MINISTRY OF DEFENCE: SALE OF THE MARRIED
QUARTERS ESTATE
INTRODUCTION
AND
SUMMARY
OF
CONCLUSIONS
AND
RECOMMENDATIONS
1. In November 1996 the Ministry of Defence (the
Department) sold their married quarters estate in England and
Wales to the Annington Group of companies for £1,662 million.
The Department lease back those married quarters they require.
2. On the basis of a report by the Comptroller and
Auditor General,[1] a supplementary
memorandum from the Department[2]
and a memorandum submitted by the Empty Homes Agency[3]
we took evidence from the Department on how the sale was conducted
and the continuing management of the married quarters estate.
3. The sale was large, unusual and complex. It involved
some 57,000 married quarters throughout England and Wales; the
majority continue to be occupied by the same group of people as
before—the families of Service personnel; and the Department
now pay rent for quarters they previously owned—currently,
over £100 million a year. From our examination we have
identified four main areas of concern about value for money:
- The married quarters were sold at a significant
discount—£77 million to £139 million
less than the assessed value of continued Departmental ownership
and management of the estate.
- Whilst the Department transferred some risk to
the new owners, the burden of managing the estate still rests
mainly with the Department. Indeed the Department strengthened
their in-house management team even before the sale was completed.
- The Department are now in the business of maintaining
and upgrading an estate which, as the quarters were sold on a
999-year lease, is in effect owned by somebody else.
- Currently, around one in five married quarters
stands empty. There is a social cost to this, and a financial
cost—over £30 million a year in rent and maintenance
costs.
4. In more detail, our conclusions and recommendations
are as follows:
On how the sale was conducted
(i) The Committee are
concerned that the Department spent £7.6 million and
over two years developing the Housing Trust scheme before abandoning
it. During this period there was an 'active dialogue' with the
Treasury and the then Central Statistical Office, and work done
on the Housing Trust scheme helped with the subsequent sale. But
the cost was mounting in the meantime, and time was being lost
in dealing with the problems of housing management identified
by the Housing Task Force in 1992 (paragraph 31).
(ii) We are very concerned that the sale price
of £1,662 million for the married quarters estate was
some £77 million to £139 million less than
the Department's own assessment of the value of continuing to
own and manage the estate themselves. As the Department's assessment
was based on what they now regard as cautious assumptions about
their own performance in managing the estate had they not sold,
the gap between the sale price and the value of continued Departmental
ownership and management could be even greater (paragraph 32).
(iii) The Committee note the Department's view
that the two other bases on which they assessed the sale showed
that the price paid by Annington was a good deal. However, we
take little assurance from this, since these assessments were
concerned with the reasonableness of the price, not whether selling
would give better value for money than not selling (paragraph
32).
(iv) A factor in Ministers' decision to accept
£1,662 million as a price which properly reflected the
public interest was the Department's assessment that the price
was the best which a good competition could extract from the market.
We are concerned, however, that the way the estate was packaged
for sale—as a single bulk sale to one purchaser—might
have put the transaction beyond the range of some prospective
purchasers and had an adverse effect on the price obtained by
the Department. Indeed, the Department themselves recognised that
selling in smaller lots might have generated bigger aggregate
receipts, although they saw possible disadvantages to such an
approach (paragraph 33).
(v) Another factor in the decision to sell was
that the sale offered the opportunity to 'release from public
ownership this large residential portfolio, and thereby the risks
associated with its ownership'. We recognise that as a result
of the sale the Department have transferred to the new owners
the risks, as well as the potential rewards, of dealing with those
married quarters declared surplus by the Department. However,
the Department have imported the risks associated with uncertainty
about their future rental costs. And they have retained the risks
and costs associated with continuing to maintain and upgrade the
estate—the Department plan to spend £816 million
(net present value) on maintenance over 25 years, and £470 million
(cash) on upgrading married quarters over the next five years.
We conclude, therefore, that only in a limited sense have the
risks of ownership been transferred to the new owners (paragraph
34).
(vi) One of the objectives for the sale was to
improve the management of the quarters through greater involvement
of the private sector. We are struck, however, by the contrast
between the new owners' main estate management role of dealing
with surplus married quarters surrendered by the Department, and
the significant management responsibilities retained by the Department,
including the maintenance and upgrade tasks. Indeed, even whilst
preparations for the sale were being made, the Department established
the Defence Housing Executive, to bring early improvement to the
in-house management of the married quarters estate. We
therefore question how far, in reality, improved management of
the married quarters estate has been achieved by the sale (paragraph
35).
(vii) The Department pay a reduced rent to reflect
their maintenance obligations, but we are concerned that the rent
has not been reduced to reflect the £470 million which
they plan to spend on upgrading married quarters to the standard
they require for Service families. Moreover, as the Department
surrender properties, the new owners will benefit from the money
spent by the Department to maintain and upgrade the married quarters
estate (paragraph 36).
(viii) It is unsatisfactory that in conducting
the sale the Department were constrained by incomplete information
about their own track record in managing the estate. We are concerned,
for example, that data limitations were a factor in the Department's
decision to exclude maintenance work from the sale, and that they
also constrained the Department's exercise to compare the sale
price with the value of continued in-house ownership and management
of estate. As the Department started work on the sale as long
ago as August 1994, some 27 months before the sale was completed,
and were working on the Housing Trust scheme for two years before
that, it seems to us that they had every opportunity to generate
the data they required for the sale (paragraph 37).
(ix) In view of the Department's continuing management
responsibilities for the married quarters estate, we recommend
that they take prompt action to ensure that they have fully developed
management information (paragraph 37).
(x) The Committee note that the Treasury required
the purchase price for the married quarters estate to be paid
in two instalments, and that this was done against the background
of the Government's objectives for public expenditure at the time.
Whilst the bidders had advance notice of the payment arrangements,
we are concerned that there is now no means of knowing whether
the value to the purchaser of being able to defer payment of £700 million
was reflected in the price paid. If it was not, the cost to the
Exchequer of this arrangement could have been up to £27 million
(paragraph 38).
(xi) The Department quite rightly established
clawback arrangements to enable the taxpayer to share in exceptional
gains by the new owners not reasonably foreseeable at the time
of the sale. As the clawback arrangements will be extinguished
after fifteen years, the Department should be alive to the possibility
of the new owners embarking on a selling spree once the Department's
entitlement to a share has come to an end. We note, however, that
a disposal strategy structured to avoid or postpone clawback payments
to the Department would, in all but a small isolated number of
cases, result in a lower rate of return to Annington Homes (paragraph
39).
(xii) It is clear to the Committee that future
events could have a significant effect on the value for money
from the sale, and that the full impact of the sale will only
become clear in the long run. Key factors include the outcome
of rent reviews, and how the opportunities for the new owners
to terminate the Department's leases after 25 years, subject to
the Department's right of veto on operational grounds, work out
in practice. We look to the Department to ensure that, within
the terms of the sale agreement, the Department fully protect
the interests of taxpayers generally, and Service families in
particular (paragraph 40).
On the continuing management of the estate
(xiii) It is disturbing,
particularly when there are problems of homelessness, that over
13,600 (around one in five) of the married quarters in England
and Wales alone is unoccupied. And we are concerned by the financial
cost of this failure to achieve better occupancy rates. We calculate
that the direct cost to the Department of rent and maintenance
for unoccupied married quarters is currently more than £30 million
a year (paragraph 54).
(xiv) It is unsatisfactory that the Department
have not done more to resolve the long-standing problem of empty
married quarters. Indeed, the situation has deteriorated of late,
the number of vacant quarters having increased by more than 1,600
in little over a year. We look to the Department to bring about
an early reduction in the number of vacant quarters, by identifying
and surrendering (or selling in the case of those quarters still
owned by the Department) those quarters that they no longer need,
or by pursuing with vigour opportunities to rent out properties.
We welcome the Department's assurance that they are looking at
the scope for renting out, including to the social sector, some
of the vacant quarters they are holding for redeployment (paragraph
55).
(xv) The Committee note that some 2,800 empty
quarters have already been identified for disposal and that what
happens to a further 4,300 will depend in large part on the outcome
of the Strategic Defence Review. The Department's view is that
they need to maintain a management margin of vacant quarters,
and their aim is to reduce this to 13 per cent, and in time
to 10 per cent. We recommend that the Department set a firm
and demanding timescale for achieving this, and, mindful of the
social and financial costs of vacant quarters, that they keep
under review the number they need as a management margin. We also
recommend that the Department see what lessons might be learned
from practices in other countries (paragraph 56).
(xvi) Given that there are so many vacant quarters,
it is worrying that the Department are currently spending around
£11 million a year renting from the private sector.
We look to the Department to keep this cost under review (paragraph 57).
(xvii) As married quarters are currently allocated
by need but within a rank structure, there could be a mismatch
between the type of quarter available and the rank of a person
needing accommodation, and this could result in quarters remaining
empty and the Department incurring extra cost by having to use
the private rental market. We note that the Department are looking
at whether they should be more flexible in the way they allocate
quarters to Service families (paragraph 57).
(xviii) It is important that the Department keep
their maintenance and upgrade costs to the minimum necessary to
ensure that Service families have a proper standard of accommodation.
We note that the Department are taking action to drive down their
costs and that they intend to benchmark their performance against
other organisations. We stress the importance of the Department
spending no more than is necessary on those married quarters likely
to be surrendered to the new owners, and to this end we recommend
that the Department establish a clear plan of those properties
likely to be surrendered to the new owners (paragraph 58).
1 HC 239 of Session 1997-98: The Sale of the Married
Quarters Estate Back
2 Evidence,
p1 Back
3 Evidence,
pp 1-4 Back
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