Improving social housing policy

The financial troubles of a private provider of government-backed social housing contracts, Chao Chi Property Management Consulting and its subsidiaries, came into the spotlight earlier this month. Hermit Crab Management Consultancy, one of the subsidiaries, has said that it can no longer continue providing services.

That alone means more than 6,000 government-subsidized rental management cases nationwide have to be transferred to other providers.

Chao Chi handles a substantial share of the government’s master leasing and property management services, so what would otherwise be a straightforward business issue has become a significant public risk for landlords, tenants and the government’s housing policy. Beyond how Chao Chi landed itself in trouble in the first place, there is a fundamental, institutional question to be asked: In outsourcing swathes of its social housing policy program to private companies, has the government actually made plans for what happens if one of the companies fails?

The government can outsource public functions to private companies, but it cannot offload its public responsibilities along with them. When a private contractor only has a few dozen or few hundred households to handle, the government might be able to quickly transfer them to another provider should the company encounter difficulties, but when one company handles thousands of households or holds a significant share of the overall market, the company’s risk is no longer just its own.

A fiscal crisis for one of these providers spells trouble not only for its shareholders and creditors, but also the rental income of landlords, tenants’ housing security, deposits, repairs and maintenance, lease management and the housing services promised by the government. This is a classic example of a concentration of risk in public policy.

A discussion among government officials about limiting the proportion of contracts that a single provider can undertake is a step in the right direction, but it should not stop at setting a limit.

First, the government should establish a concentration-control system for property rental and management providers.

Beyond price, the number of households served, and a company’s ability to expand, the government should also consider market concentration as part of its risk assessment when awarding contracts. Caps could be set at the national, regional and contractor levels to prevent numerous housing services from being concentrated among a few providers.

In finance, regulators restrict excessive concentration to prevent problems at a single institution developing into systemic risks. Rental management is not the financial sector, but when one company controls thousands of social housing rental relationships, there is a significant public interest at stake.

Second, the government should establish a continuous financial monitoring system for providers.

If government oversight focuses mainly on a company’s eligibility to bid for contracts and performance in fulfilling them, it risks overlooking a crucial point: whether it will still have sufficient financial capacity in two years. Providers in charge of a number of households above a threshold should be required to regularly disclose their financial structure, liquidity, major liabilities, related-party transactions and other major developments that could affect their ability to fulfill their contracts.

In particular, if a parent company or affiliated company experiences problems such as corporate-bond repayments, major debts or unusual movements of funds, the authorities should activate an early-warning mechanism that includes looking for a replacement rather than waiting until the provider formally announces that it can no longer continue its services.

Third, the government should devise a functional “exit and takeover” mechanism.

If a rental-management provider suddenly stops operating, tenants are less concerned about who the government will hold responsible than about practical questions such as who to pay rent to, who to contact for property repairs, whether their deposit is safe and whether their lease is still valid.

The government should establish something similar to the business-continuity management mechanisms used in finance. Large providers should be required to submit business-continuity and exit plans, covering how lease information will be transferred, how deposits will be safeguarded, how rent payments will continue, how repair responsibilities will be handed over and how quickly a new provider must take over.

Finally, a transition system cannot be improvised after a company gets into trouble. Housing policy is not dealing with thousands of households in the abstract; it is serving thousands of real families.

The government can harness market forces to advance housing justice, but it cannot allow housing justice to bear the risks of private companies’ business failures.

The Chao Chi case should serve as a warning that, at a certain scale, the rental-management program can no longer be managed along the lines of ordinary government outsourcing and procurement.

The more important a private company becomes in providing public housing, the stronger the government’s regulatory system must be to match that public importance.

Social housing policy must shift its focus from how many households are covered to address a more fundamental question: If a private provider collapses, can people’s homes remain secure?