 million, which we never actually spent, and the third was unspent contingency of £10 million, which together account for quite a large chunk of that £50 million. The rest is the sort of forecasting variance you would expect to see.

Q49    Kevin Hollinrake: So you would describe that as exceptional; on a normalised basis, the trend is heading in the right direction.

Jacinda Humphry: It is heading in the right direction.

Q50    Kevin Hollinrake: You have another big chunk of costs to save over the next five years, another £94 million. How are you going to achieve that?

Jacinda Humphry: We talked about the 20% reduction in the core departmental staff pay bill, which accounts for about £13 million of that £94 million. In addition to that, we have planned £6 million of contract savings and estate savings from the core Department, so further rationalisation, better use of our buildings and moving to a different people‑to‑desks ratio is another £6 million. The arm’s‑length bodies have plans to deliver about £20 million of staff and non‑staff savings. We are planning for an increase in income from the HCA investment portfolio, which has been historically very good at delivering income for the Department, and also some regulator fees for PINS. Together, those amount to about £28 million.

Q51    Kevin Hollinrake: Will those go down as savings or income?

Jacinda Humphry: No, they are reductions in own costs. This is all contributing towards the £94 million in savings that we need to make to reduce our cost base. The income is a plus on that, but it helps us reduce our cost. The final area is tightening our financial management and forecasting, and reducing the level of departmental contingency that we hold by £27 million this year. That all adds up to £94 million

Q52    Kevin Hollinrake: You are confident that you will be able to deliver those savings, presumably.

Jacinda Humphry: Yes. We have planned for those savings.

Q53    Mary Robinson: The Government have announced plans for more housebuilding on land that is currently owned by the HCA. How will the Government’s direct commissioning of new homes work?

Melanie Dawes: I will pass that question to Peter, if I may.

Peter Schofield: Yes, that was the announcement last week by the Prime Minister. The intention here is to diversify the supply of new homes by directly commissioning with contractors to build homes at pace on public sector land.

There are two reasons why we want to do this. The first is to bring new entrants into housebuilding. Over the last 25 years, there has been a real consolidation of housebuilding: the top eight volume housebuilders account for something like 50% of housing output at the moment, and that is something that we have seen growing over the period that I described. The second issue here is trying to increase the rate of build‑out on sites, and looking at what we can do to deal with the risks that then manifest themselves in the quite high levels of return on capital that the volume housebuilders bring.

We are going to look at eight sites at least—we have talked about four pilot ones last week—but it is HCA land, where the HCA is going to hold that land and take forward the outline planning permission. When they get to that point, they will be looking to enter into joint ventures with a construction firm, a financial partner, or a combination of the two, which would then dilute the interest of the HCA into a minority stake. But, as part of that agreement, they will agree rates of build‑out on those sites, and then the joint venture would move forward and get detailed planning permission, invest in the infrastructure and then commission the build‑out at pace.

In that way, there is the opportunity, using the supply chain, to bring in smaller firms to work with the big construction firms, which could be interested in housebuilding but have not previously had access to the land or have worried about the cost of capital. By agreeing a build‑out rate up front as part of the joint venture, we can get the build‑out of those sites much more quickly than we have previously seen.

Q54    Mary Robinson: Why, particularly, do you think that this will deliver the homes more quickly?

Peter Schofield: I talked a little earlier about the scale of the existing output that is accounted for by the large volume housebuilders. They typically insist on a return on capital in excess of 20%. The result of that is that they build only at the speed at which they can see the sale coming forward. By putting the Government’s balance sheet at stake and by partnering with people who do not look for that scale of return, we can get the homes built at a faster rate, because we are not looking for that scale of return.

Q55    Mary Robinson: Why is it important that commissioning these projects is designed to help the smaller building companies?

Peter Schofield: It is all about getting new capacity back in. That capacity can come from a number of places, and small builders are one component. As I say, we have seen small builders coming out of the industry. Back at the end of the 1980s, small builders accounted for something like 38% of output, and now it is something like 15%, so that has come right down, and that clearly is a capacity that we would love to see come back in.

But it is not only that: we would love to see capacity come from the big construction firms, the Wates and the Laing O’Rourkes of this world. They have firepower and capacity. Their main construction tends to be around infrastructure, but not around housebuilding, and we would love housebuilding to be seen as part of infrastructure. These are all sources of capacity that we would love to have come back in, and this is a way of trying to do that, one of a number of ways that are part of our overall housing package.

Q56    Mary Robinson: In terms of numbers, how achievable do you think this is?

Peter Schofield: We are starting with the eight sites that I have described. It is very much a matter of seeing how it goes and trying it out. We are quite confident, because the Homes and Communities Agency has already been doing quite a lot of market testing over the last few months, and they will do more of that. This is about showing that the model can work. This is about land as equity into developments, but, as we generate the sales, that will deliver a return. That return can then be reinvested back into new acquisition, new sites, and hopefully we will see this being a significantly growing part of our overall housing output.

Q57    Mary Robinson: We are seeing the Government taking a direct step into this arena now. Should councils be commissioning directly on more sites?

Peter Schofield: We are looking more broadly at our relationship with councils and their role in delivering more housing supply. As part of our discussions with councils around the proceeds from the sale of high‑value assets, we want them to deliver additional homes from those sales, and then we net the rest off to fund their right-to-buy discount. There is a very important conversation, particularly with councils in London, to say to them, “How much more can you do to deliver housing supply?” That is going to be an important part of what we are trying to do as part of our housing package.

Q58    Mary Robinson: Has that conversation begun?

Peter Schofield: It has absolutely begun. You have seen, in the Housing and Planning Bill, the amendment that we laid setting out our intention that, if we do a deal with councils in London, we would see two new homes for every one that is sold as part of the high value assets scheme. We would love to see that happen. We are working closely with them and looking at their ambitions, to really make the most of the proceeds that come from that source.

Melanie Dawes: It has been really interesting to see in the last five or so years that some councils, particularly in London, have got to direct commissioning and have been setting up quite interesting commercial vehicles. I am thinking of some of the London boroughs here in particular. In a sense, they have got there slightly ahead of us and have found that this is something that can raise revenue and can also help them directly to address their housing need in a way that is quite flexible and suits their purposes. That is one thing that gives us confidence that we can also make a difference, in the way that we are proposing to try out.

Q59    Mr Prisk: Just briefly, on this issue of directly commissioning, as the client, do you know what proportion will be affordable?

Peter Schofield: As you know, affordable housing is set as part of a local plan and the discussions go on in that way. We have said that, in terms of this programme, we are looking for 40% of the homes to be starter homes, but, as we develop this out, this will be something that we discuss with local authorities as part of obtaining planning permission more broadly.

Q60    Mr Prisk: If we look at Northstowe, for example, where I think some 10,000 homes are planned as part of the pilot, do you have a proportion at the moment that you, as the commissioner of these works, are envisaging would be categorised as either starter or affordable homes?

Peter Schofield: The plan is, as I say, to have 40% starter homes as part of the overall package that we are delivering. This is going to be an important way in which we deliver the Government’s ambition of 200,000 starter homes as a whole. That is what we will be doing. The way we will do this is—as I said earlier in my answer to Ms Robinson—to agree the overall composition as part of our development agreement with our joint venture partner.

We know, at the end of the day, that discussing the rate of build‑out and the combination of starter homes as part of that may mean the returns delivered are not the same returns as a volume housebuilder might be delivering on a site at a much slower speed, but this is the judgment that we have made. We want to make sure that we use this land to deliver a combination of affordable housing through starter homes and housing built out at speed, to achieve the ambition that you also had as Housing Minister, and we see sites like Northstowe meeting the needs that we have.

Q61    Mr Prisk: You mentioned Laing O’Rourke, which is clearly a leader in the field in terms of off‑site construction. Is it the Government’s express wish to encourage off‑site construction and to be a player, or a client, as opposed to an observer?

Peter Schofield: Absolutely. You will have seen the Laing O’Rourke facilities and their ambition up in Worksop, and the plans that they are taking forward to build off‑site manufacture facilities, not just for infrastructure, but very much for housebuilding. There are other people we are talking to, as well. Legal & General have great ambitions to use off‑site manufacture as part of their plans to take institutional investment, not just in terms of the post‑development phase, but to really get into development and make that happen. These are some exciting initiatives that we hope we will really see motoring now.

Q62    Kevin Hollinrake: In terms of the mix, you mentioned you have conversations with your JV partner about what you deliver on a particular site. You also mentioned that you would have discussions with the local authority, or the local authority would have a role in that, as did the Minister in his points on the Housing Bill last week. What discretion will the local authority have, in terms of determining what will be starter homes to buy and what will be affordable homes to rent?

Peter Schofield: The way it works, as the Minister said last week, is that the local authority will start with an assessment of local housing need in their area, and their local plan will be developed along the lines of what is required to meet that housing need, taking into account the need for affordable housing and then what the right mix of tenures should be within that affordable housing.

In the Housing and Planning Bill, we are taking powers to enable the Government to set a minimum threshold for the proportion of starter homes, but the question of where we set that threshold is something we will be consulting on, to make sure we get the balance right and take into account all the relevant considerations, and to think about how we do that and whether we have different thresholds in different places. We want to use the power to encourage local authorities to take seriously people’s aspirations for home ownership products, but we also want to make sure that local authorities, exactly as you say, have the opportunity to get the right mix that meets their local housing need.

Q63    Kevin Hollinrake: I accept that. If nationally we set a target of 40% starter homes to buy, and the local authority then said, “We also need 20% affordable homes to rent on every site”, would that make the scheme unviable?

Peter Schofield: Viability, as you know, is the constraint that applies in all of this. That is why we are consulting, because we want to get this right. The numbers that you have described seem high. It may well be lower than that; it may be higher in some places than it is in others. We want to get this right. We do not want to set this up in a way that means we do not get the mix of housing that we need, but we want to encourage local authorities to take seriously the Government’s starter homes initiative.

Q64    Chair: If the current benchmark for Section 106 agreements is 20% affordable housing, the Government are not going to insist that all of that 20% should be starter homes, then.

Peter Schofield: We are going to be consulting on that, and people will make their representations. My answer to Mr Hollinrake implies that there will have to be some flexibility in how we do that, in order to enable local authorities to meet local housing need, but, in some places, the full affordability need will be met by starter homes. I do not want to constrain the consultation. We genuinely want to hear what people think.

Q65    Chair: The initial explanation you gave as to why this initiative had been undertaken would generally receive a welcome, but is it not a pretty damning implicit condemnation of the volume builders and how they operate?

Peter Schofield: That is an interesting challenge. If you look at individual volume builders, they would say that from one year to the next, certainly since the financial crisis, they have seen their growth increasing. But the fact is that, if we are going to deliver a million homes over the course of the Parliament, we cannot necessarily just wait for incremental growth; we need to see new entrants coming in.

As I said in my answer to Ms Robinson, the crucial challenge for us is that we are looking at people leaving the industry. We need other players to come back in, particularly small builders. In answer to Mr Prisk’s question, we also want to see the construction firms and modern methods of construction coming in. We do want volume builders to be there, and we want them to continue to grow, but we want others to come in and grow and add to capacity, because that is what we need.

Q66    Bob Blackman: Before I move on to one of the areas I want to look at, a number of housing action zones were announced last year, before this current announcement. Is there any effect on those housing action zones from this new policy?

Peter Schofield: No, they are very much part of the picture, particularly in London, where the Greater London Authority was able to put some of its own grant funding alongside the financial instrument funding that we put in place. Those housing zones are moving forward. It is the HCA’s own land that we are looking to use in this way, and it very much complements the housing zone initiative.

Q67    Bob Blackman: The announcement of the housing zones predated the move to starter homes for sale, and there was a much bigger mix of social rented accommodation within the housing zones. Can you clarify whether or not there has been a change in policy in how those zones will operate?

Peter Schofield: No, those zones will operate as agreed. The changes in planning policy apply everywhere, and the starter homes initiative and the thresholds that I have described in terms of the Bill will apply there as well. But the idea with housing zones is to take brownfield land and get that moving forward for housing. We have the zones in London; we are taking forward the initiative outside of London as well, through the HCA. It is an important part of the overall picture.

Q68    Bob Blackman: Then we had the announcement over the weekend of the replacement of volume estates. Have you yet had a chance to establish how that is going to work, how it will be delivered, and who will be involved?

Peter Schofield: Yes. As the Prime Minister said yesterday, the key for us here is to use the Government’s own funding—we have a total of just under £300 million in financial instrument money, if you include the programme that we had announced previously and the £140 million that was added to that—but also the other things that Government can do, and to leverage in other capital to really make a big difference.

One of the exciting things about this whole area is that institutional investors are starting to see the opportunity to come into the development phase, as well as waiting for the developments to be built. I met a number of institutional investors this morning, who were saying that to me in the context of estate regeneration. The challenges that they raise are about certainty; planning certainty, for example. They are about deliverability, in particular what package is being offered to existing residents, about scale and about the ability to look at this at a portfolio level.

What we really want to do—and this is what Lord Heseltine’s panel will take forward—is work with quite a large number of places. We are talking about 100 or so different places, if we can. We want to get the best ideas in terms of what Government can do to help remove the barriers to other investors coming in. Sometimes it will be our money—our £140 million, or the total £300 million package that we have had—but sometimes it will be about things that we can do about the package for residents or about planning certainty, working closely with local authorities.

We want to see what comes from this. We genuinely want to engage with places. We want to engage, as we have started to do, with providers of capital, taking what Government can do and leveraging that to bring in huge amounts of the capital that will be required to make the transformation we all want to see.

Q69    Bob Blackman: Will there be special delivery vehicles, effectively, set up to do this? Most of these estates either are in the control of a local authority or have been outsourced for management purposes to a housing association or another registered social landlord. Is it then envisaged that some sort of company or delivery vehicle will be set up to administer the sort of estate regeneration that we are talking about here?

Peter Schofield: We are open to a number of different approaches. As you say, most of the redevelopments that we have seen recently have been led by a private sector developer, but often in partnership with the local authority or with the Homes and Communities Agency. For example, we have seen that in Kidbrooke, in the relationship with Greenwich, and in Packington in terms of Islington. One interesting point that was made by investors this morning was that they would love to see some sort of ability to look at this at a portfolio level, because then some of the risk can be traded off between one development and another, or you might get one development that is moving more quickly forward than another.

Of course, the other challenge here is that there will be some estates where land value uplift and the opportunity to increase levels of density just will not be there, and there will be a need for gap funding. We do not have gap funding as part of this package; the funding we have is financial instruments, so this is not a model that will work everywhere by any means. But the idea is to find the maximum number of places where this can be made to work, and that is what Lord Heseltine and his panel will be taking forward, listening to places and to investors to find out what the right things are that we can do.

Q70    Bob Blackman: What about the role of residents, be they tenants or leaseholders? What is their involvement in this whole process?

Peter Schofield: That is a really, really important part of the package. It has been an important part of the process for every redevelopment that I am aware of in the past. It was interesting, talking to investors this morning, that that is something they raised with us. They wanted to know what the offer would be for tenants and for leaseholders. From an investor point of view, it is all about providing clarity, but, from the point of view of the local authority and of Government, it is about treating people fairly and appropriately, given where they are and given—if it is a leaseholder, for example—the fact that they have invested in their property and they need to have appropriate compensation for that.

Q71    Chair: One of the concerns will be that many of these properties will be social rented properties. People might say, “Okay, the redevelopment is going to happen. We are going to get more houses for sale that we cannot afford, houses at market rent that we cannot afford, and we are going to be displaced off these estates to somewhere else, because we will not be able to afford to live here.” That is going to be a real fear for many people. It may be a wrongly‑held fear at this stage, but it is going to be a fear. How are you going to dispel that and make sure that it does not happen?

Peter Schofield: I completely understand that. The reality is that, for every development that I am aware of, tenants have been given a right to return. Many of them have taken that up, and there have been affordable rental properties there for them to come back to. One of the questions for the panel will be whether we can make a very clear agreement up front, a clear commitment, that that is the way that tenants will be treated, and they do not need to worry in the way that you have quite understandably described.

The same is true of leaseholders, as I said in my answer to Mr Blackman. That is one of the quite understandable issues that people have: they have invested and bought their property. Where does that leave them? Even if they get market compensation, where will they go to with that market compensation? These are all really important things that we know we have to work through, and that is something that Lord Heseltine’s panel will be doing.

Q72    Chair: When we talk about the right of return, is that on a similar basis to the tenancy they currently have? People will be worried that they are currently on a social rent, and the market rent—particularly in parts of London—could be several times higher than the social rent.

Peter Schofield: The plan would be for them to come back on affordable rent terms, as you said.

Q73    Chair: But the term “affordable rent” can actually mean 80% of market rents, which can be much higher than a social rented property presently.

Melanie Dawes: The Prime Minister has been clear that making sure tenants and leaseholders get the right assurances here is a really important part of this. We will absolutely be taking that into account; it will be a very central part of our thinking.

Q74    Bob Blackman: You have done this new market model on homes and the evaluation of help to buy. Where have you got to in terms of that whole process?

Melanie Dawes: We will be publishing the evaluation on help to buy quite soon, and, without revealing all the details of that today, it is actually fairly positive in terms of the additionality of new supply. Almost half of the new building that has gone alongside the help to buy lending seems to be additional, according to this analysis. Now, that is just one piece of analysis, but that is quite encouraging. We will keep it under review. It is still a relatively new scheme; it has only been going for a few years, and as we extend it to London to a greater extent than it is now, with a 40% instead of a 20% equity loan, we will want to keep that very closely under review.

Q75    Bob Blackman: Are you due to publish some data, and, if so, when?

Melanie Dawes: Yes, in the next few weeks, very soon indeed.

Bob Blackman: It would be very helpful to us if we saw that.

Melanie Dawes: We will make sure that the Committee is given a copy of that quickly.

Q76    Bob Blackman: What assessment have you made, then, on both housing demand and prices, particularly in the areas where this has been implemented?

Melanie Dawes: The evaluation looks at the impact on prices, and I know there have been some concerns that help to buy would just increase prices.

Bob Blackman: It would just be inflationary.

Melanie Dawes: The evidence from this evaluation is that that has not particularly been a concern. But, again, the market is very dynamic, and it is something that we will want to keep under review.

Q77    Bob Blackman: Equally, one of the issues is the age at which people are buying properties. Have you seen any effect on that as a result of the policy?

Melanie Dawes: I am not aware of any data on that or whether it is part of the evaluation, but we can certainly pull that out.

Peter Schofield: We have set out quite a lot of our data in the equalities statement on the starter homes initiative, so it is there. We are seeing that something like 80% of help to buy is going to first‑time buyers, and that is an exciting part of the additionality that we are seeing, which we will say more about in the evaluation.

Q78    Bob Blackman: The Governor of the Bank of England has said that rising house prices are one of the biggest risks to the economy and help to buy may need to be changed as a result of this. Have you considered his remarks as yet and decided to do anything?

Melanie Dawes: We will need to keep this under review. The early evaluation evidence is quite encouraging, but, as the market changes, so could the impact of the scheme. It is something that we will want to keep under close examination, as I said. We should be clear: more generally, in terms of our housing policy, we want to see sustainable house price increases, so I do not think there is a difference of view between the Government and the Governor there. We all want to see a more sustainable housing market for the future, and, as you know, we believe that increasing supply is the most important element of that.

Q79    Bob Blackman: Have you considered, if interest rates start to increase, what the impact will be on the housing market and your forecasts?

Melanie Dawes: We do not produce forecasts of the housing market as a Department. The Office for Budget Responsibility produces the Government’s economic forecasts in the round, so we use those. Because we have an increasing portfolio of financial transactions, including the help to buy loans—and this is a very important part of DCLG’s responsibilities now—we do stress‑testing on that portfolio, on that book, in the way that you would expect a bank to do. We look at the impact of different scenarios for house prices and so on, so that we can assess risk and understand it.

Q80    Kevin Hollinrake: You said you are going to produce an evaluation of help to buy shortly. Will that cover the mortgage guarantee element of help to buy as well or just the equity loan?

Peter Schofield: No, this is our equity loan scheme.

Q81    Kevin Hollinrake: In terms of the impact of a change in the housing market, it could potentially be very expensive for the Department or the Government if the housing market took a severe turn for the worse. Are you intending to carry on this policy in the longer term? Are you looking to outsource it commercially? What is the future strategy around help to buy?

Peter Schofield: Shall I say a little bit about that? The spending review has announced that the scheme will not only be extended in terms of the size of the loan in London, but also that the scheme itself will be extended out to 2021. We have—and this is true of all of our financial instruments—massively increased our capability in terms of understanding the risks that we are taking on, modelling our expected loss under different scenarios, modelling our counterparty risk when it comes to investments, and modelling our concentration risk. A lot of work has been done on this.

The key, for us, goes back to what Melanie was saying before. Our intention, with our interventions, is to increase housing supply so that we have stability in the overall sector, in terms of our initiatives both on the demand side and on the supply side. If we, through our initiatives and through putting our balance sheet at risk, can enable greater stability, then as a financial investor, through our financial instruments, our position is safeguarded as well. It is a combination of properly qualified people doing the assessment and the monitoring, and the impact of our initiatives, which should provide greater stability.

Q82    Kevin Hollinrake: In many ways, it is an artificial intervention into the marketplace, is it not?

Peter Schofield: The Government have their objectives in terms of housing supply, and, in order to deliver those, we have a whole combination of different interventions, whether they be interventions on the planning side in terms of helping to get more planning permission coming through—which is an important part of the supply side—or in terms of government land, as we have talked about already, and getting land built out more quickly. Then there are the component parts, in terms of our investment in new supply, whether it be on large sites, in the private rented sector or in terms of starter homes. They are part of that as well. These are a number of different initiatives. You could say they are artificial interventions, but they are important interventions in order to see a response on the supply side. We know we have to do that, and it goes back to the Chair’s point earlier in terms of the scale of our ambition to get to a million homes over the course of the Parliament.

Q83    David Mackintosh: I want to talk a bit about the Department’s approach to risk management. How are you managing the Department’s growing exposure to the housing market?

Melanie Dawes: We have been touching on this a little bit already, but you are right: we have not just a growing exposure, but a rather different kind of exposure to the one we had in the past. We have loans of varying maturities, and that creates quite a sophisticated portfolio for us of financial instruments that we now need to manage. Over the last few years—this was put in place by my predecessor, and I think we are growing a very professional setup here—we have brought in specialist teams on secondments, some into the main, core Department but mostly into the Homes and Communities Agency, who have the right expertise in managing these kinds of portfolios, in terms of both agreeing the transactions and managing the deals and also overseeing the risk, and making sure we have the right frameworks in place for assessing individual deals and assessing policies when they are proposed to us. That is a growing capability that is now pretty professional.

We are also engaging with the Bank of England and the PRA about how we might continue to do the stress‑testing that I was referring to earlier. We basically want to expose ourselves to the sort of scrutiny and testing that you would expect a private sector organisation to go through, so that we understand the risk and can put in place the right mitigations. All of this has to be done in partnership with the Treasury, because, in the end, the balance sheet that is in play here is essentially the Government’s overall balance sheet. This is very much a partnership with them, and we make sure that we agree all that we do with them.

Q84    David Mackintosh: Do you have a vested interest in house prices remaining high?

Melanie Dawes: I said earlier that what we want is sustainable house prices. We need to understand the risk that different house price scenarios pose to our transactions. I think what you are hinting at is that, in a sense, we have a stake here, and we need to make sure that we understand that so we can be clear that we are acting in an impartial way and we are not in any way confusing the different roles that the Government may have here. The most important thing is for us to understand the numbers and to bring those to bear in the decision‑making, to make sure that we do not, in a sense, get blinded by the fact that we have taken a stake in the market in the way we have.

Q85    David Mackintosh: What happens if there is a decrease in house prices?

Melanie Dawes: That will then be a question for us and Ministers to look at. In a sense, what we are doing here is changing the balance of risk between the individual house buyer, their mortgage lenders and the Government. We are bringing more of the risk on to the Government’s balance sheet, and that is a deliberate decision, recognising the fact that we can borrow at lower rates than anyone else and recognising that that was a policy choice that the Government have decided to do. If the housing market changes, we will have a number of options that we could take, and there will be a set of decisions that Ministers could make in that scenario. I cannot really prejudge what those would be, but staying in the market might well be the right thing to do, for example.

Q86    David Mackintosh: You talked earlier about the HCA. Do you think that they have the capability and the right calibre of staff to manage the investments?

Melanie Dawes: This is something into which they have put a great deal of effort in the last few years. The answer to your question is yes, they have. These are professionals who are in high demand, so we constantly have to keep working at how we can make it attractive for them to come and work in the public sector. We pay them slightly more than we would normal civil servants, but not as much as they would get in a commercial environment. Andy Rose and Robert Napier, the leadership team at the HCA, have done a really good job in building up their capacity, but we need to stay on it. It is always difficult to maintain this kind of capacity in Government, but it has proved very attractive for people to come and work with us for a few years. Secondments have been a very good way of getting the capability we need.

Q87    David Mackintosh: You talked about the long‑term financial risks, some of which are driven by variables that are outside of your control. How do you work to mitigate those?

Melanie Dawes: I am not sure that I have a lot more to add to what I have already said. It is not so much a matter of understanding how we mitigate things we cannot control, but one of mitigating the impact of them. For example, it may be that some parts of the housing market are particularly exposed in a certain market scenario, and we need to understand, therefore, whether we should change our investment decisions in relation to those sectors in certain scenarios. That is what we do through our stress‑testing, not necessarily to come up with the answers as to what we would do in detail, but to understand the kinds of questions we would have to pose to ourselves.

Peter Schofield: It is also worth pointing out that, at a project level, we are bringing those professional disciplines to bear. What level of collateral we are expecting in some of our investments in build‑out projects? Where does our investment sit in relation to other providers of finance? Where does this sit in terms of overall concentration risk and counterparty risk? We have to have very clear thresholds about how much we would be willing to invest in any one counterparty. These are the sorts of disciplines that any private sector investor would bring to bear, and we are bringing them in through that expertise.

Q88    David Mackintosh: Has that changed within the Department as the exposure to risk has increased?

Peter Schofield: Yes. These disciplines are taken into account in each and every investment, both within the HCA’s own projects committee and, indeed, within the Department for those programmes that are above the delegated authority of the HCA. These are exactly the issues that are looked at.

Q89    Julian Knight: I would like to follow up on that point. You have painted a picture in one respect of the fact that you want a very similar type of stress‑testing, or at least parameters, to what a private lender would have in that regard. You are, effectively, a lender. I have a bit of experience in this area, and lenders generally game certain scenarios—normally, a 5% to 10% market fall‑off—but they also game a catastrophe fall‑off: a 40% fall‑off, for example. Are you doing the same thing?

Melanie Dawes: We are doing stress‑testing on a range of scenarios. Just to be clear, we are not “gaming” in the sense that we are trying to influence the market.

Julian Knight: I am not suggesting that.

Melanie Dawes: I just wanted to be clear about that. But we are certainly looking at those scenarios to make sure that we understand the risk we are taking in different scenarios. We keep that under review and make sure, therefore, that the exposure we are taking is not something that exposes us to a risk that had not been thought through when the original proposals were signed off. It is about understanding that, flagging to Ministers if we thought we were seeing a change in the nature of the portfolio and its overall risk balance, which we would do, and working out what to do about it.

Q90    Julian Knight: Just to boil it right down, are you effectively working off a scenario where we see a major fall in house prices? Is that one of the scenarios that you take account of?

Melanie Dawes: We have done plus and minus house price scenarios.

Q91    Julian Knight: To what percentage?

Melanie Dawes: I do not have that specific figure in front of me. Do you have it, Peter?

Peter Schofield: No, but I would point you to the NAO report that was done on the help to buy equity loans scheme, and the discussions that we had with the Public Accounts Committee then. We talked through the scenarios that had been looked at, whether it be around house prices or around the rate of sales. That showed the various scenarios very clearly, and the NAO report set them out in quite some detail. Since then, we have had time to do more work, so more analysis has been done.

The other thing that I would highlight, which is really important is this, is the value of having a very clear “playbook”: what would you do in a scenario; how would you act? The thing to bear in mind is that we are an investor. We may have longer time horizons than some of the counterparties that are prepared to invest. That may then give us a commercial opportunity to look at some of these investments in the long term. These are all quite sophisticated judgments that we need to make with the professional capability that we have brought in.

Q92    Julian Knight: Who is overseeing that? Does the PRA, for example, have sight of these stress tests you are doing?

Melanie Dawes: We have certainly begun conversations with the PRA to see whether we can ask them to audit what we are doing as an extra layer of assurance. I should just clarify your point about the 40%: we have basically applied the Bank of England’s standard tests. There are scenarios of 35%; I am not sure whether we have gone beyond them, and that is why I was not able to give you the precise figure, but we have certainly looked at those kinds of scenarios. But the PRA conversation is one that we absolutely have to open up in the course of this year. We would not expect to be regulated by them, but we would like to make sure that we are not missing anything here just because we are not part of that scrutiny.

Julian Knight: Can I ask for an update on the progress of that discussion with the PRA?

Chair: Yes, if you could write to us in due course when you have had that discussion, that would be helpful.

Q93    Helen Hayes: Your report says that the HCA needs to improve its financial forecasting. Has it, and are you content with its plans for further improvement going forward?

Melanie Dawes: Yes, we did say that, and I have the figures for you. Their percentage of mistakes in seven‑day‑ahead cash forecasting in 2014-15 was 12%, and so far, during this financial year, it is 1.5%. Their percentage of mistakes in seven‑weeks‑ahead cash forecasting has fallen from 20% down to 14%, so they still have some way to go. The other area that we are continuing to work with them on is their overall capital forecasting. It is quite hard for them to manage their budget in‑year on the big financial transactions, because they are trying to predict when they are going to strike deals with private sector and other public sector players. At the same time, we would like to get a better handle on some of those numbers with them.

Q94    Helen Hayes: Within the range of demand‑led programmes, are there particular programmes that you are more or less concerned about in terms of the accuracy of forecasting?

Melanie Dawes: One big programme is help to buy, which is clearly an extremely demand‑led programme. Another one is land disposal, which can be quite difficult, because it is led by planning decisions so it can be particularly hard to predict. There is also an issue of when loans are repaid. We are starting to get to the stage where some of the early schemes are being repaid; to that extent, the transactions are proving to be very successful, but precisely when that happens can be pretty hard to predict and a one‑financial‑year envelope is quite difficult. We have a good conversation with the Treasury about this as well, and it is quite constructive, but we would still like to be a bit clearer about that.

Q95    Helen Hayes: Are you happy with the HCA’s current expenditure mix, with over 60% of their capital expenditure taking the form of private market investments? That is a very, very significant change from around 3% in 2010‑11.

Melanie Dawes: Yes, we are, in the sense that this is a very big shift away from an almost exclusively grant‑based capital investment programme to one that is now, as you say, more than half made up through loans and guarantees. This reflects—although I say this having been in the Department for only 10 months—one of the great success stories for DCLG and the HCA in the last Parliament, which is successfully managing to introduce this very new way of supporting housing supply.

When we got to the spending review, we looked at where we thought we needed traditional grants—which is where you have a gap in funding that simply is there in the numbers for that particular part of the market, and you just have to accept that gap grant funding is required—and where it is a question of finance, so short‑term and long‑term loans can fill that gap. We used the experience of the last few years to put together proposals for the Treasury, and we have ended up with a similar blend of grants and loans for this spending review.

Q96    Helen Hayes: Are you content that the profile of the homes that are being delivered with public subsidy through DCLG is best value for the public purse, in relation to meeting the needs of those who are in genuine housing need at the lower end of the income spectrum?

Melanie Dawes: Do you mean “profile” in terms of the balance of types of investment?

Q97    Helen Hayes: The balance of types of housing: homes at social rent, target rent, other forms of affordable rent, intermediate and market housing. Are you content that the profile represents the best possible value for taxpayers, in relation to meeting housing need in the UK?

Melanie Dawes: It reflects a very clear ministerial priority, set out in the manifesto, towards more affordable homes for sale, rather than just for rent, although there is still quite a strong element of affordable rent in the mix as well. That is a clear policy choice that Ministers have made. But, in the end, as Peter was saying earlier, local authorities will also have to work out what the need is in their areas. Any individual local plan will have to balance the national support and the local need, and how that works through.

Q98    Helen Hayes: Is the impact on the deficit a factor at all in your preference for private market investment over grants to deliver new homes?

Melanie Dawes: In the last few years, we have shown that we can achieve results without needing to use grants in the same way as we might have expected we needed in the past. If we can do that and use recoverable loans—which, in the end, are better value—then we should. We have not felt constrained here in holding back from the Treasury. Indeed, we put together a pretty ambitious set of proposals for the Treasury, and we got back a pretty ambitious capital programme for the Parliament. We do not feel that the mix was particularly determined by concerns about deficit reduction.

Peter Schofield: Just to add to that, there are two components there. One is to make sure that the grant funding genuinely goes on the subsidy element. That is one of the things we have seen through the affordable housing programme over the last few years: with housing associations going and borrowing the balance, the Government’s grant is only there to get the subsidy between market rent and the actual affordable rent, so that is one component. The grant is really just for subsidy. The second thing, as Melanie says, is this huge investment in financial instruments. That provides greater long‑term certainty on funding. Sometimes, the banks are not willing to invest over the period that a development takes. Sometimes, Government can provide some de‑risking. All of that is there to encourage the private sector development component to go up alongside affordable housing.

Q99    Chair: Can you spell out clearly what the spending review said? You have talked about there being grant available for affordable rented properties. My understanding is that the majority of the money in the spending review is going towards starter homes, now classified as affordable homes. The next biggest chunk is for shared ownership, and then there is a tiny amount left for supporting specialist rented property. There is nothing for general affordable rented housing, is there?

Melanie Dawes: There is some legacy affordable housing money.

Q100    Chair: There is legacy money, but there is no new money in the spending review.

Melanie Dawes: Agreed. There is money for specialist and vulnerable groups, including the elderly, as you said. We are also expecting that right to buy and high‑value assets will deliver more homes for affordable rent.

Q101    Chair: No, I did not ask about that. I asked about departmental money going in, and you talked about grant availability for affordable housing in your reply. The reality is that, under the spending review, the only new money in the spending review for the next four years is for specialist housing. There is nothing for general, affordable rented housing, is there?

Peter Schofield: I will run through the numbers.

Chair: That would be helpful. Yes, please.

Peter Schofield: There is £2.3 billion for starter homes, and then a total of around £5.5 billion for other types of affordable housing. From that, we are looking to deliver 135,000 shared ownership properties: that is £4 billion. The remaining £1.6 billion is there for affordable rent. Yes, that was committed under the last programme, but the funding still had to be found.

Q102    Chair: Let us put it this way round: there is no money in the spending review for starting new affordable rented properties, apart from a small number of specialist properties.

Peter Schofield: No, the £1.6 billion is there for new affordable rent.

Q103    Chair: But these are properties that were already started before the spending review.

Peter Schofield: No, I am making a distinction between what was committed and what has been started. The 70,000 are starts; they have been committed under the last programme, but they still need to be funded. The Treasury still needed to agree to this. The other component—which is really important, and we should not underplay—is the sheer opportunity to use the sale of high‑value assets and the sale of right to buy to deliver new homes.

Q104    Chair: I was just trying to get at what was in the spending review. Basically, the money in there for general, affordable rented properties is only for properties that have already been committed, but they may not have all been started.

Peter Schofield: Yes.

Chair: That is helpful, just to get the absolute position. Thank you.

Q105    Kevin Hollinrake: Just on that point, how much was committed for starter homes?

Melanie Dawes: £2.3 billion.

Q106    Kevin Hollinrake: Why do you need any subsidy for that? Why does it not just come off the land value?

Peter Schofield: There are a number of components to starter homes. The bulk of it comes from bringing new types of land into the market. Our exceptions policy brings land that previously had not been identified as land for housing, but was being under‑used, into starter homes. There, the opportunity is to take the difference between non‑residential land values and residential land values, and pass that on as a discount to the purchaser. Those, and the overall planning reforms, provide the bulk of our starter homes.

The remainder is just to give us more certainty of delivering the 200,000, and there is a combination here. One is, exactly as you say, to use land: so, of the £2.3 billion, £1.2 billion is something called a “land facilitation programme”, and that is all about going in and acquiring land—building on some pilot work that the HCA has been doing already this year, and some £36 million has gone into that, partly to the HCA and partly to local authorities—de‑risking the land, and then getting starter homes built out on that. The remainder will be used for direct commissioning of starter homes. It is a combination of things, all together, to deliver the 200,000.

Q107    Kevin Hollinrake: Just moving on to the statistics, you have suffered a bit of criticism from various sources—the Public Accounts Committee and the UK Statistics Authority—regarding information that is published. For instance, the PAC said, “The Department must only count the number of homes built, or commenced, on land disposed of during the programme. This should also include the number of affordable homes.” What have you done to address those perceived weaknesses within the Department?

Melanie Dawes: On the public sector land programme, the PAC’s concerns there were not so much about the quality of our statistics as a Department, but more about what we are seeking to monitor and measure. It was more of a policy challenge than a statistical challenge. That is not to say that we are not listening to it; we are. We will be publishing the public sector land programme in the spring, with all of the detail on that. Indeed, in a couple of weeks’ time, I think, I will be giving evidence again to the Public Accounts Committee on public sector land, and I am sure we will go through those issues with them.

On our general statistics, it is certainly true that the UK Statistics Authority has raised a number of areas where it wants us to continue to improve. This is partly about the ongoing drive to make more government statistics reach the standard of a national statistic; many of ours do, but not all of them do, so we are trying to improve that and bring more under the wing of national statistics. It is also about how imaginative we are in looking at new data sources, and the Department has done some really good work in recent years in looking at open data sources and using big data techniques. We have done that, for example, in analysing planning data in quite an interesting way, but there is lots more that we can do. We have such a big agenda here, and personally, as a former economist—I started my career in the Government Economic Service—I put a really high priority on this.

Q108    Kevin Hollinrake: You have looked at the recommendations from the PAC in terms of releasing public sector land. Are you implementing them all or some of them? Is that work in progress?

Melanie Dawes: The Treasury published the Treasury minutes just before Christmas, and we have accepted most of the recommendations; not all of them. Some of this is about the scope of the programme and what it is seeking to achieve, so it is actually intrinsic to the policy, but none of that is yet set in stone. We are working it through with our Ministers and with other Departments now that the spending review has been concluded, and we have the overall outline numbers. We will be publishing a document on it in the spring, and will be making sure that the PAC has all the information that it wants from us.

Q109    Chair: Given one of the other things that the Committee raised in the last Parliament was the fact that the Department no longer keeps figures on what percentage of housing is being built on brownfield land, I think the Secretary of State indicated you might be re‑collecting those figures. Is that work now in hand?

Melanie Dawes: I am not entirely sure of the answer to that. Can you help us, Peter, or shall we come back to you on that?

Peter Schofield: It is something we are looking at. I think we should come back to you on that.

Melanie Dawes: We will come back to you on that. My apologies for not having the answer now.

Q110    Helen Hayes: Mr Schofield, you mentioned just now the opportunities arising from the Government’s policy regarding the compulsory sale of high‑value council homes and the extension of right to buy to deliver new affordable housing. I wondered what assessment the Department has done of the likelihood of those receipts covering the cost of what now seems likely to be a Government policy of two‑for‑one replacement of affordable homes—although under which definition of “affordable”, we are not entirely clear—plus contributing to the £1 billion brownfield remediation fund. The Committee asked the Minister that same question just before recess, and he could not give us an answer as to any quantitative analysis that has been done in relation to that policy. I wondered whether you had done that analysis.

Peter Schofield: There are a number of components to that. First of all, there is the level of take‑up of right to buy. We are piloting right to buy in five places at the moment. We have been doing quite a lot of modelling more broadly, looking at the take‑up of the reinvigoration of right to buy back in 2012 and the take‑up of right to buy back in the 1980s. But it will be really important for us to see the take‑up of these five pilot studies that are underway now.

The second component to that, as you say, is how much we can expect the high value asset sales to deliver. We have been doing quite an extensive data collection exercise on that with the stock‑holding local authorities; we began that just before Christmas. We have the bulk of the responses back now, and we are going to be analysing those and putting those into our model. The third thing is that you talked about two for one, and that comes back to our discussions with councils, in terms of what they can promise that they will do. It is absolutely vital for us that we see these proceeds that come from high‑value assets, but also, as I said earlier, the proceeds that come from the sale of right to buy, generating the maximum additional new supply.

When it comes to right to buy, the really interesting thing here is that—particularly in London and the south‑east—housing associations will see themselves recompensed at, basically, a value that is market value at vacant possession. That is a value that, for many of them, will be very significantly in excess of book value, which may be at historic cost or may be at market value at current tenure. There is a real opportunity here for housing associations to generate very significant proceeds, and our challenge to them will be how many new homes they can develop with that funding. For local councils, it will be, “With high‑value assets, what can you deliver in terms of new supply with the sale proceeds that you get?”

There is a lot of modelling, being informed by more data‑gathering as we speak, and we will be in a much better position to know where we stand as the year goes on, but the key thing goes back to where you started: we are working within a framework that means we have to make sure this is fiscally neutral.

Q111    Helen Hayes: Are you looking at the proportion of borrowing against the homes that may be sold already, and taking out the cost of subsidising the right to buy for the home that is being sold?

Peter Schofield: On high‑value assets, we are looking to put in place a formula, so that councils know where they stand. The way in which that formula would be set out is that you start with the scale of high‑value assets in an area. You then look at assumptions about rates of churn; these are things on which we are getting more information from the data collection exercise that I described earlier. That gives you the expected level of proceeds, but then you have to take into account the cost of putting in place a replacement unit, and the debt that you need to pay off according to the units that you have been selling. That then gets you a net set of proceeds, and you then need to compare those proceeds with the cost of covering the discounts for right to buy. That is, broadly speaking, the way the modelling works. It is along the lines of what you have described.

Q112    Chair: When will you have some information to share with us about the results of your modelling?

Peter Schofield: We will come back to you on that, because that is something that we will be working through over the coming weeks and months, as the data comes in and as we get the results of the right to buy take‑up. That is the next big bit of the process.

Q113    Chair: Will it be late spring?

Peter Schofield: We need to be in a position where we are very clear about the eligibility around the first roll‑out of right to buy, which will be later this year. We will need to be ahead of the game on that, so it is that sort of timescale.

Q114    Chair: Let us move on to one final subject. The Government announced that responsibility for the fire service was going to be transferred to the Home Office, but that you as DCLG were going to keep responsibility for the fire budget until April. Why has the change been made?

Melanie Dawes: The change was a decision for the Prime Minister, like all machinery of government changes, but it reflects the Government’s interest in blue‑light integration and collaboration. We had a consultation on that towards the back end of 2015, and of course the fire service was under Home Office responsibility some years ago, so in some ways it has always sat on that boundary between DCLG and the Home Office. We are managing that now, and the change will formally come into effect—in terms of all the resourcing—from 1 April, as you said. In the meantime, we are operating across the boundary, and I am operating as accounting officer, with our staff moving across in April.

Q115    Chair: So there are going to be no changes to the funding of the fire service resulting from this change.

Melanie Dawes: No, it has no implications for the policy and the funding at all. That delay is just how we are managing it, to make sure that we have a seamless way of managing it.

Q116    Chair: But is the reality not that collaboration at local level between fire and police services, including the transfer, as is proposed in Manchester, of fire responsibilities to the police and crime commissioner, could take place without a departmental shift?

Melanie Dawes: Absolutely, it is. This does not reflect a particular change of policy per se; it is purely a machinery of government change. It is a change of responsibility between Departments for oversight of the service. If, at local level, a decision is made to bring fire under the PCC, or if, indeed, local services decide they want to work in a different way—either through collaboration, or even through integration in some way—then that will be, as now, an issue for local decision‑making.

Q117    Chair: Some people might ask whether this is just a little step towards a situation where, once local government is completely self‑funding, there is no need for your Department at all.

Melanie Dawes: I do not think that day is very imminent, Mr Chairman.

Chair: It might reflect on the need for the Select Committee as well, which we will have to think about.

Melanie Dawes: I hope there is enough to keep us all in a job for a little while yet. My experience of the past year, since I arrived in the Department, is that, if anything, DCLG’s role is growing. The commitment to devolution being even greater in this Parliament than it was in the last means that there is an awful lot of work to do, across Whitehall in particular, to ensure we can make the changes we need to make in central Government to support a more integrated approach locally. That is, fundamentally, one of the things that DCLG has to do in this Parliament.

Q118    Chair: One of the criticisms from the Committee a few years ago was that the Department did not punch its weight; it sort of oversaw what other Departments did to local government—whether it be Health, Education or DWP—and commented from the side‑lines. Do you think the Department now is very much more in the ring and directing operations, including how other Government Departments relate to local government?

Melanie Dawes: Yes, we are in a stronger position than we were a little while ago. If you look back at how the local government system operated a few years ago, where there were very many ring‑fenced grants, the individual Departments used those grants to achieve certain policy objectives, in the context of their departmental objectives. You could say that DCLG was holding the ring a lot of the time, rather than necessarily always having the ability to look at the overview. As we have moved through the business rates reforms that we have already seen and the de‑ring‑fencing of grants, and as we are now moving to devolution, that sense of what local government has wanted for some time—which is Whitehall getting its act together across the piece and looking in a more integrated way at its relationship with local government—has become the policy agenda. We are seeing that DCLG’s role is therefore bigger, more strategic and more important.

Chair: On that very positive note, perhaps we can end our evidence session for today. Thank you very much, all of you, for coming along.

Melanie Dawes: Thank you very much.

              Oral evidence: DCLG Annual Report 2014-15, HC 531                            2