Briefing

EU structural funds 2014-2020: opportunities for LEPs to invest in green economy through retro-fitting social housing

Contact:Arno Schmickler
Team:Neighbourhoods
Tel:020 7067 1034
Email:
Date:May 2013
Ref:NS.EN.2013.BR.06
Registered office address
National Housing Federation,Lion Court, 25 Procter Street, LondonWC1V 6NY

Introduction

The 2014-2020 EU Structural Funds Programme provides an excellent opportunity to promote investment into green jobs, green firms and sustainable living. Local Enterprise Partnerships (LEPs) will be leading the strategic investment within their area delivering against the overall EU structural funds objectives.

Jointly with the European Investment Bank (EIB) the Federation put forward a proposal for a financial instrument (“revolving loan”) using EU Structural Funds to finance energy efficiency improvement in social housing (“retrofitting”). This proposal has been included in draft guidance to LEPs issued by the Department for Business, Innovation and Skills (BIS) with domestic retrofit being identified as one of the programme priorities.

Supporting energy conservation and generation in existing social housing will boost green skills training, related employment and support the delivery of low-carbon strategies/sustainable energy action plans for neighbourhoods and local areas.

The proposal is an ‘’opt in’’ model which envisages the creation of an overarching lead fund at national level, with EU funding invested from LEP allocations and with project delivery at LEP level. There is the potential for the model to be funded by both European Regional Development Fund (ERDF) and European Social Fund (ESF) programmes.

1.0What is the opportunity?

Up to £6bn EU funding will be available over seven years with notional allocations given to LEPs[1]; initial draft guidance has been published by BIS[2] and LEPs are asked to develop local investment strategies aligned to European programme priorities; these strategies should also take into consideration the future potential of existing programmes (such as Growing Places, City Deals and similar initiatives).

The 2014-2020 EU Cohesion Policy Framework emphasises the importance of place-based approaches and priorities include accelerating the move towards a low-carbon economy, achieving social inclusion and combating poverty, as well as increasing employment and supporting labour mobility.

The programme provides the option to combine capital investment (European Regional Development Fund) with revenue (European Social Fund).

2.0What is the proposal?

Building on successful projects in the current EU structural funds programme (2006-2013) and established best practice in the social housing sector, the proposal is to use a revolving loan fund to support retrofitting local housing developments which will link with other Government Initiatives and LEP priorities while at the same time creating local jobs and raising the skill levels of the workforce, so that we are better equipped in our move to a low carbon economy.

The proposed revolving loan enables a larger scale of investment, overcomes grant dependency and reduces management cost/risk. Delivery of projects is at local level, management of the fund through an intermediary at national level. This allows LEPs to opt-in to a solution which reduces risk levels through a portfolio approach and allows for better financing terms. The lead fund is also likely to attract significant institutional investment through aggregation and consolidated financial oversight of smaller scale projects at national level.

3.0How would it work?

A financial intermediary would be procured on a national basis, which would then provide loans to housing associations to undertake retrofit activities. This lead fund would be funded through ‘’opt in’’ contributions from LEPs who wished to participate in the model and who were able to demonstrate a minimum project pipeline of £10 million[3]in the respective LEP area to achieve critical mass. LEP resources contributed to the loan fund would be ring-fenced to the relevant LEP area.

Subject to sufficient interest in the model and the resulting loan having the necessary scale, it is proposed that European Investment Bank (EIB) lending and other institutional investment could be used as match for the ERDF, negating the need for match to be secured at LEP level. The model builds on a revolving loan fund already in operation in London which uses ERDF and EIB funding sources. As in the London example, in addition to providing match funding, the EIB lending could also be used to support wider new build social housing activity through the fund to provide further value added and leverage on each LEPs ERDF contribution[4].

Housing associations would borrow money from the revolving loan, to undertake retrofit projects. Subject to the level and sources of co-investment into the revolving loan fund there could also be a potential to finance energy efficient new build (non ERDF funded) projects. Repayment of the loan component could be either through a Green Deal type mechanism on a relatively long term basis (pay-as-you-save) or could come from housing association’s own resources. An element of grant financing (integrated into the revolving loan model) would ensure both viability of projects and compliance with EU structural funds regulations which require that the European funding is spent over the programme period.

4.0What are the benefits?

The revolving loan fund has the potential to deliver low carbon, employment generating and social inclusion priorities for LEPs.

In terms of employment creation; evidence indicates that retrofit is a more effective investment than even new construction. UK government figures estimate that every £1 million of investment in home refurbishment can support 17 net jobs for a year, while every new home built equates to at least 1.25 jobs created or maintained[5].

Benefits are retained in local communities: training and employment during project, readiness for low-carbon economy jobs, reduced energy cost increases purchasing power in neighbourhood and/or reduces number of people living in fuel poverty (and thus requiring subsidy).

Reduction in greenhouse gas emissions: domestic buildings in UK account for more than a quarter (27%) of total carbon emissions; reducing energy use in the home will make a major contribution to tackling climate change. With 80% of today’s building stock projected to still being used in 2050, improving the energy efficiency of existing homes is an important aspect in tackling climate change, reducing fuel poverty and improving security of energy supply.

5.0How is this different from Green Deal schemes?

Housing associations have already implemented significant energy efficiency improvements in their existing stock; however, further enhancements will require some assistance to become cost-effective. A 2011 survey of housing associations[6] identified lack of financial support as by far the biggest barrier to retrofitting. This is also complicated by the “split incentive” effect in social housing, where the tenant keeps the cost benefit of retrofitting, while the landlord pays for the works.

Whilst the Green Deal may address some of these issues it is dependent on the “Golden Rule” of the achieved energy savings outweighing the upfront investment. As most of the cost-effective work has already been carried out in social housing stock and due to persisting fuel poverty the Green Deal might not always be a viable option to finance retrofit in social housing.

The Green Deal is also restricted by issues with credit screening criteria and comparatively high interest rates. Finance from the proposed Green Deal Finance Company rules out around 20% of the population with the lowest credit rating (many of whom are social housing tenants), and comes at an interest rate around 7%.

It is proposed that finance from the revolving loan fund would be universally available to social housing providers and tenants, and would be offered at a much lower interest rate, thus addressing the lack of financial support and accelerating retrofit activity at a local level, whilst also attracting additional institutional investment.

6.0What do we need to make it happen?

LEPs are invited to develop investment strategies under the umbrella of an “English Growth Programme” to set out local priorities for the 2014-2020 EU structural funds programme. To make the proposed financial instrument viable a sufficient number of LEPs will need to identify retrofitting social housing as one of their local priorities and consider subscribing to the lead fund to deliver local schemes.

Housing associationsneed to work closely with LEPs to identify a significant level of investment-ready schemes within the respective LEP areas and demonstrate commitment to deliver.

The Federation is working with the EIB on the further development of the financial terms and conditions of the proposed revolving loan fund, taking into consideration feedback from the LEPs and member engagement. These will also feed into the next iteration of the LEP guidance to be issued by BIS.

The Federation will continue to work with BIS to inform the development of the EC/UK Partnership Agreement which will govern the implementation of the EU structural funds 2014-2020 programme.

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[1] Managing authority responsibility will remain with central government departments to reduce administrative burden.

[2]Consultationon draft guidance closing by end of May: https://www.gov.uk/government/publications/development-of-eu-structural-and-investment-fund-strategies-preliminary-guidance-to-local-enterprise-partnerships

[3] The £10m are the total investment volume; EU funding could be a much smaller percentage of this amount depending on match-funding and gearing levels of the revolving loan.

[4] The EIB, in conjunction with the Greater London Authority (“GLA”), has already implemented a pilot scheme in London which introduces this model. The pilot involves a £6m allocation of ERDF, match-funded with £6m by the GLA, being on-lent by a financial instrument to housing associations for retrofit. Alongside this, EIB is lending £200m for retrofitting and new build in London, through the same process.

[5]Refurbishment figures calculated by Department for Communities and Local Government based on results from the Housing Market Renewal (HMR) programme in relation to refurbishment; using data in House of Commons written answers 28 June 2010; new build job figures calculated on HMR total new build, using data on jobs created reported in Government response to DCLG Committee’s report on Housing and the Credit Crunch follow up Sept 2009: HMSO CM7695 Crown copyright

[6] 116 of 134 social housing providers surveyed identified finance as one of the biggest barriers – (