Property for sale signs (The Guardian)

Land Registry Operations: Why privatisation matters

(minor edit: 25 May 2016 on FoI (Question 2), with thanks to the New Economics Foundation’s post)

On 24 March, just before the Easter weekend, the Department for Business Innovation and Skills (BIS) released a consultation document on the future of the Land Registry. This surprised many people, as the Government had only just over a year an a half ago, in July 2014, announced that following a similar consultation, there would be no change to the Registry’s operating model.

So we decided to explore the issue of what might be driving renewed interest in privatising the registry and what the consequences of this might be, in order to formulate our own response to the consultation.

Much of recent Government Policy as regards Planning and Local Government has not been opened up to consultation, and it is welcome that Government are actually seeking views, albeit on something which has previously been considered and rejected. The general direction of Policy in the current Parliament has been to reduce Government spend and privatise Government services in order to boost Treasury receipts with lump sums. This has led to an oft-reported “unprecedented” sale of Government assets. However, the vast majority of this has been the sale of shares in the banks which were nationalised in relation to the 2007 financial crisis (Northern Rock, Lloyds/HBOS and RBS), but there has also been a sale of smaller Government assets, such as the Fire Service College and the Government’s Food Safety labs, as well as the Royal Mail and consideration given to selling Network Rail (the railway infrastructure) in whole or part.

This is, currently, a live document, and your input and comments at this stage are welcome. In addition, this is being released under a Creative Commons Non-Commercial Share-Alike licence (cc-nc-sa) rather than the usual Attribution (by) version, to facilitate the use of this text in consultation responses.

Why is this important?

The Land Registry maintains the register of land ownership, some 24 million titles which, despite the fact registration of land was made compulsory in the Land Registration Act 1925, only covers 86% of the country (LR Annual Report 2015, p. 7). The registration of land ownership is important to the functioning of the land trading economy, and also so people can find out whether spaces are public or private, if land has been abandoned or is being sat on awaiting ‘more favourable market conditions’, or is being used as a store of offshore wealth.

It is critical for all of these purposes that the Registry remains independent and cannot be ‘bought’ by a party with specific interests in land speculation or investment.  As is now well-documented, the housing market in London has been skewed by large and institutional investors, many from abroad. With land and property’s primary purposes now seen to be investment rather than for their utilitarian value, the operation of the Registry in public hands acts as a neutral overseer of the process.

The Consultation

There are ten questions in the Consultation Document, and it’s probably easiest to go straight into our response to those questions. However, it is worth briefly summarising a couple of key aspects of the consultation first:

  • What is proposed is a privatisation (selling-off) of the operation of the Land Registry, with the Register to remain vested in the Crown (as now). Other options mentioned are part-mutualisation and contracting out of the operation
  • The Registry is a Government Trading Fund, which is a specific type of company managed by a Government Department (in this case, the Department for Business, Innovation and Skills – we could speculate as to why this is not the Department for Communities and Local Government, which is responsible for Planning, but we won’t here)

Also, at the moment, something which is probably mainly speculation is the reasoning behind the proposal to sell the operations. The Consultation Document makes clear that “The Government is pursuing this goal through a number of means, one of which is selling assets that, with the right protections in place, do not need to be in the public sector (and often do not benefit from public ownership)” (Section 1). This is, arguably, an ideological position in favour of ‘Small Government’ rather than one on whether certain services are better remaining under public ownership.

The preferred option is to form a company, referred to as ‘NewCo’, which will operate the Registry and then be sold off.

Position Statement

There are certain aspects to our position at Samuel L. Foxton which probably have a bearing on the specific answers we give, namely that:

  • We would like to see more openness in Land Ownership data, particularly with live issues such as Driven Grouse Shooting, which often involves the deforestation and draining of large areas of moorland, with consequent impacts on flooding downstream
  • We are in favour of Land Value Taxation as a counter to the continued rise in land values and the consequent worsening of housing affordability, and also as a means to capture for the public good some of the rises in land values which occur as a result of gentrification and infrastructural improvements. In addition, land is impossible to hide offshore

Q1. Do you agree that ownership of the Registers should remain in government?

Yes

The Land Register is an important asset to the nation, and its vesting in the Crown should remove from it from outside interference, keeping it independent. Due to the sensitive nature of some data contained within the register, it does not appear to make sense for ownership of the Register to be in anything other than public hands at the national level

Q2. What steps should government take and what safeguards should it put in place to ensure continued and improved access to high-quality and reliable Land Registry data?

The Government’s commitment to Open Data, and to allowing public access to as much of the data as can be opened without risk to landowners (particularly small landowners) must remain in all cases.

The privatisation of operations, particularly of searches and data extraction, appears to be at odds with this aim, so keeping the operation of the Registry within the public sector should be considered as an important part of preserving both data security and data openness.

In addition, the rights to Freedom of Information Requests on the Registry’s activities should remain in any case, as part of making sure ownership information and information on the activities of the Registry can be made available to the public.

Q3. How could government use this opportunity to improve the quality and accessibility of data produced by Land Registry for all sectors of the economy?

The Land Registry’s fees and openness are set by Regulation and Rules, and the Government should use its oversight of the costs of Registry operation to determine those fees. Bearing in mind that “The government rules on charging, which are set out in the document Managing Public Money, stipulate that fees must be set at a level that recovers the cost of the services to government including a small amount to reflect the cost of capital to central government. Land Registry is supposed to ensure that its income from fees covers its expenditure under normal operating conditions. It is not currently permitted to generate a profit from core statutory functions, because fees must not be used to generate revenue for the Government to spend elsewhere – that is the purpose of taxation” (Consultation Document, Section 20), oversight of all costs within the Registry is required to set fees at the optimal level of covering costs but not generating excessive surplus, and this stands to be lost if the Registry’s operations are privatised.

In addition, the Consultation Document does not make it clear what the relationship between the “no-fault indemnity” and the proposed new operator of the Registry will be. Schedule 8 of the Land Registration Act 2002 allows for compensating landowners due to mistakes in the register or in searches, and that (op cit., Section 6) this could be up to the value of an estate lost due to this process. At present, the indemnity means the Registry is strongly incentivised to ensure its records are correct. Section 51 of the Consultation Document states “The government would seek to agree a mechanism to transfer an appropriate share of financial risk associated with the indemnity to NewCo”, but this does not mean that an adequate share of the risk will necessarily pass to private hands. The retention of the indemnity on a “no fault” basis (op cit., Section 18) means that the private sector Registar will have no legal responsibility as to the quality of the data, merely some liability for compensation. On this basis, there is a significant risk of the quality of the Register data declining if its operation is entirely privatised. On the other hand, if operation is contracted out to a private contractor, there can and must be an adequate share of liability in the operating contract. The outright sale of NewCo to a private entity gives the Government less oversight of data quality and indemnity, and makes it more difficult to remove a poorly performing operator as the assets associated with maintaining the Register will be out of the Government’s hands.

Q4. On what basis should government manage the relationship with a privately owned Land Registry to ensure Land Registry meets, as far as is reasonable, the data quality and availability requirements of all stakeholders?

The Government’s preferred option is not to have an independent regulator, but have operation of the Register conducted by an outside organisation. This does not provide for any regulation of the data and service quality aside from the compensation regime discussed above. That the Government are proposing there not to be a regulator beyond the ‘light touch’ of the Competition & Markets Authority, and also for there not to be a clear idea how the liability for mistakes in the data are to be handled suggests there will be inadequate protection for customers who are receiving poor service or need to make claims against the Registry operators.

Q5. Do you agree that the suggested safeguards should be included in any model?

Yes

However, we do not believe the safeguards detailed in Sections 63-65 are adequate, as outlined in the previous responses.

Q6. Are there any other safeguards that you think should be included?

Sections 63-65 of the Consultation Document do not fully explain how the interests of landowners and Registry searchers will be safeguarded. In addition, there are a number of questions which remain unanswered by these sections:

If a body is to be set up to manage the relationship between the Government and a private sector operator, why should it not be set up to have some regulatory function, given the Government intend for the operator to effectively have its licence rescinded if they perform poorly (Section 66). Without some kind of regulatory function here, how would such a decision be possible?

The issue of Conflict of Interest with the sale of the Registry has not been discussed in the document. Many prospective private sector operators of the Registry are likely to have their own property interests and trade property as part of their operations (it is considered that the companies which have bought other Government functions on privatisation would be likely to bid). Safeguards must be in place to ensure that the operator of the Register will not be able to use its preferential access to the Register for unfair commercial gain.

Sections 64 suggests that fee-setting would move from Parliament to a Regulator under a regulated approach. This would ensure independence from Parliament, but this suggestion does not indicate why that would be preferable to Parliament continuing to set the fees while a regulator ensures a good service is being delivered.

Q7. Do you agree with the preferred option?

No

We do not agree with the Preferred Option

Q8. What are your reasons for your answer to question 7?

There are a large number of reasons we have for not agreeing to the Preferred Model.

Government Objectives

The Preferred Model is preferred in relation to meeting Government Objectives set out in Sections 40 and 41, firstly that “any change needs to be deliverable in the short term (from 2017)” (Section 40). It is not clear why a change needs to be made at such short notice, and, given the requirement for new Primary Legislation (Section 66), this would mean a Bill being tabled for this year’s Queen’s Speech (as has been done), for enactment and coming into force during that Parliamentary Year.

Three objectives are listed in Section 41, to “Maximise upfront proceeds for the Exchequer”, “Allow classification of the new service delivery organisation to the private sector”, and “Deliver a modern, digitally-based service that benefits Land Registry customers as well as taxpayers as a whole”. The maximising of upfront proceeds to the Exchequer is a wider Government Objective, but one which makes little sense for a Government Trading Fund which generates a surplus, some of which accrues to the Treasury. The second appears to have the intention of capturing more of the Operating Surplus and allow the Registry to sell its consultancy services into the wider market. This could be done in different ways in order to maximise the value derived from Consultancy. The third objective, to deliver a modern digitally-based service appears very much like it is being met by the Registry at the moment, with a 25% improvement in units processed per person in two years (LR Annual Report p.13), with some benefits already passed on to service users through reduced fees (ibid.) and with the IT infrastructure having been substantially upgraded in 2013 and well over 80% of applications made electronically (op cit. p. 10), it seems very much as if this objective is well on the way to being achieved regardless of any privatisation.

If the key objective is indeed to maximise revenue to the Treasury, the Consultation Document appears to make the following assumptions:

  • That the current state of the Registry having substantial operating surpluses will continue (this is critical to any future purchaser of the operations and to the Treasury being able to maximise its receipts). The Registry was making an operating loss for several years, primarily due to the Financial Crisis causing a downturn in work, but also as unit operating costs were higher
  • That it would be undesirable for the Government to achieve the objective of fees covering only costs and cost of capital by reducing those fees – yet this is not considered to be a possible way of meeting that objective, and it is not made clear why such an approach is considered undesirable
  • That the Registry operations sale will raise an amount of money which is greater than the Net Present Value of its net surplus plus its asset value. There are a number of risks for any potential purchaser which may not make the operations a desirable purchase
  • That the Registry’s current operating surpluses are ‘lost’ to the Treasury. The Registry’s Annual Accounts reveal that it paid the Treasury a dividend of £121.7 million in 2014/2015, and £146 million the previous year (p. 72), with each of those years including £100 million of exceptional dividend (p. 18)

There is a key question as to what the Registry’s current status as a Government Trading Fund prohibits it from doing, and whether those objectives are best met through the currently preferred option. In particular, the Land Registry’s Consultancy operations use its specialist knowledge which puts it in a commercially competitive position for certain specialisms, one which could be commercially exploited, but which also makes use of specially privileged knowledge (as operators of a Crown database) which give it an unfair commercial advantage.

The Consultation Document opens with the statement “Without sound public finances there is no economic security for working people. In normal economic times governments should prepare financially and economically, so the country is better prepared for whatever lies ahead” (Section 1), however, this Government has been unable to deliver sound public finances, and no evidence is provided to demonstrate that the removal of a revenue stream in favour of a lump sum to the Treasury contributes to sound public finances in the future. Indeed, it has been well-documented in other places that the Government has so far failed to obtain fair market prices in the privatisation of public bodies.

Financial Impact on Local Authorities

The timing of this consultation is unfortunate, as the Registry have not completed their assessments of the impact of the move of Local Land Charges to the Registry (from management by individual local authorities) as stipulated in the Infrastructure Act 2015. This means that the impact of the proposed changes, in as far as it can affect the desirability of different operating models, cannot be fully assessed. This supports the case for retaining the current operating model.

Risk to Government

The preferred model carries with it a number of risks to Government. Primarily, because the Land Registry’s fees are fixed in a volatile market, the Registry’s surplus has been highly variable over the previous 7 years (LR Annual Report, p. 101), despite the general upward trend. The Registry operations as a complete sale would therefore be less attractive than an operating contract in which profit for the operator would be less directly dependent on the volatility of the land and property market (such as, for example, on a ‘cost plus’ basis or an Annual Premium basis as with certain rail franchises). The Government therefore risks its returns from the sale being smaller than expected on that basis.

In addition, because of the “no-fault indemnity” in the Land Registration Act 2002, which the Government intend to retain, the Government remains liable in law for mistakes which the Registry operator may make. While there is intended to be a means of sharing that risk, the sheer scale of indemnity which the Registry may have in extreme cases will also act as a devaluer of the business to a potential purchaser, and negotiations around the level of indemnity accruing to each party may result in the Treasury or BIS having to weigh up the amount of risk retained with the upfront sale value of the Registry operations. In any case, the privatisation of profit and nationalisation of risk model which could result from negotiations only offers benefits to the private sector operator and significant disbenefits to Government. The negotiations here would have to take place with full public scrutiny.

Commercial Viability of a Privatised Registry

As stated above, for a potential purchaser of the Registry operations, while the Consultancy arm would carry only the usual commercial risk of such an operation, the Register operations themselves carry a financial risk on account of there being fixed fees and variable demand, and also in terms of the nature of any risk-sharing agreement for indemnity. Any purchaser would benefit from the Registry’s significant landholdings and recent renewal of IT infrastructure, however.

In contrast to many other privatised services, where there is the potential for pricing to be used to alter demand, the contribution of Registry fees to land transactions is almost insignificant, and, as registration is a statutory requirement, the purchaser will have no powers and no commercial freedom to expand this side of the business. This also means there would be little benefit to the Government and society at large from a move to private sector operations, as a profit margin greater than the current 3.5% return on capital to the Treasury will be demanded by any potential purchaser.

Conflict of Interest (openness)

Any potential purchaser of the Registry operations would have to ensure they did not have a significant conflict of interest (as a landowner) by way of having preferential access to the Registry. A private sector landowner having preferential access to the Register, to ownership and price paid data on all registered land parcels, would have an unfair advantage in all land transactions, and the ability to have access to this data for commercial purposes may outweigh any consideration of the commercial viability of operating the Register. The consultation document contains no reference to the risk of a conflict of interest any future Register operator may have in respect of their own land dealings.

Q9. Do you think an alternative model would be better and why?

Our preference would be for the current operating model to remain, as it is able to generate some revenue to the Treasury, is neutral and is incentivised to deliver a high quality service.

Our second preference would be for a concession model in which the operation of the Registry is let out as a concession for a fixed fee, which would incentivise the Register operator to further reduce costs. However, the large cost reductions achieved to date through a move to electronic operation are very unlikely to be repeatable. In addition, in order to incentivise the Register operator to offer a high quality service (in respect of errors and the indemnity therefor), some form of independent oversight is required from Government or an Independent Regulator. However, we strongly believe that a concession model is preferable to an outright sale, as it would enable the service to be more easily brought back into Government operation if a private operator fails to provide a good service. Outright sale will make this more difficult and expensive, and the purchaser will demand compensation in this case, particularly in respect of the physical assets they will own.

We therefore believe that the current model is preferable to any of the proposals

Q10. Are there other key costs and benefits that you think we have missed?

The impacts of the Registry’s new responsibility for Local Land Charges has not been considered in the consultation, in large part because these are still being worked out by the Registry. Therefore, there are impacts of the proposed privatisation which are not yet known, and until they are, it seems unwise to go ahead with any changes to the operating model.

This is currently a live document, released under Creative Commons (cc-nc-sa)

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