Examination of Witnesses (Questions 1
- 19)
WEDNESDAY 28 JANUARY 1998
SIR RICHARD
MOTTRAM, KCB
Chairman
1. Today we are taking evidence on the Comptroller
and Auditor General's report on the sale of the married quarters
estate. We have before us Sir Richard Mottram, the Accounting
Office for the Ministry of Defence. Welcome, Sir Richard. May
I take this opportunity of congratulating you on your knighthood.
I do not know whether it was a Treasury nomination or not, but
perhaps I will not embarrass you by asking that. We will go straight
into our questions. I want to start with a question based on paragraph
3.15b. The sale price for the married quarters estate was some
£77 million to £139 million lower than the assessed
value of keeping the estate in public ownership. How did you assess
that this discount was a reasonable price for transferring risks
of ownership of the estate to the private sector?
(Sir Richard Mottram) As the report brings out,
we assessed the price on three bases and this was one of the three.
We put to Ministers the whole equation, that was all three bases
on which we had addressed the sale, two of which showed that the
price which Annington were prepared to pay was a very good deal,
the third of which showed that the price was lower than the other
comparator we were using-the departmental benchmark. We invited
Ministers to consider these things and to consider both the risk
transfer issues and their policy, which was to dispose of houses
the department did not need to own. For the reasons set out in
the report, they decided that the right answer was to sell these
houses.
2. Paragraph 2.10 shows that you have retained
substantial responsibilities beyond the financial for running
the estate. In what real sense can you say that you have transferred
responsibilities and risks to the private sector? Why, for example,
did you retain responsibility for upgrading and maintaining the
properties you sold, just as one example?
(Sir Richard Mottram) We retained responsibility
for maintaining the properties ourselves and for upgrading them
ourselves for two reasons. One was that our advisers were of the
view that if we were to seek to offer for sale both the houses
and the maintenance of the houses this would over complicate the
sale in relation to the sort of people who would be interested
in purchase and would actually very probably lead to a less good
result than the one we achieved. Secondly, and this was very important
for Ministers, there was the consideration of establishing a clear
responsibility within the Ministry of Defence which individual
Service families could interrelate to, could interact with, rather
than having them deal with a series of interfaces-to use a horrible
jargon word. In terms of the management of the estate and building
confidence in the Services that they would not be adversely affected
by the process of the sale of the houses, the view taken was that
it made sense for us to retain the maintenance and upgrade responsibilities.
In parallel with that, what we were quite clear about was that
if we were going to take on these responsibilities they needed
to be performed in a much clearer and more coherent way than had
been achieved in the past. We therefore established an organisation
for this purpose, the Defence Housing Executive, which is both
the interface with all of our Service customers and the interface
with Annington and organises the process of maintenance and the
upgrade programme, but actually the delivery of both the maintenance
and the upgrade programme is outsourced to the private sector.
The DHE is an organisation which is facilitating these processes:
it certainly is not doing them. Since this had compelling advantage
from the perspective of the Services and since advisers considered
it made the sale a better proposition, we thought on both grounds
it was the right thing to do.
3. Paragraphs 3.6 and 3.7 show that in considering
what your financial position would be if you did not sell, you
were constrained by the absence of data about the department's
own performance in managing the estate. In those circumstances,
how were you able to judge the value for money achieved by selling?
(Sir Richard Mottram) Because, as the report brings
out, we carefully modelled alternative ways of addressing most
of these issues so as to be sure that we were not making a single
set of unrealistic assumptions.
4. You say the report brings this out but
I must say I did not quite understand the report and how you can
build a model without data.
(Sir Richard Mottram) You build a model by making
a set of assumptions, as we have here. You test those assumptions
against the data we did have and you then vary the assumptions,
which is what we did. What we lacked was, for a variety of reasons,
definitive answers to all of the characteristics which are built
into the investment appraisal, as is brought out here. We tested
different assumptions about each key aspect of the appraisal and
then, as the report brings out twice, we tested the sensitivities
of various of those assumptions again. That is why we produced
in here not a single answer, because we certainly put advice forward
to our Ministers which was based on Figure 10 on page 36 of the
report. That shows that scenario five was one of the cases that
we analysed and was the central case. The advice we gave to Ministers
was based upon looking at all those scenarios from two to six.
5. Paragraph 3.11 states that you did not
have detailed plans regarding married quarters occupancy beyond
1999. How can you be sure that the guaranteed minimum rent payments
and the guaranteed surrender of surplus quarters in your contract
with Annington have been set at the right levels?
(Sir Richard Mottram) We cannot be 100 per cent
sure but as the diagram shows, if one makes reasonable assumptions
about the likely movement in rents and if one allows for the basis
on which we calculated the guaranteed payment, we are reasonably
confident that the trend in our occupancy will be roughly down
the middle. This is quite a difficult thing to judge, for all
sorts of reasons, so we had a fairly wide spread between these
two numbers, as you see there. Why did we get into doing this
at all? Because it increased the proceeds from the sale.
6. Why did you fail to realise before spending
£7.6 million that the Housing Trust scheme would not go ahead?
I am referring back to paragraphs 1.8 and 2.39. Surely you could
have clarified this with the Central Statistical Office and the
Treasury at the outset.
(Sir Richard Mottram) It would be true to say
that there was an active dialogue about whether it would or would
not of a kind which would be familiar to you.
7. A frank discussion, or something Sir
Humphrey would recognise.
(Sir Richard Mottram) Yes, something like that.
I am not trying to make a funny point, we were trying to find
an answer which met our needs in the way which is described here,
in the form of this trust. It was always recognised that this
raised difficult issues, they were being looked at. As we clarified
the nature of the trust, so the arguments against it being allowed
hardened up against us.
8. Moving on to the management of the estate,
I am talking now to paragraphs 1.6 and 2.8. I see that you aim
to keep 13 per cent of married quarters empty at any one time
and to pay rent for these empty quarters.
(Sir Richard Mottram) Yes; we do.[1]
9. I make that over 8,000 quarters in England
and Wales alone. Why so many, and how much rent are you paying
for empty properties-some 12,000 were empty at the time of the
sale?
(Sir Richard Mottram) How much rent are we paying
for empty properties currently?
10. Yes.
(Sir Richard Mottram) Why is the margin so large?
Because the nature of the housing we are providing relates to
the nature of the Services. The nature of the Services-we can
discuss whether this is right; it is certainly something we are
looking at at the moment-is one where people actually move around
quite a lot, so properties there are moving in and out of occupation
and that process has to be managed but inevitably you cannot get
it exactly right. We have historically neglected the investment
in our married quarters estate and we need to put that right.
That means we have to put some to one side for upgrade at any
one time. We have a modernisation programme which roughly runs
for seven years ahead and all the time we are identifying houses
and putting them to one side to be upgraded. We have frictional
problems because we have an estate which is both behind the wire,
as it is called, which basically means associated with garrisons
or Royal Air Force stations, and that bit of the estate is covered
by security considerations and cannot readily be prised out without
cost. Then we have people outside the wire. We have the population
moving around, for reasons we can go on to discuss; we have a
significant outflow of people and this creates a set of frictions
which you have to manage. These frictions, as at December of last
year, amounted to 13,647 houses empty. Of those 13,647, we estimate
we need roughly about 6,500 for the various management reasons
that I touched on: held vacant to be upgraded, pre-allocated to
families who have yet to arrive, moving around in the case of
the Army or the Air Force mainly, held for future deployments
of units or behind the wire. All that accounts for about 6,500.
There are 2,817 which are already identified for disposal but
not yet disposed of and we are holding 4,317 which are effectively
blighted because of the Strategic Defence Review. We are in a
position where the Government are reviewing the whole of the force
structure plans for the armed forces. These could involve changes
in the basing of the armed forces, we may find that we are moving
units around the world, some of them might be coming back to the
United Kingdom. Ministers have decided that in those circumstances
they do not wish to dispose now of houses which may be needed
if they were to decide to make such changes. If you add all that
up it is 13,647 empty houses and the cost of each empty house
is £2,739 a year including its maintenance cost and if you
multiply all that up I think it comes to £37 million or something
like that. Is that an answer to your question?
11. It gives a number of answers and raises
a number of questions. Just as a comment, these are married quarters
after all and if you move a husband and wife, a family group,
on every two years, this would amount to a house empty for four
months every two years on the sort of number you are talking about
here, 13 per cent. It does seem an extraordinarily large number.
You did actually raise this question of the upkeep of the stock.
Why did the department allow the married quarters to get into
a condition where £470 million needs to be spent on them?
(Sir Richard Mottram) We normally have a maintenance
programme anyway and we had made provision in our forward programme
for about £370 million over seven years. Why had we not made
more provision than £370 million? Because our budget is constantly
under pressure and had been falling. This was one area amongst
many where we were not making as much provision as we might ideally
have wanted to make.
12. You are saying it was budgetary constraints
which stopped you keeping the stock in a proper state?
(Sir Richard Mottram) In the condition we would
have wanted it to have been maintained in, yes, that is what I
am saying.
13. How do your management costs today compare
on this in relation to the estate before the sale?
(Sir Richard Mottram) In relation to the performance
of the Defence Housing Executive, compared with the numbers which
are quoted in this report, we certainly now are driving down the
maintenance cost per house and we have further initiatives in
hand to get a better handle on upgrade and to try to drive those
costs down as well. We have a whole series of steps to reduce
cost being taken by the Defence Housing Executive, having come
in and inherited from the various organisations which used to
do this work. In terms of the management overhead the DHE spends
roughly about £300 million a year; this is at current prices.
In the current year the DHE is spending about £342 million
and that is a combination of all their accommodation services
and the payment of the rent as covered here. The running costs
of the Defence Housing Executive are about £28 million. Does
that help?
14. I am looking at page 73. Over the appraisal
period the department seemed to be expecting costs to increase
from £38 million to £55 million; this is a combination
of MOD management costs and fees to external advisers.
(Sir Richard Mottram) Is this in the investment
appraisal?
15. Yes. Is that right or am I misunderstanding
that?
(Sir Richard Mottram) I was probably answering
a question which you did not ask. I was answering a question which
was essentially about the overall cost of our DHE effort. In these
investment appraisals we made assumptions about what would be
the cost of managing these interfaces with Annington in circumstances
where we decided to sell the homes. Perhaps I misunderstood your
question. If your question is, have those assumptions been validated,
the answer is that we would now estimate that we overprovided
in the investment appraisal for those costs. In other words, the
cost of the Defence Housing Executive managing these interfaces
is substantially lower than we assumed in the investment appraisal.
16. And will be reducing in real terms,
is what you are saying?
(Sir Richard Mottram) Yes. Does that help?
Chairman: That is very helpful. You
have raised all sorts of interesting openings and I am sure there
are lots of questions.
Mr Page
17. I should like to carry on from the Chairman's
last question and that is on the condition of the housing stock
owned by the MOD. One of the reasons I do so is because I have
a letter here from the wife of one of the occupants. It is a sad
history of poor conditions, poor maintenance, unnecessary work
in some areas and then a failure to do work in others; slates
being allowed to stay off roofs until the houses become uninhabitable,
thus causing more cost. Paragraph 2.12 mentions that a detailed
appraisal was taking place. You made reference to that earlier
to the Chairman. How different is that going to be from this figure
of £470 million?
(Sir Richard Mottram) I should not think it will
alter it very much.
18. You have just said it was going to be
much less. Now you say it is not going to alter very much.
(Sir Richard Mottram) What I thought I said was
that we were trying to get a better grip on the cost of maintenance
generally and on the upgrade programme, which is what this £470
million refers to. I am not anticipating that it is going to be
significantly less than this number.
19. When did this detailed condition survey
of all quarters to identify where, and what, work is needed and
at what cost, start?
(Sir Richard Mottram) It started last year and
it is due to finish now roughly.
1 Note by Witness: Rent is only paid on those properties
which we lease from Annington. See Appendix 1, page 30 (PAC 172). Back
|
