Consultancy Report on Review of Private Sector Involvement in Response to the submission of the Alliance of Housing Department Staff Unions
Estate Management and Maintenance Services
The Housing Department's (HD) response to the questions raised by the Alliance of HD Staff Unions (the Alliance) are set out in the following paragraphs. The response was prepared with comments from the Consultant of this review.
Relationship between the Housing Authority and Housing Department
2. The consultant explains that the underlying rationale for suggesting that the Housing Authority (HA) should consider introducing a client contractor split is to introduce greater transparency into the relationship between the HA and the HD. He also recognises that there is inevitably a potential conflict in the current arrangement where the HD as one of the HA's major providers (and for some services its only provider) is also being asked to provide the HA with independent advice on both policy and management issues. Again, establishing a clear client contractor split will help to overcome these issues and provide a sound foundation for further improving the value for money provided by the HA.
3. The consultant stresses that this recommendation stands on its own. It is in his view a sensible proposal to support and underpin the subsequent proposals to increase private sector involvement but it could also be usefully pursued even if the HA did not wish to pursue increased private sector involvement (PSI) in that it would place the relationship with the HD onto a more business like footing.
4. The consultant has submitted a detailed explanation in the Annex about the cost effectiveness comparisons with regard to Figure 6 of the Report. It would help readers to better understand the make up of the costs.
5. The consultant explains that the reason that he has compared staff costs only is simply to facilitate a like for like comparison across a number of estates and between the public and private sectors. The issue of scope of service has been covered in the Annex. He recognises that there are some property management services which private management agencies (PMAs) do not carry out but, equally, PMAs undertake certain tenancy management services. His judgement is that the "net" impact is marginal in terms of comparisons.
6. The breakdown of the HD overheads as shown in Figure 6 can also be found in the Annex. It comprises both the non-estate based direct staff costs of providing property management services e.g. the staff costs of the Regional Management Offices and the Branch administration overheads and the costs of Headquarters supporting services. On reflection the consultant now considers that the inclusion of the non-estate based direct staff costs as overhead costs may be slightly misleading in the presentation.
7. As for Figure 7, the consultant does not suggest that the maintenance and improvement works are handled by PMAs. He just compares the staff costs and overheads incurred by HD to manage maintenance works in-house and the staff costs for projects managed by outside consultancy firms. The point made by the Alliance that there is no PMA who can provide professional maintenance services is not accurate. In fact, the HD has received letters from PMAs recently expressing their support to the consultant's recommendations as well as their interest to provide major maintenance services too.
8. The maintenance and improvement works managed in-house ($2,603M) include major improvement and those general minor maintenance works, and the majority of projects contracted out are major projects e.g. the Condition, Appraisal, Repair and Examination Programme and improvement works for commercial centres. However, there is no information to reflect that there must be a difference in the input of staff resources for these two types of projects.
9. The consultant opines that the Alliance's proposed alternative of re-engineering existing processes would certainly improve the HD's relative cost effectiveness but, given the size of the current "gap" and the fact that the private sector is continuing to rapidly increase its cost effectiveness to remain competitive he does not believe that an internal re-engineering exercise will be adequate.
The impact of Tenants Purchase Scheme
10. The consultant is of the view that the point made in paragraph 3.1 of the Alliance's submission has some validity in that it is extremely important that in devising an appropriate contracting strategy the HA ensures that appropriate service levels continue to be provided to tenants and owners. However, he considers that the comments fail to acknowledge two important points. First, the services the HD are still providing to some Home Ownership Scheme (HOS) courts are supervision services and is different from the services that it provides to Tenants Purchase Scheme (TPS) estates which are property management services. Second, the Alliance's points miss the fundamental issue that it is not clear why a public sector organisation should wish to compete with the private sector to provide services to owner occupiers (any more that it tries to compete for work in private residential estates now).
Impact on Tenants and Society
11. The consultant is of the view that the issue of the poor quality of private sector building maintenance is an entirely separate issue although it reiterates the valid point that the HA would, as part of its detailed contracting strategy, need to assure itself that appropriate quality standards are set and are delivered. The point made in 4.2 is, again, irrelevant to the specific arguments about estate management and maintenance (EMM) services but does highlight the importance of selecting the right providers who can deliver high quality services.
12. There is also the doubtful assertion that private sector companies will inevitably compromise quality. The consultant asserts that the opposite is likely to be the case, providing the HA specifies clearly its performance expectations. First, the private sector - spurred by competition - has stronger incentives to innovate and introduce new approaches and techniques which will ultimately benefit tenants/owners, either in cost or quality. Second, quality providers will clearly be looking to this area as a long term opportunity, not a one off purchase. It is therefore directly in the long term commercial interest of any of the potential providers to ensure that they meet or exceed the contractual requirements set down by the HA. The evidence to date from tenant satisfaction surveys carried out by the HD shows virtually no difference in the perceived quality of service provided by the private and the public sectors.
Implications for the Civil Service and HD Staff
13. The allegation that the Government is implementing a large scale redundancy programme and will sack 5,000 to 6,000 staff are totally unfounded. The Director of Housing has said that in the light of the impact brought about by the transformation of our tenants into owners, and if they do not choose HD as their management agents, redundancy is inevitable if we do not take suitable precautionary action now.
14. The consultancy report does not cover staffing arrangements. Staffing issues will be carefully addressed after the HA has decided on the direction forward. Affected staff will be consulted on the staffing arrangements in accordance with existing guidelines.
Consultant's Response on Cost Effectiveness Comparisons
The key issue raised in this area concerns the validity of the cost comparisons set out in our report and, specifically, the data provided in Figure 6 of the main report (a copy of which I have reproduced below for convenience). As you are aware, this data indicated that, in terms of staff costs, the private sector is some 45% cheaper than the public sector in terms of property management services. A similar comparison was also made for the management of maintenance expenditures with almost identical results.
2. I should start by explaining in more detail our approach and methodology for undertaking this cost comparison work. First, the most robust approach to any such cost comparison exercise is to work with actual data. Ideally, we would have been able to compare actual data for the entire range of estate management and maintenance (EMM) services but this was simply not possible - given that some of these services are currently only provided in-house by the Housing Department (HD). However, we were able to obtain information on the actual audited costs of property management agencies (PMAs) providing property management services to a total of 4 public rental housing (PRH) estates. The information we obtained were total costs, from which we have extracted staff costs and converted these staff costs to an average cost per unit per month in order to facilitate comparison with the Department.
3. We then attempted to assess the HD (staff) costs for providing the same service as that undertaken by the PMAs to provide a like for like comparison. Our basic approach was to establish the total direct and indirect costs for providing services to PRH estates, split out those costs which relate to property management services and then divide these total costs by the total number of PRH units to provide an average cost per unit per month in the same way as for the PMAs.
4. In following this approach, we inevitably had to make a number of key assumptions and judgments about both the scope of existing HD services (particularly between property and tenancy management functions) and the allocation of costs to these services - particularly in terms of overhead apportionment. We must emphasise that, by definition, these assumptions and judgments may not be 100% accurate: no such assumptions or judgments could be since any such cost comparisons inevitably require judgments to be made about cost apportionment. That said, we can state clearly that we have spent a great deal of time reviewing in detail available Departmental data and discussing our assumptions with senior staff in the Department. Certainly this is the most comprehensive attempt we are aware of to undertake detailed private/public sector costs comparisons for estates management services and we are confident that our assumptions are soundly based on hard data and are consistent with the Department's approved approach to cost allocation.
5. The key assumptions we have made - and our approach to making them - are summarised below :
- we have apportioned HD's direct estates staff costs between property management and tenancy management in the ratio of 60:40. This split is based on a detailed analysis of the approved manning scales for estates based staff and were validated in discussions with senior Departmental management. We noted that some property management responsibilities are handled by Housing Department staff, rather than PMAs, but equally that some tenancy management functions (such as rent collection are handled by PMAs rather than the Department. Given these arrangements and the extent to which they offset each other, we have adopted a pragmatic view which acknowledges these differences but suggests that the overall apportionment of 60:40 between property management and tenancy management remains valid;
- we have assumed that all security costs should be included in property management costs for both PMAs and the Housing Department, and that the Housing Department's technical staff costs at estates level should also be included as property management costs since they involve technical staff and artisans whose functions clearly fall within the definition of property management;
- in order to make a clear like for like comparison with the Housing Department, we have assumed that PMA overhead costs for providing property management services to PRH estates will be similar to those charged for providing equivalent services to Home Ownership Scheme (HOS) estates, excluding the related HD Headquarters supervision costs for PMA operated HOS estates (since these are no longer charged once an Owners Corporation has been established). This amounts to some $26 per unit per month as shown in Figure 6 of the report;
- for HD overheads, Figure 6 of the report shows a total overhead figure of $109 per unit/month. This total overhead figure breaks down further as follows: $70 per unit/month represents the non-estate based direct costs of providing property management services, some 60% of which represents the staff costs associated with the District Maintenance Offices (DMOs)/Regional Management Offices (RMOs). The remaining $39 of overhead costs is split between branch administration and overhead ($17) and the costs of Headquarters supporting services ($22). Given that these figures have clearly created some confusion it is perhaps worth reiterating that only $22 of the total overhead costs of $109 represent what might be called "general overheads" incurred centrally and that this figure represents around 30% of the total central overhead. The figures for central overheads can be verified against the annual financial statements published by the Housing Authority. For the year ended 31 March 1998, total central administration and support service expenses amounted to some $603 million. Of this total overhead figure , $301 million was allocated to the rental housing business using the Department's detailed cost allocation procedures. Using a split of 60:40 between property management and tenancy management services would therefore give a total (allocated) central overhead to property management services of some $180 million for the year. Taking this figure and dividing it by the total number of units in the public rental stock gives an average cost of some $22 per unit/month as stated above (actually $22.74)
- A summary table showing a more detailed breakdown of costs than was provided in Figure 6 is attached to this letter. You will see that, on reflection, we think that it may be a little misleading to include the non-estate based direct costs as "overhead" and we have therefore included them as direct staff costs for the purposes of comparison with PMAs.
6. There are a number of other important points to make about these cost comparisons. First, while we have generated comparative data which we believe is as accurate as possible, it is also fair to say that this involved an enormous amount of work - much of it manual in nature - both for the Department and for us as consultants. As we highlighted in our report, we consider that these difficulties in obtaining high quality cost data from the existing financial systems are an important shortcoming which need to be addressed as a matter of urgency - both to support more informed decision making within the Department and to underpin our proposed approach to phased service transfer.
7. Second, some staff have questioned whether the PMA operated PRH estates are "representative". There is no simply answer to this question. It is the case that we have compared average costs for the 4 PMA managed PRH estates with the average costs of providing the same services to the entire remaining PRH stock managed by the Department. We were not informed that these PMA estates were specifically selected because they were the "easiest" estates to manage and we therefore felt comfortable in assuming that these estates as a whole would be similar to the average of the Department's stock as a whole. There are undoubtedly older and more difficult estates to manage but, conversely, there may also be estates which are more straightforward. Equally, we should acknowledge that it is quite possible that the 4/5 PMA run estates are in fact easier to manage than the "average" remaining PRH estates - we simply have no evidence available to prove this proposition (and it is difficult to see how this could be achieved without undertaking a major exercise to calibrate the degrees of difficulty of managing each and every PRH estate across the entire rental stock). However, to the extent that this is the case it would of course exaggerate the cost differential between the private and public sectors.
8. Third, a point which was raised in our report and is worth repeating again is that, under the current approach to contracting with PMAs, the Department requires PMAs to adhere to certain staffing structures. As we pointed out in our report, this constrains the private sector's ability to compete fully by submitting proposals which incorporate their own staffing structures and salary scales. If, as we have suggested, the Authority introduces an output/service based approach to contracting with private sector providers - with minimum input restrictions - we would expect to see further savings generated (and/or quality improvement). This would of course tend to widen further the cost differential, perhaps substantially.
9. Fourth, a further point raised concerns the potential savings from increasing private sector involvement (PSI) in EMM services. We have quoted a potential savings figure of $1 billion in our report. The purpose of quoting this figure was simply to illustrate the scale of potential savings that might be achieved. The figure was arrived at in the following way: we estimated (based on Figure 6 of the report) that, on average, the private sector can provide property management services (staff costs only) for some $121 per flat/month less than the public sector. Therefore, if these average savings were able to be achieved across the entire current rental stock of 661,600 units, this would generate savings of $80 million per month or approximately $961 million (rounded to $1 billion) a year.
10. The following additional points are important to note here:
- The $1 billion figure is not intended to be an exact calculation and actual savings could be higher or lower than this figure. In practice, the actual savings will depend on a wide range of factors such as the actual savings negotiated with private sector bidders, the extent to which overhead savings are realised, the extent to which the Authority applies the proposed approach across the entire stock and so on. However, to reiterate, the $1 billion figure quoted is useful to illustrate the likely magnitude of potential savings;
- against this $1 billion of annual savings, there would both be some one-off transition costs and certain additional recurrent costs to, for example, establish effective contract management and monitoring arrangements for the Authority. These additional recurrent costs are difficult to estimate in detail at this stage but will probably amount to somewhere between $50-100 million per annum;
- the $1 billion figure only related to property management services (staff cost component only). These costs only represent some 60% of total EMM costs. To the extent that savings could also be generated in the remaining 40% of EMM costs which we have not compared in detail with the private sector for the reasons set out above, there would be a corresponding increase in overall savings. If, for argument's sake, the level of savings for the other 40% of EMM services was the same as we estimate for property management services, this would increase the potential savings available.
11. Finally, it is perhaps worth making the point that the substantial gap we estimated in the relative cost effectiveness of the private and public sectors is not unexpected. Indeed, the "new management model" introduced by the Department in order to provide an estates management service at comparative cost to that provided by existing PMAs, involved a significant reduction in staff resources.
12. The fact that in our view there is a substantial differential in cost effectiveness is not in any way intended to reflect personally on individual staff members, many of whom have served the department loyally and diligently for many years. Rather, the cost effectiveness "gap" inevitably flows from some important structural differences between the private and public sectors in this area:
- based on data provided to us, private sector salary packages are generally less generous than those applying in the public sector and, in some cases, there is a substantial difference when civil service benefits are built in;
- the civil service operates a more rigid staffing structure which doesn't readily facilitate multi-disciplinary working. This tends to be less of an issue in the private sector where flexible working is often the norm;
- overhead costs will be substantially lower in the private sector since the additional overhead costs involved in securing additional business for established private sector providers is marginal (i.e. they have already incurred the costs for their headquarters and supervisory structures) whereas the Department has to incur substantial overheads in order to provide EMM services in-house;
- civil service rules and procedures inevitably constrain the Department from operating in a fully commercial way.
13. Taken together, therefore, our costing data also accords with a more qualitative assessment of the likely differences in cost effectiveness and the reasons for these differences.
Source : PricewaterhouseCoopers
Property Management Staff Costs
|Private Management Agency($/unit/month)
|DIRECT STAFF COSTS
|Estate Based Direct Costs
|Non-Estate Based Direct Costs (Note)
|DIRECT STAFF COSTS
|Branch Administration & overhead
|Headquarters Supporting Services
Note: Approx. 60% of these staff costs relate to District Maintenance Office / Regional Maintenance Office