Part 3: Our findings

Inquiry into the Ministry of Social Development’s funding of private rental properties for emergency housing.

3.1
In this Part, we discuss our views about:

Introductory comments

3.2
We consider that, although the Ministry no longer funds private rental properties as emergency housing, lessons arising from this inquiry are relevant to other situations.

3.3
Public organisations are accountable to Parliament and the public for how they spend public money.

3.4
The Ministry's position on the emergency housing grant is that the arrangement is between the Ministry's client and the supplier. The Ministry sees its role as providing financial assistance to the client through the emergency housing grant. It provides that financial assistance by paying for the accommodation on the client's behalf.

3.5
However, in practice, the way that the Ministry accessed and paid for emergency housing on behalf of vulnerable people through the emergency housing grant placed it in a central role.

3.6
The people applying for the grant often relied on the Ministry to find emergency accommodation in circumstances where they had no other options. Second, once they were in the accommodation, it is unclear what rights, if any, the people had in relation to the property they were in. If there was a problem, it appears people relied on the Ministry to help resolve it.

Best practice

3.7
Our good practice guide Public sector purchases, grants, and gifts: Managing funding arrangements with external parties sets out the basic principles that govern how public organisations use public money to pay or fund external parties. These principles apply whether the public organisation is spending money through a procurement process, a grant, or a gift.

3.8
The basic principles are as follows:

  • Accountability: Public organisations are accountable for their performance and should be able to give complete and accurate accounts of how they have used public funds. This includes funds that they passed on to others for particular purposes. They should also have suitable governance and management arrangements to oversee their funding arrangements.
  • Openness: Public organisations should be transparent in how they administer funds. This supports accountability and promotes clarity and a shared understanding of the respective roles and obligations of the public organisation and the external parties they have entered into funding arrangements with.
  • Value for money: Public organisations should use resources effectively, economically, and without waste. They should have due regard for the total costs and benefits of an arrangement and its contribution to the outcomes the organisation is trying to achieve. Where practical, this may involve considering the costs of alternative supply arrangements.
  • Lawfulness: Public organisations must act within the law and meet their legal obligations.
  • Fairness: Public organisations have a general legal obligation to act fairly and reasonably. Public organisations must be, and must be seen to be, impartial in their decision-making. Public organisations may sometimes also need to consider the imbalance of power in some funding arrangements and whether that imbalance is significant enough that they need to change the way they conduct the relationship.
  • Integrity: Anyone managing public resources must do so with the utmost integrity. The standards applying to public servants and other public employees are clear, and public organisations need to make clear that they expect similar standards from any external parties they fund.

3.9
A public organisation should have mechanisms to ensure that it is getting value for money. It should also be able to report to Parliament and the public about whether the money it spends is achieving its purposes.

3.10
As well as applying the principles described above, our good practice guide provides advice about taking a strategic approach to funding arrangements:

It is important for public entities to think clearly about the different ways they can use funds, and the benefits, costs, and management consequences of different approaches, throughout their planning.40

3.11
We expected the Ministry to have:

  • taken a strategic approach to deciding which suppliers to fund;
  • mechanisms to ensure that it was getting value for money; and
  • been able to describe how it had used public money to achieve its purposes.

Strategy should inform service provision

3.12
We expected the Ministry to consider how it met the needs of people seeking emergency housing by finding options and assessing their costs and benefits for both the short term and longer term.

3.13
Funding arrangements are not an end in themselves. They are a way of achieving the public organisation's broader goals:

A fundamental part of strategic thinking and business planning for any public entity is considering the most effective way to use public funds to achieve its goals.41

3.14
The Ministry has several strategy documents that set out its broader goals and outcomes, and the principles it will use to deliver its outcomes. We expected the Ministry to use these documents to inform its strategic planning when it makes decisions about paying to use private rental properties as emergency housing.

3.15
The Ministry's strategy documents include:42

  • its statement of intent, which acknowledges the importance of working with others to achieve its outcomes and goals;
  • Te Pae Tata – Te Rautaki Māori me te Mahere Mahi – Māori Strategy and Action Plan; and
  • Pacific prosperity: Our people, our solutions, our future – a Pacific strategy and action plan.

3.16
These three documents emphasise the importance of working in partnership with the community. Although not all were in place when the Ministry started using private rental properties, the concepts in them built on those set out in strategic documents that were in place at that time.

3.17
In addition, the Ministry is a joint owner of the Aotearoa/New Zealand Homelessness Action Plan. Cabinet approved this in February 2020, before the Ministry decided to stop funding private rental properties as emergency housing. We expected the Ministry to have used the principles in the Homelessness Action Plan when it made that decision.

3.18
The Aotearoa/New Zealand Homelessness Action Plan is a cross-agency plan that sets out the guiding principles that underpin the plan and actions carried out under the plan. These principles include Te Tiriti o Waitangi, a whānau-centred approach, embedding kaupapa Māori approaches, and a joined-up approach between agencies and communities.

3.19
As we described in Part 2, the decision to start using private rental properties as emergency housing was innovative and a pragmatic way to respond to a difficult problem. We acknowledge that the Ministry was responding to urgent need in a market where there was significant pressure to find housing, especially for larger families.

3.20
However, in 2018, when the pressure for emergency housing continued to grow in Auckland and the amount that the Ministry was spending on private rental properties was increasing, it carried out no analysis or planning about:

  • how many houses it would need;
  • where the houses would come from;
  • whether using private rental properties as emergency housing would affect other parts of the rental market;
  • how much the private rental properties would cost;
  • what terms and conditions may apply to the arrangements with suppliers;
  • what the alternatives to using private rental properties were; and
  • how it would account for the money it spent and how it would consider value for money.

3.21
We expected the Ministry to have considered these matters once it started paying emergency housing grants for private rental properties. The Ministry's guidance for its staff referred only to motels and hostels as emergency housing and did not cover arrangements with suppliers of private rental properties.

3.22
The Ministry told us that it did not want to encourage the use of private rental properties (by providing explicit guidance), given the potential impact on the rental housing market. However, by September 2019, almost a quarter of the people in emergency housing in Auckland were in private rental properties. It was clear that, whatever issues there were with the cost and quality of private rental properties, there was considerable demand for them.

3.23
In September 2019, the Ministry became aware of issues with private rental properties being used as emergency housing. The Ministry discussed possible solutions with the Ministry of Housing and Urban Development. However, there was limited analysis of the scale of the issues or in-depth policy analysis of options to address those issues.

3.24
The Ministry told us that its Auckland regional office provided analysis of the scale of the issue for its meeting with the Ministry of Housing and Urban Development. The Ministry said that it weighed the factors and decided that a gradual exit would be desirable. This would allow time for suppliers to explore other options, such as providing the properties as long-term rentals, and minimise disruption for its clients.

3.25
In November 2019, the Ministry wrote a letter to suppliers attempting to persuade them to meet housing standards and not to take their properties from the long-term rental market. The Ministry appears to have taken this approach because it needed suppliers to continue housing larger households despite the issues raised and because it did not believe it could enforce standards.

3.26
The letter did not resolve the issues with the private rental properties. The use of private rental properties as emergency housing continued to increase. We were told that there continued to be complaints about the quality of housing. It was not clear from the evidence we saw how the Ministry would have addressed the issues with private rental properties if it had not been for Covid-19 and the border closure.

3.27
As we mentioned in Part 2, the Ministry announced in May 2020 that it would stop using private rental properties as emergency housing from 30 June 2020 because more motels and hotels had become available for larger households.

3.28
We acknowledge that frontline staff needed to find a solution urgently and acted in their clients' best interests when the Ministry funded the use of private rental properties as emergency housing.

3.29
In our view, the decisions to start, then stop, using private rental properties were reactive, made for pragmatic reasons, and a significant change in practice. The Ministry made both decisions without carrying out any strategic thinking, analysing the issues, or considering the likely costs or benefits of options.

3.30
The Ministry also did not appear to consider the expectations in its strategic documents and (after February 2020) the Aotearoa/New Zealand Homelessness Action Plan that it would work with those affected by its decisions to identify the best outcomes for them.

3.31
Good planning and strategic thinking are important elements of delivering services effectively. Although the Ministry had some strategic documents outlining its goals for emergency housing, we saw little evidence of planning to meet those goals.

3.32
Whether or not the Ministry was paying a fair price to use the private rental properties as short-term emergency housing (see paragraphs 3.36-3.50), it appeared to provide a much higher rate of return for property owners than they would have received through a transitional housing lease or private rental arrangements.

3.33
As the Ministry accepted in retrospect, this could take properties out of the long-term rental market. The Ministry did not fully consider this before the practice became widespread. It was able to partially mitigate the impacts of its use by encouraging Auckland region staff to limit use of private rental properties to larger whānau.

3.34
We encourage the Ministry to consider a more strategic approach to meeting people's needs for emergency housing. The Ministry could identify options and assess the costs and benefits of each option for the short term and the longer term.

3.35
In doing so, the Ministry should work with the Ministry of Housing and Urban Development and the communities most affected by homelessness (Māori, Pacific People, the rainbow community/takatāpui, women, young people with mental health and addiction needs, and the disabled community) to find and assess options.

Value for money

Managing cost

3.36
As we mentioned in paragraph 3.8, it is important that a public organisation uses its resources effectively, economically, and with due regard for an arrangement's total costs and benefits. In this instance, the Ministry was not able to show that it received value for the public money it spent.

3.37
The Ministry generally paid suppliers of private rental properties between $2,000 and $3,000 a week for a furnished property. Average rental costs in Auckland and, in particular, South Auckland varied depending on location, number of bedrooms, and condition. The median rent for Manukau between 2017 and 2020 for an unfurnished rental ranged from a low of $450 a week in December 2017 to a high of $560 a week in December 2020.43

3.38
The Ministry's guidance for commercial premises had a maximum of $260 each night, and Ministry staff had the discretion to pay more. However, they had no guidance for what a reasonable payment for short-term furnished private rental properties was.

3.39
We saw evidence that payments for private rental properties were more than $260 each night, which was the maximum rate each night for motels.44 However, some households would have required more than one motel room to accommodate everyone.45

3.40
Ministry staff entering into those arrangements on the Ministry's behalf had the delegated authority to do so and were able to agree amounts that were not beyond actual and reasonable costs.

3.41
We heard that there was significant pressure on them to find somewhere for people to stay that day and that there were limited options for some households. In some instances, using private rental properties may have been cheaper and more suitable than using multiple motel units. However, we expected the Ministry to have monitored the cost of the private rental properties and assessed what a fair rate would be, especially as the practice grew, to ensure that rates were in fact reasonable.

3.42
The Ministry did not put in place any mechanisms to guide staff on the appropriate rate to pay for private rental properties, and frontline staff seem to have had limited control over what they would pay.

3.43
Ministry staff said that there was a pressing need to find somewhere for people to stay. This meant that suppliers were often able to determine the rate because they knew there were few options available.

3.44
As a result, the Ministry paid several times the long-term market rate for private rental properties. This meant that it was paying more than other people in the market for long-term private rental properties could pay.

3.45
We accept that the rates paid for short-term rentals are generally higher than long-term rentals because of the risk that properties are vacant for periods. The Ministry also did not guarantee the property's ongoing use, and suppliers covered costs, such as power and gas, that tenants would normally pay for.

3.46
However, as the Ministry advised its Minister, it is likely that the higher rates it paid for these properties will have distorted the rental market.46

3.47
We expected the Ministry to have carried out some analysis to determine what a fair rate would be. This analysis could include comparing the market rates of weekly rental options for fully furnished houses. It could also have provided guidance on national contracting practices to support staff. However, the Ministry did not do this analysis or provide this guidance.

3.48
The Ministry told us that it believes that the amount it paid for private rental properties was no more (and, for large families, less) than it would have paid had the people been placed in motels. However, paying the same amount for different "products" is not the same as ensuring value for money.

3.49
For these reasons, we consider the Ministry is not able to demonstrate that the private rental properties it funded represented value for money. Although the Ministry has stopped paying for private rental properties, it continues to fund emergency housing, including housing for larger households and disabled people.

3.50
As more people need emergency housing and are having to stay in it for longer, the Ministry could usefully review its guidance to ensure that it adequately supports its frontline staff to know what a fair price for emergency housing is.

Ensuring quality emergency housing

3.51
To achieve value for money, the Ministry also needed to consider whether what it was paying for contributed to the outcome it was seeking.

3.52
The Ministry said that its focus for emergency housing was on ensuring that people had a warm, dry, and safe place to stay. The Ministry understood that private rental properties would be fully furnished, including bedding, and that amenities such as electricity and water charges would be included in the weekly rate.

3.53
However, the Ministry did not have any processes, or require any evidence, to ensure that the private rental properties met its expectations and complied with council requirements or the terms of any leases with the property owner. It considered that it was not responsible for ensuring that properties met legal or regulatory requirements.

3.54
The Ministry told us that it relied on existing regulatory and monitoring regimes such as the Council or Tenancy Services. The Ministry's only mechanism for ensuring that accommodation was suitable was by responding to complaints from people in the houses.

3.55
This meant that the clients in the accommodation, who were in a vulnerable position, had to raise concerns with the Ministry. In our view, this is not a suitable process for ensuring that the housing it wanted to provide is "warm, dry, and safe".

3.56
Although the Ministry says that it does not have a role in monitoring compliance, it said it required suppliers to provide evidence that they had the authority to rent out the property after September 2019. However, this did not happen for suppliers that registered before September 2019 or for individual houses.

3.57
We found evidence that not all the properties supplied for emergency housing were suitable (see paragraphs 2.64-2.71). Although these may have been isolated incidents, it is not possible to know the extent of the issues because the Ministry did not record and retain the addresses of properties it used, set standards for those properties, or have a process to check whether the properties met its expectations. The Ministry also did not keep comprehensive records of all complaints made about the properties.

3.58
In our view, the Ministry should have processes to ensure that the private rental properties it was paying for met quality standards (including what a minimum standard may be). The Ministry did not write to suppliers expressing its expectations that housing be warm, dry, and safe until September 2019.

3.59
The Ministry could have considered this earlier in the process to help ensure that it was paying for accommodation of a suitable quality. What we saw was an agreement to pay a provider to provide accommodation and little more than that.

3.60
In effect, the Ministry trusted suppliers to deliver suitable emergency housing, with little or no monitoring. In our report Management of the Wage Subsidy Scheme, we recommended that:

… when public organisations are developing and implementing crisis-support initiatives that approve payments based on "high-trust", they:
  1. ensure that criteria are sufficiently clear and complete to allow applicant information to be adequately verified; and
  2. put in place robust post-payment verification measures, including risk-based audits against source documentation, to mitigate the risks of using a high-trust approach.47

3.61
These points apply equally to this situation.

Accountability

3.62
As we mentioned in paragraph 2.12, the Ministry's position is that it had no contractual relationship with the supplier. On that basis, we understand that the Ministry considered that it did not have contractual levers to control price and quality. However, in our view, the Ministry is still required to account for the public money it spends, whether it is through a contract or another funding arrangement.

3.63
Being accountable means giving Parliament and the public "complete and accurate accounts of how they have used public funds, including funds passed on to others for particular purposes".48

3.64
The Ministry spends public money to provide special needs grants to people who need them. The Ministry has said that the accommodation it funds should be warm, safe, and dry. However, it did not have the mechanisms to ensure that the properties fit these criteria. It should also be able to report on whether it has achieved that outcome.

3.65
In some circumstances, the person receiving a grant from the Ministry to pay for a good or service provides accountability and assurance that the money has been properly spent.

3.66
However, for private rental properties, the Ministry rather than the recipient selected the emergency housing. The Ministry also agreed the price with the supplier. After seven days, if the person still needed emergency housing and wanted to stay in the same location, both the Ministry and the supplier needed to agree to renew the grant to cover that property.

3.67
The Ministry told us:

It is acknowledged that the Ministry's emergency housing placement practice has developed over time. At the beginning of the period in question it remained common for clients to source their own emergency housing, however, by the end of the period it had become MSD practice to refer clients to emergency housing considered likely to meet their needs.

3.68
The Ministry also told us that it agreed the price with the supplier "on the client's behalf". However, if the people in the house had any specific rights in relation to the house, it was unclear what they were and how they could enforce them.49

3.69
To remain in the same house, people relied on the Ministry to renew the emergency housing grant and the supplier to continue to make the house available. Even when people were staying in emergency housing for weeks or months, there was no guarantee that they could stay in the same house beyond the period of the current emergency housing grant.

3.70
The Ministry of Housing and Urban Development is developing a code of practice that will set out expectations for both suppliers and people needing transitional housing. The Ministry is working with the Ministry of Housing and Urban Development on this.

3.71
However, the Ministry told us that it is unlikely that it will be able to enforce the code for emergency housing "because the current model for [the emergency housing grant] is not contract based".

3.72
The Ministry says that it will use the code to "inform" its process for resolving complaints instead. This relies on households that depend on the Ministry and the supplier to meet their immediate housing needs and have no other options available to them to make a complaint. In our view, this is not a robust model.

3.73
When the Ministry paid an emergency housing grant to a supplier, it was difficult for the person living in the emergency housing to hold the supplier accountable. In our view, a complaints process may not be adequate to achieve accountability.

3.74
The Ministry's aim is to fund emergency housing that is warm, dry, and safe. Although the Ministry could account for the money it spent on emergency housing under arrangements with suppliers, it could not show whether the money it spent achieved that aim. We encourage the Ministry to consider the processes it can put in place to be able to do that in future.

40: Controller and Auditor-General (2008), Public sector purchases, grants, and gifts: Managing funding arrangements with external parties, page 11.

41: Controller and Auditor-General (2008), Public sector purchases, grants, and gifts: Managing funding arrangements with external parties, page 11.

42: See msd.govt.nz.

43: See the data on median rents in Auckland at interest.co.nz.

44: Weekly rental was generally between $2,000 and $3,000, which equates to daily rates of between $285 and $428.

45: The Ministry did not collect information about how many people were covered by individual emergency housing grants from November 2017 to June 2020. Therefore, it is not possible to accurately say whether the Ministry was paying more or less than it would have paid for motel rooms.

46: Paragraph 14 of the Ministry's briefing to the Minister of Social Development dated 20 August 2020 states: "By early 2020, it had become clear that MSD's use of private properties was having a small but potentially tangible impact on the Auckland property market, particularly given that many of these properties were at the affordable end of the market and may otherwise have been leased on a long term basis to our clients."

47: Office of the Auditor-General (2021), Management of the Wage Subsidy Scheme, page 6.

48: Controller and Auditor-General (2008), Public sector purchases, grants, and gifts: Managing funding arrangements with external parties, page 9.

49: It was unclear whether the Residential Tenancies Act 1986 applied to people in emergency housing during June 2017 to November 2020, as the Ministry suggests. Whatever the legal position was, we are not aware of people being told they had any specific rights for their tenancy. On 12 August 2020, the Residential Tenancies Act was amended so that it did not apply to people living in emergency or transitional housing funded through a special needs grant or any other government payment. People in emergency housing will be unable to enforce housing standards under the Residential Tenancies Act in the future.