Examination of Witnesses (Questions 40
- 59)
WEDNESDAY 28 JANUARY 1998
SIR RICHARD
MOTTRAM, KCB
40. All scenarios two to six on both assumptions,
25 or 30 years, show a loss to the public purse. Choosing any
of them, or if you had chosen an average, if you had chosen any
of those different scenarios each one of them showed a loss to
the public purse.
(Sir Richard Mottram) Each one of them shows that
if you use this methodology--
41. What you admit yourself was a very conservative
set of estimates.
(Sir Richard Mottram) If you use these conservative
estimates then you generate a feel for the public sector comparator
which is as in this report, yes.
42. I was interested that you chose these
scenarios. You had spent £7.6 million on investigating the
trust option. Did you not include that as a comparator? After
all, you had a very great deal of experience. You had people in
post. Could that not have been an alternative scenario? I assume
that one of the reasons for going for the trust option was to
improve the efficiency of the way you dealt with your properties.
(Sir Richard Mottram) Yes, but we could not pursue
the trust option for the reason that it was ruled out. We were
then looking at two alternatives: we would retain ownership of
the properties and dispose of those we did not need progressively;
alternatively, we would construct a process of selling the estate
and leasing back those which we needed. Those were the two options
open to us. In the case of the amount of money we spent on the
housing trust that was not all nugatory money because some of
the work which was done on the scale of the estate and the legal
background to the estate, was drawn on in the next stage of the
work.
43. I presume that the trust option was
ruled out because it did not transfer the properties to the private
sector. None of the scenarios did the same. You could have had
an adaptation of the trust option which would have maintained
the properties in the public sector but which allowed you to make
use of all the additional experience you had built up having spent
£7.6 million and appointed your three senior officers.
(Sir Richard Mottram) We had a view about the
housing trust. The housing trust was ruled invalid for the reasons
given. The objectives we were working to were laid down by Ministers.
Ministers were entirely clear that the basis on which we decided
to go forward with the sale to Annington met their objectives.
44. Then you are saying to us that the objective
which was primary here was to transfer it to the private sector
and gain a capital receipt.
(Sir Richard Mottram) No, I am saying that the
objectives were the ones laid down in the report; a number of
objectives.
45. You mentioned earlier the possibility
now of transferring it to another part of the public sector, perhaps
to the social sector and, indeed, being able to address some of
the issues of homelessness and other problems up and down the
country. Was that ever investigated as a comparator? As I understand
this report, most of the receipt that has been received has gone
to the Consolidated Fund. There would have been Consolidated Fund
benefits if these properties had been transferred to local government
or indeed to some other part of the public sector. Was any of
that investigated as part of the comparator on Figure 10?
(Sir Richard Mottram) No. Certainly in relation
to Figure 10 some of the disposals which we made which are assumed
in Figure 10 might well have gone to housing associations. We
have done this in the past. Some of the disposals which Annington
make in the future may go to social housing. We did not have an
alternative model which was, let us assume that we will transfer
all our surpluses to a social housing alternative.
46. May I look at the other side of the
equation? You did include in Figure 10 the performance you were
assuming for the new owners. I would have assumed from that set
of assumptions that you could work out, using a different calculation,
the amount of value that these properties transferred would have
to the person who purchased them.
(Sir Richard Mottram) Yes.
47. Can you give us from those assumptions
some indication of how much profit-if I can call it that-you expect
the purchaser to receive on a 25 or 30-year prospect?
(Sir Richard Mottram) As the report brings out,
we did three calculations. Two of those calculations were thinking
about the sale from the perspective of the potential private sector
purchaser. In each of those cases the benchmark for the sale was
exceeded by the amount we received from Annington. As the report
also brings out, the NAO have done a calculation of what they
think is the underlying rate of return for the people who took
on these properties and it appears to be 7.5 per cent according
to their calculation.
48. Was that calculation done on the assumptions
which are included in Figure 10?
(Mr Hawkswell) We calculated it mainly on the
basis of the rents which the Ministry of Defence expected to be
paying to Annington, added to that the residual value of the properties
at the end of the 25-year period and then did a calculation to
see how that related to the sale price. That came out at a 7.5
per cent rate of return. What I would stress is that that rate
of return figure excluded the development gain that Annington
might make on properties because we could only speculate as to
what that might be. The certainties were the rents which the department
were likely to pay and the residual values of the properties.
Chairman
49. May I be clear on this? Does that mean
in effect that was a minimum return, a guaranteed return you will
get?
(Mr Hawkswell) No. We calculated this on the basis
of the level of rents which the MOD were expecting to pay, which
is more than the minimum.
(Sir Richard Mottram) May I add a point which
may or may not be helpful? This is a forecast rate of return on
a certain set of assumptions where obviously Annington is now
carrying a whole series of potential risks in relation to those
assumptions. What we have done by selling the properties is to
transfer a number of those risks to them. I am not arguing we
have transferred all the risks engaged here, because quite clearly
we have not. When the thing was thought about from the other way
round we asked two sets of people to say if they were thinking
about it from the point of view of a private sector purchaser
and he was thinking about the risks and the benefits he was going
to receive, what would he be likely to pay. On both of those calculations
Annington paid more than the private sector benchmark price, as
the report brings out.
Mr Love
50. I am still not clear. You used a completely
different set of assumptions than were used under the performance
in Figure 10. At no point did you do a calculation based on those
assumptions? I just want a yes/no answer.
(Mr Hawkswell) The calculation was based on the
assumptions in Figure 10.[5]
51. May I take you now to Figure 14, page
42? You have done a number of sensitivity tests in relation to
all of these assumptions, yet again you make very conservative
estimates relating to those sensitivities, either to occupancy
or to property market growth. I would ask, over the last 10, 20
or 30 years, what has property market growth been either amongst
your stock or in Britain generally? Surely it has been closer
to two per cent real net growth than it has been to some of the
other much more conservative estimates that you have made. If
so, should those not have been the assumptions on which you worked?
(Sir Richard Mottram) I do not have with me what
the historic rate is. In preparing the base case we consulted
the Treasury and the Department of the Environment. The base case
was derived from discussions we had with them. I am not transferring
the responsibility for it to them. I am saying the base case was
an educated estimate based on a discussion of that kind.
52. May I move on to the occupancy rates?
I would assume both assumptions E and F were reasonable estimates.
With all the other assumptions, G and H, I assume that you will
have either 50,000 or fewer properties at the end of this period.
That assumes that your need for these properties is very, very
substantially reduced at the end of the period and indeed that
assumes that you are going to be disposing of something between
1,300 and 1,600 properties a year. Do you think that is a feasible
and realistic option?
(Sir Richard Mottram) Do I think G is something
which could be an outcome?
53. Could you see yourself reducing to as
few as 15,000 properties and disposing?
(Sir Richard Mottram) Yes, I could. May I say
that is not a prediction? I am saying yes, it could be that.
Mr Wardle
54. In your answers to Mr Love you said
that the housing trust was ruled invalid for the reasons given.
I think there are several members of the Committee who did not
understand what you meant by that. Were you referring to something
in paragraphs 2.39 or 2.40 or is it a reason you had already given
and the rest of us missed?
(Sir Richard Mottram) No, I was not referring
to that. I was referring to the fact that it is touched on in
the report. Is it paragraph 2.39?
55. Perhaps I have missed it. Could you
just spell out now for the Committee what were the reasons?
(Sir Richard Mottram) The reason why the housing
trust was ruled invalid was because there was insufficient transfer
of risk from the Ministry of Defence to the trust for it to be
regarded that we were no longer effectively the owner of the trust.
56. It took £7.6 million of expenditure
and the help of Savills and Coopers & Lybrand to come to this
conclusion, did it?
(Sir Richard Mottram) No, it took £7.6 million
of expenditure and the help of Savills to get a sense of what
would be the size and value of the assets which might be put into
the trust.
57. We will come to that in a moment. I
am curious to understand the drift here. I think the transcript
of today's proceedings will show that early on you suggested that
Ministers had a strong influence here. Later on, when talking
about the trust, you talked about the feelings of the armed services.
You are the Accounting Officer. At any stage did you disagree,
and did you record your disagreement if there was any such disagreement,
with the decision to move to the sale as described in this report?
(Sir Richard Mottram) All of the calculations
which are shown in the report are based on--
58. That is not my question. Did you record
your disagreement, if indeed there was any such disagreement?
(Sir Richard Mottram) I was coming to answer the
question. The answer is that I did not record my disagreement.
What I thought I said was that we were operating within a policy
framework laid down by Ministers, as described in this report.
Ministers had before them all the information which is in this
report about both the two private sector calculations and the
public sector comparator. Ministers reached a decision on what
they thought was the right way forward. I did not seek to have
any view of mine recorded.
59. Elegantly put; thank you for that. I
think the Committee understands what you are saying. Is it not
really the case that for some time there had been well-known public
expenditure round pressures at the Ministry of Defence as defence
technology becomes more and more expensive? Did you not have review
after review to try to cater for this problem? Did not somebody,
after a flurry of proper Treasury procedure and due competition
for all the advisers who got so well paid, say "Let's unload
these assets"? But is not the truth of it that you sold assets
which were quite simply valued in the market on the basis of the
rent that you as the Government guaranteed to pay and for no other
reason, that you kept all the major problems, being the problems
of maintenance, you had no database to tell you what the size
and scale of those problems would be, no computerised maintenance
problems-I should be interested to know whether you have any-then
you unloaded the relatively minor task of dribbling out some of
the properties which became surplus to requirements. You sold
assets which are bound, if the last 50 or 100 or even 200 years
of real estate asset values are anything to go by, in the period
of the lease which you have agreed to here, to increase and increase
and increase, at a one off price and what is more, just for good
measure, you gave away a five-year rent review as well. How could
that be a good deal?
(Sir Richard Mottram) It could be a good deal
in the sense that we were transferring some risks to the private
sector. In the judgement of our Ministers, and it is a matter
ultimately for them, it is not a core activity of the Ministry
of Defence to own housing, except where, for various reasons it
turns out that it is very directly in our interest to own housing.
It is not a core activity of the Ministry of Defence to speculate
about the nature of the future property market. It may or may
not be the case that over time rents will continue to grow.
5 Note: See Evidence, Appendix 3, page 43 (PAC 315). Back
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