04 September 2012

Mr Arthur Rogers

Acting Director of Housing

Department of Human Services

Housing Framework Consultation

GPO Box 4057

Melbourne VIC 3001

Dear Mr Rogers,

RE: Infrastructure Partnerships Australia submission to the

Pathways to a fair and sustainable social housing system

Discussion Paper

Introduction Victoria’s social housing sector has reached a point of ‘periodic crisis.’1 The depreciating and ageing

public housing stock is not meeting required housing outcomes for the increasingly high need

tenants, nor is it performing well financially for the State Government asset owner.

In 2011 the State’s public housing operating costs exceeded rental revenue by 42 per cent, and the

division’s deficit is forecast to grow from $56.4 million in 2011 to $115.1 million in 2015.

There is a growing awareness that government alone cannot shoulder the entire burden of

managing, maintaining and renewing the existing housing stock, and investing in new dwellings to

meet increasing demand.

Infrastructure Partnerships Australia welcomes the opportunity to contribute to this public

consultation. The ideal outcome of this reform process would be that the social housing system is

better equipped to provide the best possible quality housing in the locations that tenants need to

live.

Infrastructure Partnerships Australia therefore recommends the Victorian Government consider

models for social housing that:

- better leverage the $17 - $19 billion asset base to attract private sector finance to help renew and

grow the stock;

- involve selling or transferring much of the housing stock (and corresponding substantial maintenance

liability) to the private or not-for-profit sectors;

1 AHURI, What future for public housing? A critical analysis, 2010.

- ensure the party best suited to constructing, renewing, maintaining and managing the stock is

contracted to do so; and that

- transform poorly performing social housing estates, into sustainable mixed income suburbs.

On this basis, Infrastructure Partnerships Australia, recommends that the Victorian Government

further investigate and consider implementing a number of the models in the Discussion Paper,

particularly: Community Housing Stock Transfer; Public Private Partnerships (PPPs); and Outsourcing

Maintenance/Management.

The Victorian Government could also investigate potential options not covered in the Discussion

Paper, including:

- Selling the public housing stock and renting properties for tenants in the private rental market; and

- An Australian version of a US-style housing choice voucher system to complement a social housing

supply programme.

The Problem Public housing is an essential public service for those people unable to obtain adequate

accommodation in the private housing market. Public housing helps tackle homelessness, and can

play a role in integrating vulnerable and low-income households into the broader community and

economy.

Currently in Victoria, ‘There is a structural financial deficit in housing operations.’2 Decreasing rental

revenue and a growing maintenance backlog is placing the future of this service at risk. It also places

current tenants in sub-optimal dwellings, with their education, employment and health outcomes

sometimes reduced as a result.

In jurisdictions right across Australia, there has been a considerable reduction of core funding of

public housing, but no institutional reform and no reform of the funding models.3 From 1996 to

2008, funding declined 26 per cent in real terms nationally, resulting in a shortfall of 160,000

dwellings.4 In Victoria demand for public housing far exceeds supply, indicated by the 46,029

applicants on the waiting list at 30 June 2011.5

Projections show that the demand for public rental dwellings will increase more than the demand for

all dwellings right across Australia, and Melbourne is one of the regions where the demand for public

housing is projected to rise most compared to the demand for all dwellings. The demand for public

rental properties in Melbourne is projected to increase by 37 per cent in the period from 2006 to

2021, with demand for all dwellings to increase by 30 per cent.6

Recent initiatives to drive increased supply include the introduction of the National Rental

Affordability Scheme (NRAS) aimed at stimulating the private sector supply of up to 8,500 new

affordable rental dwellings in the State,7 and significant additional funding from the Rudd

2 KPMG for the Victorian Government, Pathways to a fair and sustainable social housing system, April 2012. 3 AHURI, What future for public housing? A critical analysis, 2010. 4 Ibid. 5 PC Report of Government Services, 2012. 6 Peter McDonald and Jeromey Temple, Australian Demographic and Social research Institute, ANU, Projections of Housing Demand in Australia, 2006-2021. 7 Victorian Government, Department of Human Services.

Government’s economic stimulus allocation of $1.26 billion adding about 4,500 new dwellings.8

Figure 1 shows however, that right across Australia, these measures will only increase the supply of

social housing up to 2013-14, and without substantial reform or funding, supply will not meet the

heightened demand, further increasing the shortfall.

Figure 1: Social housing demand and supply projections, Australia

Source: Implementing the national housing reforms, a progress report to COAG, November 2009;

Compounding the increasing demand pressures, much of the existing housing stock across the State

is ageing, in need of substantial maintenance and renewal, and requiring reconfiguration due to the

ageing population driving an increased demand for single dwellings. The increasing net recurrent cost

per dwelling, shown in Figure 2, clearly illustrates the impact that the deteriorating condition of the

existing stock is having on the maintenance liability.

Figure 2: Real government expenditure on public housing, 2001-02 to 2010-11 (2010-11 dollars) ($

per dwelling); Net recurrent cost of providing assistance (excluding capital) per dwelling.

Source: IPA; data from the Productivity Commission Report of Government Services, 2012.

8 Ibid.

4000

4200

4400

4600

4800

5000

5200

5400

5600

5800

350

400

450

500

550

600

650

700

1996 2000 2004 2008 2012 2016 2020 2024 2028

Year

So

cia

l H

ou

sin

g D

well

ing

s (

'000)

Social housing required to keep pace with low household growth

Social housing required to keep pace with medium household growth

Actual/projected social housing dwellings

In addition to insufficient capacity and increasing expense to the taxpayer, social housing across the

country is not meeting social outcomes. Social housing tenants suffer from lower employment and

educational outcomes than the general population. The National Social Housing Survey (NSHS)

released by the Australian Institute of Health and Welfare in October 2011, found that:

- the proportion of the general population in full-time employment is about three times higher than for

social housing tenants;

- for those people in the labour force, the unemployment rate in the general population is six times

lower than for social housing tenants;

- the rate of achieving a bachelor degree or above in the general population is more than five times that

seen of public housing and more than three times that of community housing respondents; and

- the rate of junior secondary education being the highest level achieved in the general population was

about half that of both public housing and community housing respondents.9

There is evidence that, due to locational disadvantage effects, these outcomes are worse on large

public housing estates, which also suffer from increased instances of crime and anti-social behaviour.

The Causes Victoria’s public housing is becoming more expensive, yet delivering less. This can be attributed to a

combination of the sector’s residualisation caused by a lack of funding. Stock management efficiency

could also be improved.

Funding Many of the system’s problems are symptoms of a ‘legacy of sustained under-investment’ that has

‘intensified the residualisation of public housing stock.’10 Increasing residualisation (see Figure 3) –

which sees housing allocated to those most in need – undermines the financial viability of the sector

as the high need tenants are paying less rent and requiring increasingly expensive complex services.

Figure 3: Proportion of new tenancies allocated to households with special needs – public housing

(per cent)

Source: IPA; data from the Productivity Commission Report of Government Services, 2012.

9 AIHW, National Social Housing Survey, October 2011 10 AHURI, What future for public housing? A critical analysis, 2010.

40

45

50

55

60

65

70

2006-07 2007-08 2008-09 2009-10 2010-11

Proportion of newtenancies allocatedto special needshouseholds (per cent)

Sustained underinvestment has been driven by complex Commonwealth-State funding

arrangements, along with public housing capital and maintenance expenditure allocations struggling

to compete with other government priorities including health and education programmes. Like many

other public services, the social housing supply backlog is further compounded by tight fiscal

conditions in which governments are looking to reduce their operating expenditure.

There is a growing awareness that government alone cannot shoulder the entire burden of

managing, maintaining and renewing existing housing stock, and investing in new dwellings to meet

increasing demand; nor are they best placed to do so.

Management of stock and tenants There is some evidence to suggest the stock could be managed more efficiently. The average

turnaround time for vacant public housing stock in Victoria in 2010-11 was 29.2 days, up from 27.2

days in 2007-08.11

Housing could also be better aligned with tenant requirements. The fastest growing demand is for

single units due to the ageing population, and most of the existing stock is larger multi bedroom

homes better suited to families, as shown in Figure 4.

Figure 4: Public housing stock and waiting lists by bedroom size as at June 2011

Source: Victorian Auditor-Generals office based on Department of Human Services data.

In 2011, 46.8 per cent of public housing households in Victoria were underutilised, further illustrating

the mismatch. Driving significant levels of underutilisation in public housing are policies that ensure

unlimited tenure within the same dwelling. Promoting policies that instead ensured unlimited tenure

within the public housing stock would markedly reduce underutilisation, whilst still guaranteeing

tenants’ housing security. As recognised in the Discussion Paper, ‘Each dollar saved by eliminating

cost overruns and inefficiencies can be used to reduce the maintenance backlog, invest in new

housing stock.’

11 Productivity Commission Report of Government Services, 2012.

The Solutions The Victorian Government could implement a suite of reforms to allow the social housing system to

overcome these challenges, and provide the best possible quality housing in the locations tenants

need to live.

The Government should not necessarily be in the business of directly managing and maintaining

social housing. Some of the models covered in the Discussion Paper have the potential to transform

the roles played by sector participants, with corresponding opportunities for efficiency gains. The

State Government Housing Authority could perform a gatekeeper role, managing waiting lists, and

monitoring performance levels. The community housing sector could be developed to be the housing

providers, managing tenants on a day-to-day basis and coordinating the services they require.

Competition would then exist between the community housing providers, where they compete to

deliver the best services at the least cost. The private sector could be engaged more in the

construction, renewal and long-term maintenance of the assets.

As with other forms of economic and social infrastructure, most important will be solutions which

are likely to mobilise the greatest private investment, including long-term institutional commitment.

The Victorian Government owns a substantial portfolio of public housing assets – valued at an

estimated $17-$19 billion. A significant opportunity exists for these assets to be leveraged to fund

the construction of new stock.

However, this asset value does not account for the substantial maintenance liability. A 2011 State

Budget submission states that substantial maintenance is ‘required to avoid the closure of

approximately 10,000 properties’ over the next four years, approximately 14 per cent of the

portfolio. The amount requested was $600 million over a three-year period, and this does not

include the anticipated maintenance costs past the three-year period.12

The Victorian Auditor-General’s Report, The state and future of public housing, recognised that the

full extent of the maintenance liability is unknown because:

- the extent to which public housing has been under-maintained has not been accounted for as a

liability; and

- an accurate forecast of accrued maintenance across the portfolio is prevented by a lack of property

condition data.13

Models for housing provision should be considered that offer the ability to better leverage the

existing stock for growth while transferring the liability away from the Government.

For their potential to drive service improvements, grow the stock to meet demand, and help solve

the funding challenge, the Victorian Government could consider a combined suite of the following

options from the Discussion Paper:

- Community Housing Stock Transfer;

- PPPs; and

- Outsourcing Maintenance/Management.

The following discussion provides some additional detail on these options.

12 Victorian Auditor-General’s Report, The state and future of public housing, March 2012. 13 Ibid.

Community Housing Stock Transfer This model involves transferring legal title and other rights over the State’s public housing stock to

community housing providers (CHPs). The CHPs can then leverage the value of the assets to secure

borrowings for new stock.

As recognised in the Discussion Paper, small and incremental transfers are unlikely to have a

significant impact on supply. A substantial stock transfer programme could help to increase the

volume of quality social housing in Victoria.

Service Benefits:

As the community housing sector develops, competition will drive service improvements as housing

providers compete to deliver the best services at the least cost. The CHPs will be able to be more

engaged and tenant-focussed than a large State Government provider. They will also be better

equipped to offer efficient integrated packages of housing and the additional services public housing

tenants require.

When compared to public housing, the housing provided by community housing providers is

assessed by tenants as better in meeting their housing needs. In 2010 only 27.2 per cent of Victorian

public housing tenants surveyed were very satisfied with their housing. Comparatively, of the

community housing tenants surveyed, 39.3 per cent were very satisfied (see Figure 4).14

Figure 5: Customer satisfaction, Victorian public housing and community housing tenants surveyed

2010.

Source: IPA; data from the Productivity Commission Report of Government Services, 2012.

Victoria also already has a regulatory framework in place that will ensure appropriate standards of

service delivery.

Funding benefits:

This model has the potential to attract a larger revenue stream; CHPs can charge higher rents as they

would be covered by Commonwealth Rent Assistance, whereas public housing providers are not.

CHPs often have a more diverse mix of tenants than public housing, further increasing their revenue

stream, and helping to correct the funding shortfall caused by increasing residualisation.

Furthermore, CHPs receive preferential tax treatment; they don’t pay GST when they buy or build a

house and they have charitable tax status, further reducing their running costs.

14 702 public housing tenants and 484 community housing tenants were surveyed.

0

10

20

30

40

50

Public housing Communityhousing

"Very Satisfied"surveyedtenants

The main funding benefit of the stock transfer model is that the maintenance and management

liability is effectively outsourced.

The UK Government initiatives of the late 1980s and 1990s inform support for the stock transfer

model. Government subsidies were offered that incentivised many public housing authorities to

transfer their stock to community housing associations. Implementing similar strategies in Australia

could open up new funding streams necessary to enable the community housing sector to reach a

sufficient scale to generate its own growth.

Public Private Partnerships The future of public housing is dependent on how successful public housing authorities are in

transforming their old estates. Social housing concentrated in poorly performing estates across the

country is not meeting housing need. In many jurisdictions locational disadvantage remains

prevalent in these communities, and maintenance and management is more costly for these estates

than for other stock.15 As outlined in the Discussion Paper, estate renewal PPPs are a solution

achieving positive outcomes in other jurisdictions.

Service Benefits:

Estate renewal PPPs are generally designed to deliver a range of benefits additional to sound asset

management. They are often intended to break the stigma associated with concentrated public

housing. For example, in the Bonnyrigg PPP in New South Wales, the public (30 per cent of

dwellings) and privately owned properties (70 per cent) cannot be differentiated by residents and

passers-by. By improving the social mix of the estate, estate renewal PPPs help to improve the public

housing tenants’ education, employment and recreational opportunities.16

Funding benefits:

A 2007 Infrastructure Partnerships Australia research report found that PPPs demonstrate superior

cost efficiency over traditionally procured projects. The cost advantage can range from 30.8 per

cent from project inception, to 11.4 per cent when measured from contractual commitment to the

final outcome.

Particularly for social infrastructure assets, life-cycle maintenance terms built into the PPP contract

allows more efficient maintenance and replacement of facilities/equipment over the life of the

contract. The private sector is able to link the design and construction phase with the operational

phase to enhance value for money outcomes. Considering the State’s current situation of a rapidly

increasing net recurrent cost per dwelling, there are substantial potential benefits to be gained

from improving operational efficiency over the life of an asset.

Social infrastructure assets, including public housing, should be designed and built to facilitate the

optimal delivery of a public service. Placing service delivery at the heart of a PPP can drive this.

Involving the providers of core services and soft and hard facilities management as key members of

the PPP consortium from the project’s inception – and specifically through the competitive bid

process – ensures physical assets are delivered that will best facilitate efficient service delivery.

15 http://search.informit.com.au.ezproxy.uow.edu.au/fullText;dn=448025089327305;res=IELHSS 16 http://search.informit.com.au.ezproxy.uow.edu.au/fullText;dn=448025089327305;res=IELHSS

For example, dwellings that are designed and built with the capacity to be easily modified in line

with a changing tenant profile could reduce future costs of expensive reconfiguration, or help to

prevent the problem of a long waiting list yet significant underutilisation.

Outsourcing Maintenance/Management Outsourcing the delivery of operations including tenancy arrangements, administration, relocation,

communication and consultation, as well as maintenance and repairs has the potential to

simultaneously improve services and drive down cost.

The profit motive provides a strong incentive for companies to better manage items like growth in

costs, efficient supply chains and better pricing and management of business risks. This has been

shown in Australia and globally across a range of public services, resulting in efficiency savings,

improved services and increased accountability. The Victorian Government could achieve improved

housing outcomes from every dollar spent by contracting out maintenance and management

services.

Service Benefits:

As discussed above, opportunities exist for more efficient management of the housing portfolio.

Significant efficiency improvements stand to be gained through contracting with the private or not-

for-profit sector to deliver these services.

The contracting-out of a public service allows for the private contractor to be held accountable for

the performance of service levels in a transparent way that is not possible under a traditional public

service delivery model. Contracts can be structured to trigger financial penalties for non-compliance

or to provide incentives for good performance, such as automatic renewal of contracts for meeting

or exceeding key performance indicators.

In instances of severe underperformance on the part of the contractor, the government can

terminate and re-tender the contract for public service delivery. For example, when Western

Australia’s Acacia Prison was first contracted to the private sector, there were problems in the

service quality and the decision was made to market-test the prison. Another operator bid for the

contract, and subsequently delivered vastly improved prison management and outcomes. The

contractual provisions allowing the government to re-tender in the case of underperformance forces

the service provider to meet rigorous performance guidelines – and imposes financial or contractual

penalties if they fail to do so.

On releasing the report of the November 2010 inspection of Acacia Prison, Inspector Neil Morgan

recognised the improvement in Acacia’s performance since the contract was re-tendered, judging it

‘at least equal to the best public sector prisons in the State, and in many respects it is superior.’17

'It is no coincidence that the best private prisons are found where there is transparency and strong

external accountability. And Acacia is the most closely monitored and accountable prison in

Australia,' Inspector Morgan said. 'First, it is governed by a contract that sets clear standards and is

publicly available.’18

17 Report of an Announced Inspection of Acacia Prision, Office of the Inspector of Custodial Services, 2011. 18 Report of an Announced Inspection of Acacia Prison, Office of the Inspector of Custodial Services, 2011.

With the right contracts in place, the outsourcing of public housing maintenance and management

services can drive vastly improved services.

Funding benefits:

Competitive models of public service outsourcing have achieved significant cost savings both locally

and globally, and across public service sectors. In addition to delivering high quality services, Acacia

Prison delivers a substantial financial saving to the Western Australian taxpayers. The daily cost of

managing a prisoner at the prison is approximately 30 per cent less than at a public prison.19

In the social housing context, a recent UK study (detailed in the Discussion Paper) showed that

typical savings of 10 to 15 per cent are available through traditional operating and maintenance

(O&M) outsourcing contracts; collaborative models typically deliver savings of 15 to 25 per cent; and

transformational models deliver savings of 20 to 35 per cent.

Other suggestions The following three suggestions were not covered in the Discussion Paper; however, the Victorian

Government could investigate whether they could be applied in Victoria. These options could help to

remove the maintenance liability going forward, improve the social mix of large under-performing

estates, and provide housing that is newer, better quality and more appropriately matched to tenant

needs.

Selling the public housing stock and renting properties for tenants in the private rental

market

In 2010-11 the cost to government, per public housing dwelling in Victoria (including capital) was

$26,802. Comparatively, the median weekly rent in Victoria is $277,20 or $14,404 per year – close to

half as much. On these numbers alone, the model warrants further investigation.

Housing choice voucher system

The housing choice voucher programme is the US Government's major housing assistance

programme. Public housing tenants are provided funding vouchers and are free to choose any

housing in the private rental market that meets the requirements of the programme.

The Housing Authority pays a subsidy to the landlord directly, thereby reducing payment default risk.

The tenant/family pays the difference between the market rent charged and the subsidy. The

vouchers can be turned up or down depending on the participant’s circumstances, helping to

encourage independence.

In an Australian context, the concept has been discussed based on the idea of extending

Commonwealth Rent Assistance to public housing tenants. This would boost the State Housing

Authorities’ funding streams, and give tenants improved choice of housing.

This model could be applied in addition to a social housing supply programme.

19 Report of an Announced Inspection of Acacia Prison, Office of the Inspector of Custodial Services, 2011.

20 2011 Census Data.

Increasing Commonwealth Rent Assistance (CRA)

As outlined above, demand for public housing far outweighs supply. One of the drivers of this

imbalance is that CRA payments – provided to support recipients to access housing in the private

rental market – are significantly less than the subsidy provided for public housing. This keeps

demand for public housing high.

Increasing CRA payments could help to decrease demand for public housing, as many people on the

waiting list would be better assisted to obtain private rental housing.

Increasing the amount of CRA is a Commonwealth Government lever; however, the Victorian

Government could investigate how different increases in CRA would influence public housing

demand in the State, and help to achieve the policy directions of COAG’s National Affordable Housing

Agreement.

Conclusion and contact information In reforming the public housing system, Infrastructure Partnerships Australia asks the Victorian

Government to consider the issues raised in this submission, to help ensure this essential public

service continues into the future.

Should you require further information, I invite you to contact our Manager, Policy, Zoe Peters, on

(02) 9240 2064.

Yours sincerely,

BRENDAN LYON

CHIEF EXECUTIVE OFFICER