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Select Committee on Public Accounts Fourteenth Report


FOURTEENTH REPORT


The Committee of Public Accounts has agreed to the following Report:—

MINISTRY OF DEFENCE: MANAGING REDUCTIONS IN THE NUMBER OF VACANT FAMILY QUARTERS

INTRODUCTION AND SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS

1. The Ministry of Defence (the Department) provide around 61,000 family quarters in Great Britain to accommodate some 84,000 entitled Service personnel and their dependants. The bulk of the estate, some 51,000 homes, is owned by Annington Homes Limited and leased back to the Department under the terms of a sale agreement drawn up in 1996. The Department, through the Defence Housing Executive (the Executive), nevertheless remain responsible for the management, maintenance and upgrade of the family quarters estate in Great Britain, costing nearly £183 million a year, net of accommodation charges received from Service families.[1]

2. In recent years, there has been an overall upward trend in empty houses and disposing of surplus quarters has been one of the Executive's key challenges. As at August 2000, some 24 per cent of the estate (14,352 houses) was vacant, costing some £41 million annually in rent and maintenance.[2]

3. On the basis of a Report by the Comptroller and Auditor General (C&AG), the Committee examined the scale and cost of vacant quarters, how efficiently the estate was managed to minimise vacant quarters, the Executive's strategic planning arrangements for providing Service housing in the future with a minimum of vacant quarters and the constraints imposed by the sale agreement on the management of the estate, and, in particular, the disposal of surplus quarters.

4. Overall, our main conclusions arising from this examination are:


(i)The proportion of quarters that are vacant is disturbingly high, at 24 per cent of the estate.
  
The cost to the taxpayer of vacant quarters is £41 million annually. This proportion has risen in recent years, and while there are signs that the Department are on course to reduce the scale of the problem, their track record in hitting their targets on vacant housing is poor. We have asked for quarterly monitoring reports so that we can monitor their progress on reducing vacancy levels.
  
(ii)The Department need to re-examine their definition of the maximum level of vacant houses needed to manage the estate efficiently.
  
The Department need a 'management margin' of vacant quarters so as to cater for the implications of around 22,000 moves each year, and for upgrade work and disposals. But their current estimate of an efficient management margin, 10 per cent of the estate, is higher than previous estimates—and higher than some estimates provided by their own area managers. The current estimate is too heavily based on current practices, rather than an analysis of what should be achievable.
  
(iii)Increased stability in the size and disposition of the Armed Forces highlights the need for better forecasting of demand for housing from Service personnel.
  
The Department told us that one of the main reasons for the current high level of vacant quarters had been their inability to define long-term needs because of uncertainty over the implementation of the Strategic Defence Review—but that the position was now clearer, however, and the resulting stability will help them to assess defence needs more accurately. Adjustments to the size or disposition of the estate require a long lead time, and the Department should now develop better ways of forecasting demand, for example by modelling the demand for quarters from Service personnel, which has recently been falling at four per cent each year.
  
5. Our more specific conclusions and recommendations are set out below.
  
On the financial implications of vacant family quarters
  
(i)While the overall size of the family quarters estate has fallen from around 75,000 houses in 1991 to some 61,000 houses in 2000, the number of vacant properties has grown from nearly 11,200 (15 per cent of the estate) to 14,352 (24 per cent) in the same period. This level of vacancies is unacceptably high and represents a significant drain on resources, costing some £41 million a year in rent and maintenance (paragraph 16).
  
(ii)The Department plan to dispose of 6,500 surplus houses by March 2001. They expect that this will reduce the proportion of empty quarters on the estate to 18 per cent. The Department plan to reduce further the level of vacant properties on the estate to around 10 per cent - the management margin that they estimate is needed to run the estate efficiently. While the setting of such targets is welcome, the Department's track record is not impressive and the expected continued decline in demand for family quarters places in doubt the Department's ability to achieve the targets set. We therefore expect the Department to provide the Committee with reports showing progress against their disposal and vacancy targets each quarter until the end of 2001. Where shortfalls against target are reported, the Department should notify the Committee of the recovery action proposed (paragraph 17).
  
(iii)We are not persuaded by the Department's contention that only £4 million of a total of £41 million spent on vacant housing in 1999-2000 was not cost-effective and that the balance of £37 million was an acceptable cost for the management margin needed to run the estate. Vacant houses cost the taxpayer money whether or not they are planned for disposal, awaiting upgrade or are simply surplus to requirements. The vacancy target adopted by the Department should exert pressure on all reasons for vacancies, to provide an incentive for the efficient management of all housing operations. They should therefore define their targets in terms of the number and costs of vacant houses held (paragraph 18).
  
(iv)The Department have reduced considerably the number of houses that they hold empty for lengthy periods, from 3,800 houses empty for more than six months in September 1999 to 632 houses in August 2000. But the very small reduction in the overall numbers of vacant properties in the estate, from 14,425 houses to 14,352 during the same period, indicates that many of these houses were still awaiting disposal or occupation by families and therefore continuing to attract rent and maintenance costs. The Department need to ensure that these houses are released or occupied as quickly as possible (paragraph 19).
  
(v)Where the Department retain an interest in the site of a demolished property, they are required to pay Annington Homes Limited a "ghost rent" for up to 25 years until disposal, equivalent to the rent on the type of property that has been demolished. The Department believe that their liability in respect of such empty sites during the first 25-year period of the operation of the sale agreement may amount to as much as £60 million. The Department should draw up plans for relinquishing their interest in such sites at an early stage so as to minimise the potential liability for ghost rents. They should include details of the progress made in reducing the number of such sites in their quarterly monitoring reports to the Committee (paragraph 20).
  
On managing the estate efficiently
  
(vi)The Department's long-term target for a management margin of vacant homes remains up to four per cent higher than the margin they regarded as acceptable when giving evidence to our predecessors in 1986-87. Their current estimates are too heavily based on current housing practices, and pay too little regard to the possibility of more efficient housing management, which their own managers have indicated is possible (paragraph 33).
  
(vii)Management margins of vacant stock at individual area offices range between 3 per cent and 20 per cent of local estates according to circumstances. The Department should monitor area performance closely to ensure that each area retains only the minimum margin necessary to administer its local estate effectively. They should consider introducing an incentive scheme for area managers designed to achieve greater efficiency in this respect (paragraph 34).
  
(viii)A contributory factor to the high level of management margin held by the Department is the complexity of the entitlement criteria operated by the Department. While they have taken some steps to increase flexibility in the allocation of housing, the Department should review whether it would be possible to simplify entitlement rules to allow more efficient use of available housing stock (paragraph 35).
  
(ix)Vacant family quarters that lie "behind the wire" of military bases cannot be disposed of by the Department unless the perimeter wire is moved. 400 vacant properties will be freed for disposal in this way over the coming months. The Department should review the scope for freeing-up more of their estate in this way so as to minimise future disposal difficulties (paragraph 36).
  
(x)The Department have taken steps to improve the information provided both to and between area offices about the posting of Service personnel and associated movements within the family quarters estate. Such improved communications are long overdue and the Department will now need to ensure that the resulting potential for improvements in the efficient management of the estate are achieved (paragraph 37).
  
On shaping the estate to meet future needs
  
(xi)The Executive's ability to forecast accurately demand for family quarters has been hampered by uncertainties about force strengths and dispositions following the Strategic Defence Review, though the position has now largely stabilised. The Executive should remain in close touch with the Services throughout the implementation phase so that their long-term housing plans progressively become more soundly based (paragraph 48).
  
(xii)There are currently no financial incentives for local Service commanders to release surplus properties. All rent and maintenance costs of vacant houses are met by the Executive. While the Executive have improved their management arrangements in this area and Service commanders are now more aware of broader financial issues, we are concerned that the Executive's ability to secure the release of surplus accommodation could be undermined because the Services do not bear the financial responsibility for their decisions. The Department should consider establishing financial incentives by transferring to the Services the rent and maintenance costs relating to those vacant houses that are retained at the Services' request despite there being no identified need for them (paragraph 49).
  
(xiii)The demand for family quarters has continued to fall by around four per cent each year - around 2,000 families a year. The Department now factor this in to their long-term housing plans. Forecasting demand is a crucial factor in matching supply to demand; but the extent of the fall in demand appears to have undermined the Department's efforts to manage the estate effectively. The Department should further refine the techniques they use to understand the factors that influence demand so that they can devise more rigorous forecasting (paragraph 50).
  
(xiv)On their formation, the Executive inherited 53,000 houses of which only 1,000 were rated as standard one for condition (the ideal standard). As part of a modernisation programme to upgrade the quality of the housing stock they spent £48 million in 1999-2000 and now have 11,000 houses rated at standard one. They have identified core stock, for which they see a long-term need, and we support the Department in their aim to target resources on that stock to avoid nugatory expenditure on houses subsequently sold or returned to Annington Homes Limited (paragraph 51).
  
(xv)Despite the Department's efforts to target their upgrading work as above, we are nevertheless concerned that, as the extent of the upgrade programme increases, it may be difficult to avoid passing some upgraded properties to the new owners as part of any surplus returned by the Department. In their examination of the sale of the married quarters estate, our predecessors noted that the Department had included in the sale agreement a clawback arrangement on future exceptional gains made by the new owners. The Department should police closely the operation of the existing clawback arrangements to ensure that they receive their full entitlement to the added value achieved in cases where upgraded properties have been returned to Annington Homes Limited (paragraph 52).
  
(xvi)Around 2,200 quarters are used for purposes other than housing Service families, for example, family welfare centres, crèches or the Executive's offices. While these uses may serve to meet wider Defence objectives, they do not contribute to the core purpose of such housing and are only possible because of the present oversupply of family quarters generally. The Department should permit such alternative uses only where it is clearly cost effective to do so (paragraph 53).
  
On operating within the sale agreement
  
(xvii)While the Department need to minimise the amount paid to Annington Homes Limited in dilapidation charges, dilapidation negotiations can be resource intensive and time consuming. The Department and Annington Homes Limited seem unable to agree on ways to simplify the process further, though it should be in both parties' interests to do so. The Department should explore, in conjunction with the owners, ways of facilitating this process, for example by reconsidering the use of joint surveyors to reduce the scope for conflict in dilapidation negotiations (paragraph 60).
  
(xviii)The sale agreement requires the Department to provide Annington Homes Limited with six months' notice to terminate their lease of vacant houses, for which they continue to pay rent. But we note that Annington Homes Limited will accept quarters before the end of the six month notice period provided that dilapidation negotiations are complete. The Department should encourage Annington Homes Limited to accept the earlier release of properties where all other conditions of release have been satisfied (paragraph 61).
  
(xix)Other than for dilapidation negotiations, the Department use the six month termination period to resolve issues about, for example, the continued supply of utilities and road access to released properties. Yet these houses will have been identified for release some months before termination notices are served. The Department should begin work to resolve such issues at an early stage to facilitate the earlier release recommended above (paragraph 62).

THE FINANCIAL IMPLICATIONS OF VACANT FAMILY QUARTERS

6. The number of vacant properties within the family quarters estate has grown from nearly 11,200 in 1991 to 14,352 in 2000. Measured as a proportion of total family housing stock this represents an increase from 15 per cent to 24 per cent. The C&AG's Report noted that the total stock of quarters had fallen from some 75,000 houses to around 61,000 over the same period. Demand for quarters had therefore dropped even faster than the stock, leading to increased oversupply.[3]

7. The Department explained that the increase in vacancy levels had arisen for two main reasons. First, there had been a sustained decline in demand for quarters from the Armed Forces. In recent years the rate of decline had been about four per cent a year, representing some 2,000 fewer families each year needing to be housed. This meant that the number of surplus properties had risen in proportion to the total stock. Secondly, successive Defence reviews throughout the period had caused planning uncertainties about the precise numbers of people, types of military units and their location. That uncertainty only came to an end in the middle of 1998 with the release of the Strategic Defence Review, but the Department were still coping with the consequences.[4]

8. The Department assured the Committee that they were taking steps to counteract rising vacancy levels. Between September 1999 and August 2000 there had been significant increases in the numbers of vacant houses agreed for disposal and allocated to Service families awaiting occupation. And the Department had also achieved a sharp reduction in the number of houses that had been held vacant for long periods. At the time of the C&AG's Report, 3,800 quarters had been empty for more than six months, of which 346 houses had been empty for more than three years. These figures had now reduced to 632 and 50 respectively.[5]

9. The Department's target was to dispose of 6,500 houses by March 2001, which was double the target of a year ago. This would reduce the proportionate level of vacant homes to 18 per cent of the estate at that date. And, by about 2005, they hoped to get down to a steady state with a core housing stock of about 40,000 properties and a 10 per cent margin of 4,000 vacant homes above that. They assured the Committee that this was a better target than previous targets in that it was built up from individual area forecasts, not given as a top-down general statement.[6]

10. We noted that, despite the Department's wish to release surplus property, vacancy levels had continued to increase in previous years, and that the Department had consistently failed to achieve their planned levels of disposals for the last five years. For example, in 1999, the Department had disposed of some 1,800 surplus houses against a planned total of around 2,400. Taken together with the fact that the Department expected 2,000 more properties to become surplus each year, we were concerned that the number of vacant quarters might not be very much lower by the end of 2001.[7]

11. The Department accepted that it was disappointing that the sharp fall in demand for quarters was working against the progress that they had made in disposing of property. They assured the Committee that planned disposals were certain to occur since, within the terms of the sale agreement, Annington Homes Limited were required to accept them. Delays could occur, however, due to difficulties in meeting all the requirements needed for freehold entitlements such as separation of utilities and securing access road agreements. These might mean that disposals might occur later than planned.[8]

12. To date, since January 2000, 2,300 properties had either been transferred to Annington Homes Limited, passed to the Defence Estates agency for disposal on the open market or demolished. The Executive had issued termination notices to Annington Homes Limited in respect of a further 3,300 properties with hand back dates prior to 31 March 2001. A further 830 Department-owned properties were due to be disposed of through the Defence Estates agency and another 18 properties were due to be demolished.[9]

13. The C&AG's Report estimated that, in 1998-99, the Department spent £39 million in rent and maintenance on 14,425 empty family quarters.[10] In evidence, the Department confirmed that this cost had risen to £41 million in 1999-2000, partly because the number of houses awaiting modernisation had grown. They considered only around £4 million of this expenditure to be not cost-effective, in respect of genuinely surplus houses for which there was no immediate Defence use, compared with non-cost-effective expenditure of £11 million in 1998-99. A large part of the remainder of the expenditure related to vacant houses that were in the process of disposal. The balance was spent on a combination of empty houses that were being held for future unit deployments, that were under offer to new families, or that were being modernised as part of the Executive's upgrade programme and represented cost-effective expenditure.[11]

14. The C&AG's Report noted that, within the overall number of vacant houses in the estate, 867 quarters were awaiting demolition as at September 1999.[12] The Department explained that it was sometimes necessary to demolish houses because of structural defects or because they were too small to meet Service requirements. In addition, much of the existing housing was too densely built and they were seeking to provide a better living environment for families by thinning out the estates.[13]

15. We asked how much compensation the Department were required to pay Annington Homes Limited in respect of demolished properties. The Department said that the terms of the sale agreement required them to pay a ghost rent for each property that was demolished but not subsequently rebuilt. The sale agreement provided for a full site review to be undertaken at each 25-year point in the Annington underlease. The review would take into account all changes made to properties and revised rent levels would be negotiated accordingly. Any ghost rents then in payment would be subsumed within the review. While there were currently 977 properties falling into this category, the Department were unable to forecast accurately the full cost of the ghost rents relating to them because of the difficulty of anticipating movements in market rents generally, on which future rent increases would be based. However, on the basis of best available information, they estimated that the current ghost rent liability throughout the first 25-year period was likely to be in the region of £50 million to £60 million - or between £50,000 and £60,000 for each ghost property.[14]

Conclusions

16. While the overall size of the family quarters estate has fallen from around 75,000 houses in 1991 to some 61,000 houses in 2000, the number of vacant properties has grown from nearly 11,200 (15 per cent of the estate) to 14,352 (24 per cent) in the same period. This level of vacancies is unacceptably high and represents a significant drain on resources, costing some £41 million a year in rent and maintenance.

17. The Department plan to dispose of 6,500 surplus houses by March 2001. They expect that this will reduce the proportion of empty quarters on the estate to 18 per cent. The Department plan to reduce further the level of vacant properties on the estate to around 10 per cent - the management margin that they estimate is needed to run the estate efficiently. While the setting of such targets is welcome, the Department's track record is not impressive and the expected continued decline in demand for family quarters places in doubt the Department's ability to achieve the targets set. We therefore expect the Department to provide the Committee with reports showing progress against their disposal and vacancy targets each quarter until the end of 2001. Where shortfalls against target are reported, the Department should notify the Committee of the recovery action proposed.

18. We are not persuaded by the Department's contention that only £4 million of a total of £41 million spent on vacant housing in 1999-2000 was not cost-effective and that the balance of £37 million was an acceptable cost for the management margin needed to run the estate. Vacant houses cost the taxpayer money whether or not they are planned for disposal, awaiting upgrade or are simply surplus to requirements. The vacancy target adopted by the Department should exert pressure on all reasons for vacancies, to provide an incentive for the efficient management of all housing operations. They should therefore define their targets in terms of the number and costs of vacant houses held.

19. The Department have reduced considerably the number of houses that they hold empty for lengthy periods, from 3,800 houses empty for more than six months in September 1999 to 632 houses in August 2000. But the very small reduction in the overall numbers of vacant properties in the estate, from 14,425 houses to 14,352 during the same period, indicates that many of these houses were still awaiting disposal or occupation by families and therefore continuing to attract rent and maintenance costs. The Department need to ensure that these houses are released or occupied as quickly as possible.

20. Where the Department retain an interest in the site of a demolished property, they are required to pay Annington Homes Limited a "ghost rent" for up to 25 years until disposal, equivalent to the rent on the type of property that has been demolished. The Department believe that their liability in respect of such empty sites during the first 25-year period of the operation of the sale agreement may amount to as much as £60 million. The Department should draw up plans for relinquishing their interest in such sites at an early stage so as to minimise the potential liability for ghost rents. They should include details of the progress made in reducing the number of such sites in their quarterly monitoring reports to the Committee.


1  C&AG's Report (HC 435 of Session 1999-2000) paras 1 and 1.1 and Evidence, pp 1-2, paras 1 and 8 Back

2  ibid, para 2 and Evidence, pp 1-2, paras 2 and 9 Back

3  C&AG's Report, paras 2.5, 2.6 and Figure 6, and Evidence, p1, para 2 Back

4  Evidence, Q1 Back

5  Evidence, Qs 1, 26, 134 and Evidence, pp 2-3 Back

6  Evidence, Qs 1, 9, 24, 185 Back

7  Evidence, Qs 79-81, 185-186 Back

8  Evidence, Qs 81, 107 Back

9  Evidence, Qs 186-189 and Evidence, Appendix 1, p23 Back

10  C&AG's Report, para 1.16 Back

11  Evidence, Qs 15, 23, 31 and Evidence, Appendix 1, p23 Back

12  ibid, Figure 8 and Q179 Back

13  Evidence, Qs 127, 143 Back

14  Evidence, Qs 93, 183 and Evidence, Appendix 1, p23 Back


 
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