House of Commons - Public Accounts

Select Committee on Public Accounts Fourteenth Report

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

MANAGING THE ESTATE EFFICIENTLY

21. The Executive must be ready to house applicants on request, and the precise timing and number of those requests is not wholly predictable. The Executive must therefore maintain a proportion of empty quarters to be able to meet the demand for accommodation from entitled personnel. In addition, there will be vacant quarters that are allocated for an agreed deployment, being modernised, awaiting disposal or demolition or being used to accommodate families who need to be moved to facilitate upgrade programmes or disposals. Together, these differing groups of empty properties represent a margin that the Executive need to operate the current system efficiently.[15]

22. The C&AG's Report noted that the Executive had a key performance target to reduce the number of vacant quarters to 13 per cent of the estate by March 2002 and to 10 per cent of the estate thereafter. These were arbitrary figures and had been set without reference to any analysis of what level of vacancy would represent optimum efficiency in the allocation process.[16]

23. We asked the Department when, and on what basis, they might devise a more meaningful target. We were told that, discounting properties in the process of disposal, the Department should achieve the 13 per cent target by Spring 2001. Beyond that, the Department had adopted the National Audit Office's recommendations so that their long-term housing plans were now built up sector by sector from individual areas rather than given as a top-down statement. They also took account of forecasts of Service requirements over a four year period, surveys of people's preferences and trend information. On this basis, the Department's best estimate was that they would require a core housing stock of around 40,000 houses by 2005 with a management margin of 4,000 properties.[17]

24. The Department acknowledged that the previously high vacancy levels and associated targets were the product of an imperfect system. Previously, the three separate Services had managed their properties independently within devolved budgets. Once these were brought together with the creation of the Executive in 1996 the scale of the problem had become more apparent and the Department could begin to put in place the processes needed to deal with it. The Executive's first task was to dispose of surplus quarters but they were now moving on to look to manage the whole operation more efficiently and the National Audit Office's recommendations would help them to do that.[18]

25. We noted that the current long-term vacancy target exceeded the margin of six to seven per cent that the Department regarded as acceptable when giving evidence to our predecessors in 1986. The target also compared unfavourably with margins adopted by other public sector housing providers such as local authorities and housing associations. The Department said that they were not in the same position as other providers since Service families moved on average every 18 months to two years, some 22,000 moves a year, and they therefore required a high management margin to cope with such a high turnover. The Department assured the Committee, however, that they did use best practice benchmarks where possible to do so. They had every interest in minimising the level of vacant and unused properties within the estate.[19]

26. Area managers interviewed by the National Audit Office said that, dependent upon refurbishment and modernisation programmes, the management margin should be somewhere between four and eight per cent of total stock.[20] In evidence, the Department said that individual area margins could vary between 3.5 and 20 per cent, for example where properties were awaiting modernisation or where the Executive expected to receive incoming unit moves within the next two to three years in places like Aldershot.[21]

27. The C&AG's Report noted wide differences in the vacancy rates achieved by areas. Two areas had triple the target vacancy rate and eight areas had vacancy rates of more than double the target.[22] We asked whether the Department had management incentive schemes in place, such as manager of the month, and whether they knew who were the good managers or bad managers. The Department said that they did not operate such schemes, though they had now instituted a monthly review of disposals on an area by area basis. High vacancy rates within individual areas did not necessarily relate to the comparative efficiency of the managers concerned, but often reflected the circumstances of particular locations. For example areas might hold additional vacant property in readiness for incoming infantry battalions due within the next year or two.[23]

28. The size of house to which personnel are entitled varies according to individual circumstances. Officers and entitled civilians are allocated quarters according to rank and appointment, while other ranks' accommodation is determined by family size. In all, the Executive provide nine different types of house to satisfy these entitlements. The C&AG's Report noted that the Executive's ability to provide families with suitable accommodation efficiently would increase if the number of different entitlements were to be reduced.[24]

29. We asked whether the Department had looked to ease their management of the estate through simplifying the entitlement criteria. The Department said that 80 per cent of housing was provided for other ranks rather than officers and was therefore allocated according to family size. They had nevertheless looked at injecting more flexibility into the system. The "one down rule", which obliged personnel to take accommodation one grade below their entitlement where appropriate quarters were not available, was to be extended to the Royal Air Force as well as the Army and the Royal Navy. Other options used by the Department to minimise the number of empty properties included the ability to change the margin between senior and junior officers' quarters, for personnel to pay for quarters above their entitlement and to house eligible, rather than entitled, staff such as single or married unaccompanied people. In future, new build programmes would provide properties that would make it easier to move people between houses. However, they had never recommended that the entitlement criteria should be changed.[25]

30. The C&AG's Report noted that surplus properties may sometimes not be released for disposal for security reasons because the empty houses are located within the boundary of the military base itself.[26] The Executive confirmed that around 15 per cent of the estate, some 10,000 quarters, were currently "behind the wire". They had not determined in how many cases perimeter wires could be moved so as to free up entire estates. However, they were currently moving the wire at RAF Wyton and RAF Chicksands to allow large disposals to occur and to free up the estate to ease future disposal programmes. There were also a number of military bases, such as Blandford, where a large number of quarters were situated well behind the wire in the centre of the garrison. Where such houses were of an acceptable size, and there was a long-term requirement, the Executive would look to modernise them so that they could dispose of other houses located outside the wire.[27]

31. The Department did not know how many houses located behind the perimeter wires of military bases were vacant. They were, however, moving the wire to allow them to dispose of 400 properties in the near future. For operational security reasons, none of the empty houses located behind the wire could be offered to non-entitled people, but they were available to be occupied by people outside of their ordinary entitlements or from within eligible groups. The Executive had, for example, offered flats behind the wire to single Service personnel where there was a shortage of barrack accommodation.[28]

32. The C&AG's Report noted that Service personnel usually received around three months notice of a posting, and those personnel wishing to live in family quarters at their new location normally applied almost immediately to the new area housing office. Some area managers were concerned, however, that they often received little notice of an individual's posting out of their areas.[29] In evidence, the Department said that there was an understandable reluctance on the part of families to notify area offices of their impending departure until they had arranged such issues as their children's education at their forward location. They confirmed that they had now acted on the National Audit Office's recommendation to ensure that, immediately on receipt of an application for housing from Service personnel, the relevant area office would notify the "losing" area of the relevant details.[30]

Conclusions

33. 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.

34. 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.

35. 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.

36. 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.

37. 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.

SHAPING THE ESTATE TO MEET FUTURE NEEDS

38. If the Executive are to deliver the right housing at the right time it is imperative that the Services strive to define clearly their requirements. At the time of writing the C&AG's Report, however, the Services were not always able to provide accurate forecasts. They were in a period of instability stemming from the Strategic Defence Review. A significant number of major decisions about the configuration and deployment of the forces had yet to be finalised and the Services could not provide robust information on their requirements beyond a two year horizon.[31]

39. In evidence, the Department confirmed that the situation was now becoming more stable. Of around 60 different changes arising from the Strategic Defence Review, some 15 or 16 were still to be completed. These included the reorganisation of the Defence Logistics Organisation, the impact of the Defence Education and Training Review in terms of where people should be trained, and the consequences of the Department's joint force structures, such as joint helicopter units and joint fast jet units. In each of these cases the Department told us that it was not possible to be absolutely certain of their future requirements for individual locations.[32]

40. As the uncertainties associated with defence reviews were removed, the Executive's planning arrangements would become more robust. The Department believed that their long-term housing plans were now more sophisticated than before, so that they were better able to identify houses both for long-term retention and for disposal on an area by area basis. The Executive believed that their most positive achievement since the C&AG's Report had been the ability to identify core stock. This would ensure that they refurbished only those quarters that would be required in the medium and long-term and that they disposed of all property that was not intended to be part of the core. There was increasing acceptance among Service commanders that it was in their interest to focus on core stock in this way.[33]

41. We drew the Department's attention to the concern expressed in the C&AG's Report that there were no financial incentives for the Services to identify and release surplus houses. At present, all rent and maintenance costs of vacant homes fell to the Executive, even where the Services had requested that apparently surplus property be retained. This allowed the Services to retain as many empty properties as they wished, without any financial responsibility for that decision. We asked the Department what incentives they now intended to introduce to encourage local commanders to release accommodation.[34]

42. The Department said that, while there were no financial incentives for local Service commanders to release surplus properties, the Executive now held formal quarterly meetings with the military authorities. A dedicated team of Executive staff liaised with local commanders to ensure that the process of determining core stock and disposing of surplus property was pursued vigorously. The time taken to agree with the Services those houses that could be released had now reduced from 140 days to 90 days. The Services were also now aware that any resources that could be saved through more efficient management of the estate could be reallocated to front line uses.[35]

43. The Department's biggest problem was that the demand for family quarters was falling so sharply, by about four per cent a year in recent years. The Department explained that this reflected general social trends, such as the tendency to get married later in life. A further factor was the importance that people attached to buying their own property at a time of rising values, or where the spouse's job was important. The underlying need for family quarters remained strong, however, and was underpinned by the operational need of the Armed Forces to move 22,000 families each year. Continuous attitude surveys conducted by each of the Services had shown that personnel placed a high priority on the availability of appropriate and modern Service housing to compensate for their turbulent and mobile lifestyles. Survey information about people's preferences was one of the factors taken into account in the Executive's revised long-term housing plans.[36]

44. The C&AG's Report noted that around half the housing stock was in poor condition and needed upgrading, disposal or demolition.[37] In evidence, the Executive told the Committee that they had defined an ideal standard for properties, referred to as standard one. Properties that had only a few minor defects or one major defect, such as in a bathroom or kitchen, would typically be classed as standard two. A property that required complete refurbishment, or a new kitchen and bathroom, would be classed as standard three and would generally require families to move out while the house was refurbished. The Executive said that they did not undertake a full stock condition survey until 1997 but they estimated that probably fewer than 1,000 of the 53,000 properties that they inherited in 1995 met the strict criteria for standard one at that time.[38]

45. The Department had set the Executive a target to upgrade 40 per cent of the estate to standard one and 40 per cent to standard two by Spring 2001. The total planned expenditure on the upgrade programme was £600 million. Of this sum, £48 million was spent in 1999-2000 while a further £68 million was to be spent in 2000-2001. Since 1996, the Executive had upgraded 11,000 properties to standard one.[39]

46. We were concerned that so much of the estate was not at standard one condition at the time of the sale, and that the cost of upgrading the estate had subsequently fallen to the Department under the terms of the agreement with Annington Homes Limited. The Department assured us that they were trying to focus the upgrade programme on those properties that they knew to be core stock and for which there was therefore a long-term requirement. They recognised that it would be foolish to focus the upgrade programme on stock that was to be returned to Annington Homes Limited.[40]

47. The C&AG's Report noted that around 2,200 houses were used for purposes other than housing entitled or eligible families. Over half of these had been used for non-residential, but defence-related, purposes such as crèches and family support centres.[41] We asked whether funding for such uses should be provided by the Executive. The Department said that, in each case, the Executive and the Armed Forces had been required to confirm that the houses were being put to cost-effective use, for things that would otherwise be provided at greater expense. Welfare offices and crèches helped to sustain morale and retain personnel in the same way as provision of Service houses.[42]

Conclusions

48. 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.

49. 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.

50. 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.

51. 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.

52. 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.[43] 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.

53. 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.

OPERATING WITHIN THE SALE AGREEMENT

54. The C&AG's Report noted that, under the terms of the sale agreement, the Executive were required to provide a minimum of six months notice to Annington Homes Limited of any releases and had guaranteed that, at the end of the notice period, properties would be transferred with vacant possession and in "good tenentable repair".[44]

55. There was a dilapidations process, managed by the Defence Estates agency on behalf of the Executive, which required both the Executive and Annington Homes Limited to inspect each house in order agree an appropriate level of payment to compensate Annington Homes Limited for the cost of any repairs needed to restore the property to the required standard. The process was staff intensive for both parties and could take six months or more, since the dilapidations claim for each house could vary significantly depending on the condition of the property.[45]

56. We asked why so much notice was required. The Department said that six months was the minimum period needed to agree all the various factors involved in the release of houses as freehold properties to Annington Homes Limited, so that they had free and full title. It was necessary to protect the taxpayer's interest by ensuring that the Department paid no more than was needed to bring houses up to an appropriate standard. The provision of utilities was sometimes complicated where houses had to be separated from infrastructure that was previously supplied by the Services, and it was necessary to secure road access in respect of some houses. Earlier agreement of dilapidations would not, in the Department's view, speed the release of houses since the sale agreement required the Executive to give six months notice of termination.[46]

57. We pointed out that Annington Homes Limited would accept quarters before the end of the six month notice period provided that negotiations on the financial compensation to be paid to them by the Executive for any dilapidations to the property were complete.[47] The Department said that, in practice, the biggest constraint on releasing more property more quickly was that the Executive would have to move people out of houses in order to release them in the middle of Service personnel's tours of duty. In this respect, the identification and disposal of 6,500 properties in the current year would require considerable turbulence for the affected families, around 25 per cent of whom would need to be moved mid-tour.[48]

58. In considering the sale of the family quarters estate to Annington Homes Limited, our predecessors had questioned whether the deal had provided value for money. After four years of operating under the new arrangements, it now appeared that the Department had borne all of the risks with none shared by the owners of the estate. Meanwhile the overall level and cost of vacancies had increased while the size of the estate had reduced during this period. We therefore asked whether the Department could point to any real management benefit resulting from the sale.[49]

59. The Department referred to their previous evidence that the sale was judged to have provided value for money in relation to the policies of the Government of the day. The sale had secured receipts of £1.66 billion, while rent charges paid to Annington Homes Limited were currently £109 million a year and represented a 58 per cent discount on commercial valuations. The involvement of Annington Homes Limited had sharpened up the commercial approach that the Department had been taking. The Executive now had to implement much more effective and efficient processes to balance supply and demand. On the balance of risk, the Department said that the owners were obliged to take properties that they had released once the process of agreement was completed. To that extent Annington Homes Limited faced the risks associated with selling the properties into the market.[50]

Conclusions

60. 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.

61. 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.

62. 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.

15 C&AG's Report, paras 2.2 and 2.10 Back

16 ibid, paras 3.24 and 3.26 Back

17 Evidence, Qs 9, 185 Back

18 Evidence, Qs 40-43, 185 Back

19 Evidence, Qs 56-57, 132, 135, 185 and 9^th Report of the Committee of Public Accounts, Session 1986-87 (HC 191 (86-87)), para 21 Back

20 C&AG's Report, para 3.31 Back

21 Evidence, Q58 Back

22 ibid, para 3.25 and Figure 12 Back

23 Evidence, Qs 120-122 Back

24 C&AG's Report, paras 1.5, 3.28 and Figure 2 Back

25 Evidence, Qs 52-54 Back

26 ibid, para 5.3 Back