05 May 2006
Ministers have admitted that housing associations were given out-of-date information when they calculated efficiency gains as part of the Gershon review.
Instead of using the latest inflation measure for assessing building costs, associations were told to apply the previous year's figure, which was significantly higher.
Building cost inflation for capital works fell from 10.5% to 2.3% between 2004/05 and 2005/06. By applying the higher figure, registered social landlords had less difficulty showing efficiency gains - regardless of whether they represented true savings.
'We recognise that some efficiency gains may have been predicted on a higher inflation figure and may therefore be at risk,' said an Office of the Deputy Prime Minister spokesman.
'How much will remain to be seen.'
The flawed methodology was first highlighted by Kevin Rodgers, finance director at Coventry-based Whitefriars Housing Group, at the National Housing Federation's finance conference in March.
The NHF expects that a significant proportion of the savings RSLs expected to make on capital works will now be wiped out.
Rodgers told Public Finance that, while Whitefriars will no longer save £1.4m on capital works this year, it still expects to save £160,000 on overheads and management costs and a further £200,000 by reducing the time that homes remain empty.
'It's going to be harder to achieve efficiency gains but they will be real,' he said.
Deborah Ilott, regulation policy manager at the Housing Corporation, said: 'Although it will make the challenge greater, we are not envisaging that they will have too much difficulty meeting the targets.'
PFmay2006
