Select Committee on Foreign Affairs Eighth Report

MANAGEMENT OF THE OVERSEAS ESTATE

The end of the asset recycling programme?

72. For some considerable time, our Committee has exercised especially detailed scrutiny of the Foreign Office's management of its extensive overseas estate—valued at around £1 billion[118]—and in particular of its, "asset recycling programme". Since 1998 the FCO, in agreement with HM Treasury, has been engaged in this scheme, under which future investment is funded by the sale of FCO properties. The process involves the Office identifying and selling properties that have become, "surplus through re-prioritisation, or which are not operationally effective or good value for money."[119] Initially much of the money raised by such sales was used to invest in Information and Communication Technology (ICT), under the slogan "bricks for bytes", but since 1 April 2004, 80% of proceeds have been re-invested in the estate. [120]

73. In the period 1999/00-2001/02, the FCO 'recycled' £90 million of assets under this programme. The Office subsequently agreed with HM Treasury in the Spending Reviews 2000 and 2002 (SR2000 and SR2002) that it could 'recycle' £100 million of assets in the triennium 2001-04 and a further £100m in the period 2003-06. However, the 2004 Annual Report made clear that the Office had fallen short by £23 million of its target of £100 million of sales in the triennium 2001-04, as shown in the table below (figure 4). The report noted that the last year, "was difficult, with downturns in property markets, reducing the levels of sales of under-performing and cost-inefficient assets".[121]

Figure 4: asset sales in triennium 2001/02-03/04

2001/2	2002/3	2003/4	Target for triennium	Actual sales
£40m	£13m	£24	£100 m	£77m

Source: FCO[122]

74. The 2003-04 Report went on to note that: "It is unlikely that the FCO will be able to maintain the current level of prudent asset sales. This will be a subject for further discussion with the Treasury."[123] In a supplementary memorandum, the Office reported on these further discussions with HM Treasury:

On assets, we agreed to continue our asset recycling programme, but at a reduced rate. This mechanism allows the FCO to reinvest estate sales receipts, primarily for the modernisation of the estate both overseas and in the UK. It is an important element in managing our assets to meet our operational need; it provides flexibility in our network and value for money to the UK taxpayer.[124]

The Office also noted that:

Even though the current level of asset recycling may not be sustainable it does not mean that the programme will cease. Asset recycling will continue for the foreseeable future. In view of the fact that it is not yet known what the outcome of the talks with the Treasury will be, it is not feasible to suspend sales. Sales are, therefore, continuing on a case by case basis when the estate requirements and economic assessments justify them.[125]

75. As a Committee, we have long had the greatest doubts about the long-term efficacy of the asset recycling programme. Last year, we reached the following conclusion in our Report on the Departmental Report 2003:

there are very grave concerns about the long-term impact the asset recycling programme is having on the FCO's overseas estate. There is a real danger that, in its attempts to take full advantage of the scheme agreed with HM Treasury, the Foreign Office is selling properties below their real value in order to meet a short-term target. We recommend that every precaution be taken to ensure that the asset recycling scheme takes full account of the overall, long-term value of properties before they are recycled. If necessary, the Office should be prepared to 'bite the bullet' and miss its target for the asset recycling programme in order to preserve the long-term value of its overseas estate and identify alternative sources of funding for future investment.[126]

76. We have made our view on this matter clear to the Foreign Office on many previous occasions and raised it again at our most recent oral evidence session with Sir Michael Jay. He acknowledged that a number of factors had changed, which had altered the parameters under which asset recycling had initially been undertaken:

When the asset recycling programme started a few years ago there is no doubt that there were quite a lot of buildings we had around the world that were legacy buildings which did not have the allure, if you like, of Paris or Washington, which we did not need and which it made sense to dispose of and then to reuse the assets, or to invest the proceeds in property or, as the judgment was made at the time when we were rebuilding our ICT, in ICT. I think those circumstances have changed quite a lot now. There are not the kinds of properties that there were a few years ago readily available for selling in order to downsize some of our bigger properties, those have been disposed of. ... The asset recycling programme is really shifting into a much lower gear than it has done in the past.[127]

77. He also noted that the 'cost of capital' charge levied on all departments and government bodies by HM Treasury as part of resource accounting had been reduced from 6% to 3.5% recently. As the Government incurs charges through borrowing to fund departmental activities, this cost is notionally passed on to the departments as a 'cost of capital' charge. The charge is calculated by applying a percentage rate (determined by HM Treasury) to the average value of net assets (total assets less total liabilities) held during the year. The reduction in the rate has therefore decreased the notional cost attached to FCO-owned property. Consequently, swinging the balance in favour of retention as opposed to renting a replacement building.

78. We welcome the Foreign Office's recognition, in accordance with our previous findings, that the "asset recycling programme" should be dramatically scaled down. We commend it for 'biting the bullet' and missing the artificial target set for asset sales by HM Treasury, rather than selling off even more valuable properties for short-term gain. We conclude that it is most regrettable that this decision was not taken earlier. We shall continue to monitor closely the low-level sales proposed by the Office.

Access to information

79. One major impediment to the Committee's effective scrutiny of the Foreign Office's management of its overseas estate, on behalf of the House of Commons and taxpayers, has been the FCO's unwillingness to provide detailed figures on sales and purchases. During the course of this inquiry, we engaged in a lengthy correspondence with the Foreign Office in order to obtain the figures we needed to carry out our duty. The exchanges are summarised in the table below:

Figure 5: summary of correspondence between Committee and FCO on sale and purchase of overseas properties

Date	Description	Contents
26 January	Response to written parliamentary question (PQ) from Mr John Maples MP, Member of the Committee[128]	Mr Maples asks for details of residential properties sold and purchased by the FCO since June 1997 and the net cash proceeds of each. FCO supplies list of properties but refuses to provide details of the proceeds, citing "commercial confidentiality" and exemptions 12 and 13 of the Code of Practice on Access to Government Information.*
5 February	Letter from Committee to FCO[129]	Following Mr Maples' question, Committee requests details of net proceeds of each sale made since 1997.
23 February	Letter from FCO to Committee[130]	FCO replies and provides some information but no specific details on individual properties, again citing "commercial confidentiality".
25 February	Letter from Committee to FCO[131]	Committee reiterates its request, and asks for clarification of how the two sections of the Code of Practice cited by the Office are relevant.
16 March	Letter from FCO to Committee[132]	FCO replies and, after "looking carefully" at the data, provides details of sales and purchases up to March 2002.
28 April	Letter from Committee to FCO[133]	Committee reiterates request for all the data to be supplied and again asks how the Code of Practice is relevant.
18 May	Letter from FCO to Committee[134]	FCO finally provides all information requested as a confidential annex to letter.

* The Code of Practice sets out guidelines for all government departments on how they should respond to requests for information. It includes 15 exemptions, under which departments may refuse to provide certain data for specific reasons.[135]

80. We were very dissatisfied that it had taken nearly five months to extract information from the Foreign Office that the public clearly had a right to know, and that when finally given it was provided in a form of which we could make little use, i.e a classification, 'Restricted—Commercial', which meant we could not share it with anyone outside the Committee. Our concern was increased by the fact that we had had a similar experience when trying to gain detailed information on the sale of the Consul General's residence in San Francisco last year.[136]

81. We consequently raised this matter with Sir Michael Jay at his oral evidence session before us. When questioned, he did not disagree that the Office had arguably misused the Code of Practice by citing exemptions twelve and thirteen.[137] These stated that:

12. Privacy of an individual

Unwarranted disclosure to a third party of personal information about any person (including a deceased person) or any other disclosure which would constitute or could facilitate an unwarranted invasion of privacy.

13. Third party's commercial confidences

Information including commercial confidences, trade secrets or intellectual property whose unwarranted disclosure would harm the competitive position of a third party.[138]

In the former case, we argued, information about the value of purchase or sales would be available from the equivalent of the British land registry or stamp duty records in nearly all countries. In the latter, we argued that this exemption only applies to a situation in which competing organisations are preparing a bid for a Government contract and to disclose how they had estimated their costs could damage their commercial competitiveness against rivals.

82. At the session, Sir Michael promised to "reflect" on his department's intransigence.[139] We were pleased to receive his subsequent memorandum, in which he stated that:

we have decided that, in the interests of openness, we will seek to meet the Committee's request. We are prepared to report to the Committee information about sales which have taken place three months after the transactions have been completed.[140]

We welcome this policy of greater openness, which will allow more effective scrutiny. The examples of the New York and Dublin residences, which we discuss in detail below, illustrate the importance of such scrutiny (see paragraphs 87-92).

83. We conclude that the Foreign Office's unwillingness to submit its "asset recycling programme" to effective parliamentary scrutiny was utterly indefensible and evidence of a lingering defensive attitude to public scrutiny. We welcome the Foreign Office's ultimate recognition of the importance of this Committee's oversight. We recommend, however, that the Foreign Office review its procedures for withholding information under the Code of Practice on Access to Government Information, to ensure that they are in accordance with Government-wide best practice.

Impact of the asset recycling programme

84. The figures finally obtained by the Committee on sales and purchases show the impact the asset recycling programme has had on the estate. The charts below (figures 6(a) and (b)) show how sales and purchases have been spread geographically, with African and European posts bearing the brunt of the losses.

Figure 6(a): sales of FCO properties (2002-04) by location

Source: FCO

Figure 6(b): purchases of FCO properties (2002-04) by location

Source: FCO

The two charts below (figures 7(a) and (b)) compare purchases to sales in the period 2002-04 by volume and value. Total sales over the period amounted to £33,252,000, while total purchases cost only £9,863,000. As can be seen, sales outnumbered purchases by a considerable extent.

Figure 7(a): sales and purchases of FCO properties (2002-04) by volume

Source: FCO

Figure 7(b): sales and purchases of FCO properties (2002-04) by value

Source: FCO

85. During our inquiry, we also asked about the size of the FCO's rental bill over the period 1998-2003. While the total bill remained relatively stable at around £64 million per annum, the Foreign Office noted that it had been, "helped by movements in exchange rates and favourable market factors".[141] Subsequently, we were told that during this period the proportion of property owned by the Office, rather than rented, had fallen from 17.5 to 15.2%.

86. We conclude that the "asset recycling scheme" has had a very serious impact on the Foreign Office's property portfolio, with valuable buildings that were appreciating in value being sacrificed on the altar of short-term Treasury-inspired targets. We further conclude that these sales have left the Foreign Office more at risk from fluctuations in the international property market and exchange rates, and may have significantly damaged the long-term financial strength of its estate.

The cases of the Dublin and New York Residences

87. The sale of two properties attracted our particular attention during this year's inquiry, as that of the Consul General's Residence in San Francisco did last year. These were the official residences of HM Ambassador in Dublin and HM Consul General (HMCG) in New York. Both had come to our attention through memoranda supplied by the Foreign Office, but neither had been 'flagged up' in any sense.[142]

88. Following our questioning of Sir Michael Jay at the oral evidence session, the full facts of both cases were disclosed. First, in relation to Dublin, he stated that:

Dublin

In 1997, it was decided to sell Glencairn [the existing Residence] and surrounding land (34 acres) for security and operational reasons. All options regarding the prospective sale of the house and land were considered. In the end it was decided that the most economical and practical option was to sell both the land and the house.

The process of sale went ahead alongside the search for a new property. The Glencairn estate was sold in January 1999 for £24.3 million. As part of the agreement, the Ambassador and Defence Attaché (who has a house in the grounds) could remain in the property until April 2002 (later extended to April 2003) until new properties were found.

In late 1999, after exhaustive searches in Dublin, a replacement property was identified: Marlay Grange. Agreement was reached to purchase Marlay Grange at a cost of £6.2 million. The deal was completed in June 2000. At the time it was estimated that the cost of refurbishment of the property to bring it up to standard, not least for security purposes, would be £2.8 million.

As a result of a more comprehensive survey of the property (not possible before purchase due to the intrusive nature of the survey) it was found that the cost of works to upgrade the property would be £3.7 million.

These higher costs at Marlay Grange coupled with a significant improvement in the general security climate (following the Good Friday agreement), and improved physical security around Glencairn (due to improved road network), tipped the balance in favour of repurchasing Glencairn and selling Marlay Grange.

The amount of work already undertaken on Marlay Grange has come to £680,000. In the current market the value of Marlay Grange has dropped to approx. £ 4.3 million. Reacquiring Glencairn will cost us approx. £7 million, leaving an overall net gain to the FCO of £13 million. [143]

89. The last sentence of Sir Michael's written evidence on this matter misses one crucial fact. Overall, the acquisition, refurbishment and disposal of Marlay Grange will cost the FCO around £2.6 million (purchase price of £6.2m, plus £680,000 for refurbishment work, minus £4.3 million re-sale value). The "net gain" referred to by the FCO will be as a result of repurchasing Glencairn without its extensive grounds (34 acres). The fact that the house and grounds were worth £24.3 million in 1999 and the house alone was worth £7 million in 2004, indicates that if the FCO had sold the grounds alone in 1999 it could have gained, at the very least, £17 million. Given the rapidly rising value of land in Dublin, this is a very conservative estimate. We conclude that the FCO's claimed "net gain" of £13 million from its Dublin property transactions should more accurately have been described as a net gain of at least £17 million being reduced by £4 million (minimum) as a result of the Department's mistaken decision to sell, only to reacquire, the Glencairn Residence and to purchase, only to sell, Marlay Grange. We recommend that, in its response to this Report, the FCO provide precise figures on how much Marlay Grange is eventually sold for and the cost of reacquiring Glencairn (net of acquisition costs).

90. With regard to the New York residence, Sir Michael told us that:

New York Consul General's Residence

HMCG's residence in New York was increasingly found to be too large, inconvenient, and no longer fit for purpose. In June 2001 the CG proposed a move to a new property that he had identified which would be more suitable. A professional valuation at the time showed the existing property to be worth $17.5 [£12.23] million.

Preliminary agreement to purchase the new property at $8.95 [£6.3] million had been reached with the developers on 1 August 2001.

Between 1 August and 11 September there were a series of legal exchanges about the detailed terms of the Purchase agreement and discussions on the design of the new apartment (which had originally been planned as three separate units).

The situation after 11 September was reviewed by the Department on 10 October and it was decided to proceed to finalise the contract negotiations: the Purchase agreement was signed, and deposit paid on 1 November 2001. The new Residence was occupied by the CG in August 2002 at a cost of £6.48 million.

As a result of the downturn in the US market the aim of receiving $19.5 [£13.6][144] million for the old property was not realisable. The property eventually sold for $12.5 [£6.7] million in February 2004. The severely weakened state of the dollar against the pound at the time meant that our gain in pounds was also severely reduced. The final sterling total received by us was £ 6.32 million, to give a net loss on the overall transaction of £0.38 million [£380,000].[145]

91. We conclude that the net loss of £380,000 on the sale of the New York Consul General's Residence and the purchase of a replacement residence, noted by Sir Michael Jay, contrasts starkly with the profit of $8.55 million (approximately £6 million in 2001[146]) originally envisaged by the FCO when it started this transaction. Even in the light of the fluctuations in the sterling-dollar exchange rate noted by the Office, such a loss seems utterly bizarre. This transaction was undertaken for the purpose of realising a gain of approximately £6 million and has instead resulted in the loss of £380,000 and the replacement of a highly prestigious property by an inferior one. We further conclude that while the tragic events of 11 September 2001 in the USA could not have been foreseen, the exchange of contracts on both properties took place after that date and it seems reprehensible to us that the FCO proceeded as it did in New York. Mr Simon Gass, FCO Director of Finance, acknowledged to us in his oral evidence that:

there is absolutely no doubt we would have wished that things had turned out differently and you may be sure that we have asked ourselves internally some very searching questions about how those two happened.[147]

92. We conclude that serious mistakes were made during the sale and purchase of the residences in Dublin and New York and should not have occurred. Such incidents serve to underline the importance of effective scrutiny of the Foreign Office's property transactions by Parliament. We recommend that the FCO set out, in its response to this Report, how it will ensure that such losses of taxpayers' money are not repeated in the future.

The Prague Embassy and the Cape Town Residence

93. In our Report on last year's FCO Annual Report, we noted the very worrying suggestion that the Office was considering selling the current embassy building in Prague (the Czech Republic), which is housed in the 15^th Century Thun Palace.[148] We recommended that:

the current historic, irreplaceable, centrally-located Embassy building in Prague be retained as part of the FCO's estate and not sacrificed to the asset recycling programme. Its loss would inevitably be a serious blow to British prestige and interests in this key European country and partner, which by May of next year will be a full member of the European Union.[149]

We were very pleased to be told, therefore, that the Office had, "reviewed the options in Prague and concluded that they do not support disposal of the Embassy".[150] We greatly welcome this sensible decision.

94. Similarly, in our Report on South Africa, published earlier this year, we registered our concern at the proposal that HM High Commissioner's Residence in Cape Town be sold. As we noted, this is a, "large and very attractive property that can accommodate a wide variety of functions," which was clearly a very useful asset to the post.[151] We strongly recommended its retention in our final Report. Subsequently, the Office confirmed that:

The Foreign Secretary has asked officials to reassess whether greater value could be obtained from the Residence in Cape Town. This is being done: no decisions have yet been made.[152]

95. We conclude that the FCO's judgment to retain the valuable embassy building in Prague is a very welcome one. We recommend that the same decision be made with regard to the highly valuable and useful residence in Cape Town.

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118   Departmental Report 2003-04, p 165 Back

119   Foreign and Commonwealth Office, Foreign and Commonwealth Office Departmental Report 2003, May 2003, Cm 5913, p 141 Back

120   Ev 63 Back

121   Departmental Report 2003-04, p 167 Back

122   FCO Departmental Report 2003, p 141, and FCO Departmental Report 2003-04, pp 167-8 Back

123   Ibid., p 168 Back

124   Ev 70 Back

125   Ev 46, para 29 Back

126   Foreign Affairs Committee, Twelfth Report of Session 2002-03, Foreign and Commonwealth Office Annual Report 2003, HC 859, para 64 Back

127   Q 133 Back

128   HC Deb, 26 Jan 2004, col 58W Back

129   Ev 91 Back

130   Ev 91 Back

131   Ev 92 Back

132   Ev 92 Back

133   Ev 97 Back

134   Ev 97 Back

135   Department for Constitutional Affairs (DCA) , Open Government: Code of Practice on Access to Government Information, Second Edition 1997 (www.dca.gov.uk/foi/ogcode981.htm) Back

136   Foreign Affairs Committee, Twelfth Report of Session 2002-03, Foreign and Commonwealth Office Annual Report 2003, HC 859, para 70 Back

137   Q 203 Back

138   Op. cit. Back

139   Q 204 Back

140   Ev 64 Back

141   Ev 91 Back

142   Ev 92 ff. Back

143   Ev 63-64 Back

144   N.B. This is different from the $17.5 million given above. The FCO aimed to sell the residence for more that it was technically valued at. Back

145   Ibid. Back

146   Exchange rate of £1 = $1.4139 in July 2001. Back

147   Q 148 Back

148   Foreign Affairs Committee, Twelfth Report of Session 2002-03, Foreign and Commonwealth Office Annual Report 2003, HC 859, paras 76-77 Back

149   Ibid., para 78 Back

150   Ev 61, para 15 [FCO] Back

151   Foreign Affairs Committee, Fifth Report of 2003-04, South Africa, HC 117, para 181 Back

152   Ev 61, para 15 Back

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Prepared 23 September 2004