Oral evidence: Service Accommodation and the Defence Estate, HC 888

Oral evidence, 16 January 2017.

Witnesses

Stephen Lovegrove, Graham Dalton and James Hopkins.

Chair

Good afternoon, everybody, and welcome to the Public Accounts Committee on Monday 16 January 2017. We are covering two subjects today: an update on service family accommodation, which our first panel is here for, and then very quickly—we hope we have quick questions and answers—we are going to move on to the defence infrastructure organisation. Obviously, the two are connected. Mr Lovegrove, before I introduce the witnesses and we get to the main element—I did inform you of this—I want to ask you, as Permanent Secretary, some questions about the contingent liability that your Department informed us about.

Stephen Lovegrove

Yes.

Chair

We received a letter about the contract awarded for the Phalanx close-in weapons system’s availability on 22 December, which was the day after Parliament recessed for Christmas. This was all going to be signed off on 31 December. Can you explain to us what happened and why we got such short notice? We are supposed to have 14 days.

Stephen Lovegrove

Yes, absolutely. I should apologise for that. It is an unacceptable position to have put parliamentarians in, so, on behalf of the Department, I apologise. The explanation is that there was a mistake in the use of an exemption. Contingent liabilities of that scale need to be notified to the House to give you and colleagues 14 days to take a view and to debate them if you would like to. There is an exemption often used by the MOD for new kit on ships. This particular piece of work on Phalanx was not for new kit on a ship; it was for a refurbishment of the base of the Phalanx gunners, as I understand it, and therefore the exemption was unavailable, strictly. However, it was invoked mistakenly and the difficulty that we placed our Ministers in was that if the support contract was not signed by the Minister, there would be a break in support to the Phalanx capability for the serving men and women on those ships. That was deemed not to be acceptable operationally, so we asked the Minister to approve it, notwithstanding the fact that it had not been through the 14-day period. There was a clear mistake in the interpretation of the guidelines. I have asked for the guidelines in the Joint Service Publication to be clarified so the mistake does not happen again, and they will be issued and promulgated in February—next month. I cannot pretend that this was anything other than a mistake in interpretation of the exemption.

Chair

I take what you say and the honesty which has been offered, and I understand about the need for continuation of service and support for our forces. We take your assurance that it will not happen again, but if it does we will call you back to explain. I trust that you will make sure it doesn’t happen again.

Stephen Lovegrove

I fully expect to be brought back if it does happen again.

Chair

I will write to the Minister to express our concern because not only were the 14 days not observed, but this was over the Christmas period. It was a doubly bad mistake to make.

Stephen Lovegrove

I understand that.

Chair

I thank you for that and I will hand over to Anne-Marie Trevelyan. Before I do, I will hashtag this part of the hearing #forceshomes; we hope it will take no more than half an hour, but it may be quicker, gentleman, if you are quick with your answers. This is on the back of our previous report, published on 13 July, “Service Family Accommodation”. It is really an update on that.

Mrs Trevelyan

I know that the Department has seen the Report and agreed its contents, which is very encouraging news. As you are all well aware, this is something that has taken up a lot of my parliamentary time. The Minister has been kind enough to grant me an exemption from parliamentary protocol, so I am dealing nationally with issues relating to CarillionAmey while we find a system that works to educate MPs on these matters. It has been busy in my office—too busy, sadly—but the situation is improving. I want to put on the record the fact that CarillionAmey has worked incredibly hard with me and with families, where it can, to improve how it does things. The Department has obviously exerted a certain amount of pressure, but on a human level its teams have gone out of their way to try to do stuff better when errors or omissions have taken place. I commend it on that because it has been quite difficult. One reason for that, which has become clearer to me over the last few months, is that often the difficulties are because the Defence Infrastructure Organisation is not meeting its part of the bargain. Having seen the audit that you commissioned in September of how the key performance indicators were being managed and whether that was going well, it is clear that some of the messages coming out—the joke with some personnel is that it is DI”No” rather than DIO, which you may have heard, Mr Dalton—are that CarillionAmey can’t always meet the needs of its customers, our armed forces families, because DOI says “No” too often. In the light of coming in new and seeing that audit, how you feel it is going and do you feel it is improving? I think that is a key part of the problem with the CarillionAmey programme.

Graham Dalton

Thank you for acknowledging their hard work. In the time I have been here, I have certainly spent time with CarillionAmey to make sure it is making a consistent and sustained effort. Thank you for your recognition. I know they will appreciate that, but I will make sure they don’t rest on their laurels. I hadn’t heard the misuse of the acronym, which is probably as well.

Mrs Trevelyan

You have now.

Graham Dalton

I have now, and I will bear that in mind. I don’t know whether there is conflation between families and their experience where they live and their experience at work. With CarillionAmey under completely separate contracts, they are effectively working under different regimes because on the working estate there are far more things we are not funding and are not able to do. It is a much more basic maintenance regime. I hope that in housing it is not experienced to that extent. I think the best I can say is this. I have seen some of the housing and talked with CarillionAmey, the suppliers. Looking at stats and performance, the main thing that I have done with them is to make sure they are working through the winter and keeping up to the contracted performance levels, because that is the most essential thing.

Mrs Trevelyan

The emergency response KPIs are not quite there yet, as I understand it. How do you feel that is going? Are you getting to grips with it? Are there particular issues that have caused those problems?

Graham Dalton

They are not. I have looked at the details of the emergency response failures over the last four or five months. I have not spotted a theme through there. Sometimes the failure is because the time has been missed by a relatively small amount. One of them, I think, was 20 minutes and one was two and a half hours. That is not ideal, but it’s there or thereabouts. In a couple of them, the paperwork and documents were not properly kept, so it gets treated as a failure because no one can demonstrate whether it was on time.

Mrs Trevelyan

What are you doing to improve that?

Graham Dalton

It is about driving performance and making sure that you really do keep the records accurately, because it matters and it demonstrates performance.

Mrs Trevelyan

But why is that not working? Is it because they are sometimes using subcontractors rather than their own people?

Graham Dalton

Possibly, and particularly with the emergency response ones, the fast ones, it’s that not writing the time the job was finished in the box and then going back to the office and thinking, “Oh, I didn’t do that yesterday” or whatever it may be, or rushing off to the next thing they have to do. So retraining and reminding is important. There aren’t specific themes through there. I have not spotted anything that is an endemic failure in one area, but you are right about the emergency response ones. We have a small number hanging out. The expectation is 100%. It is doable—I think we did it in December—and we will keep at it, but I am not seeing an endemic theme that is causing me to have particular worries.

Mrs Trevelyan

One of the other issues that is raised constantly with me, but was also raised in the audit, is what “meeting the response” means. Does it mean someone turning up, regardless of whether they do anything about the issue—a plumber turns up, says, “I haven’t got the part,” wanders off and ticks “Response met”? Or should response mean that if someone turns up and does not fix it, it is not completed until the job has been dealt with? It would be helpful to have some clarity, and perhaps you could feed that through, because I know that is a continuing frustration for families, in that they don’t feel that they have been looked after.

Graham Dalton

I am happy to feed that back. Under emergency response, which is the really tight response, it is to attend and make safe or fix. In one case recently, a lighting column was knocked down, which exposed cabling and wiring. In that case, it’s clear that it is not to come and put a new lighting column in—that takes a while—but to make it safe, so there is no exposed electrical wiring, for example.

Mrs Trevelyan

But it is not to actually fix the problem; the emergency response is to make safe only.

Graham Dalton

Yes, the emergency response is to make safe. If it is a situation where a family need some follow-up and it cannot be fixed immediately, the teams are trained, coached and equipped to make at least support arrangements—if the heating is off, they get heating in.

Mrs Trevelyan

The challenge for service families, which continues, is this. In fact, we had one over the weekend. It was a gas issue. The gas was turned off, but a mother was left with three kids under five and no cooking availability or heating. It went from “Emergency fixed” to nothing while they waited for Monday. CarillionAmey went out of their way to help them with a variety of matters, but there is no clarity to me on how robust the Department expects to be to ensure that our service families are properly looked after and not left with someone saying, “Well, your house isn’t going to blow up, because the gas is not leaking.” That is not a response as far as the families are concerned—those wives are looking after three kids while their husbands are flying Typhoons out of Akrotiri. That is not an acceptable support system, so how can we make sure that CarillionAmey are able to actually fulfil the requirement of looking after those families in the way that we all expect them to?

Graham Dalton

They certainly have the systems and the instructions there that enable them to make some accommodation and prioritisation. That does not necessarily mean a full fix immediately, if it is not possible to get parts or equipment, but they certainly should not be leaving families in a state of having young children and no heat, for example; if that is happening, clearly we will follow through. I am drawing something out as well about clarity and understanding of what the response levels mean. I am seeing the family federations, I think, later this week, so I can add that to the list of—

Mrs Trevelyan

That continues to be an issue and it does nothing to help the relationship between the families, CarillionAmey and the DIO, put it that way. The whole of this has educated me: the Department’s comms in relation to the families is not as good as it could be. If you could take that away and work on that I think that would be hugely appreciated by those whom we are trying to serve. We will keep an eye on those KPIs as we go forward, and I know you will too.

Chair

We will have Mr Lovegrove back in front of us in a month or so, and probably many times after that; it is easier, Mr Lovegrove, to make sure it is all working well, or you will have to face Mrs Trevelyan.

Mrs Trevelyan

Turning to Annington Homes and the longer-term picture of where we are going with this, just for some clarification first, if you could, Mr Lovegrove: you wrote to us over recess setting out that obviously you felt you might have difficulty in talking in detail, because, in your words, you are about to enter discussions with Annington Homes. I absolutely understand that. My problems stem from the fact that I have a letter dated 8 November from the Minister, who it states cannot comment further on the consequence of Annington Homes relationships because of the commercial negotiations. So I am a little confused as to where we are at, and perhaps you could clarify before we ask the CEO for his perspective.

Stephen Lovegrove

Maybe a tiny bit of history is worth going into here. Obviously, the deal that the MoD did with Annington Homes was in 1996 and lasts for 200 years. The first moment at which there is a meaningful opportunity to adjust some of the terms of that deal is effectively after 25 years, where there is a rolling series of rent reviews. Given the scale of the estate, that is going to take quite a long time. The first rent reviews, I think, are due to kick off in 2021. As a result, we are preparing ourselves for that negotiation. It is a negotiation I really want to get right because in my opinion the deal done in 1996 was a bad one for the taxpayer. I think it is an example of a deal that was probably done for affordability reasons, rather than value-for-money reasons. It is essentially a financing arrangement out of which Annington and their shareholders have done exceptionally well and the taxpayer has done really quite badly. Annington paid £1.7 billion for the properties in 1996. I think that they have so far taken out £2.8 billion in rent. They have taken out £1.6 billion in disposals and they have a carrying value, in their accounts from last year, for that estate, of £6.7 billion.

Mrs Trevelyan

You are doing nothing to help the Department’s contract negotiations credibility, are you?

Stephen Lovegrove

I have to say that this is not a deal, in 1996, that I would have done.

Mrs Trevelyan

I am very glad to hear that.

Stephen Lovegrove

There are no reopeners in it. The profit share fell away too quickly. There is a floor but there is no cap. So there are a lot of things that I want to look at in this deal when we come to the rent review. The contract itself is a 200-year contract. We cannot deal with that fact, but we certainly can deal with, I hope, the economics of the rent, which at the moment I do not think reflects the way in which the property market has gone. Nor does it reflect the fact that actually the MoD and CarillionAmey have to do all the work on the estate. So those are the kinds of things that I want to look at. We are at the beginning period of thinking about how we want to negotiate this contract. Obviously, we will be talking to Annington about that. I have had a couple of conversations with their shareholder in the form of Terra Firma just to let them know my opinion of where this contract is and what it represents.

Charlie Elphicke

To follow up on that particular point you made, Mr Lovegrove, which is a very important point: in the last Parliament the gentleman who is now Lord Maude—then Francis Maude—was in the habit of revisiting PFI contracts and reworking and renegotiating them. Was any form of attempt made in the last five years to rework or renegotiate, and are you hoping to do so, to get a more sensible, fair deal?

Stephen Lovegrove

I am not aware of that, but I have only been in the Department for nine months and I haven’t checked. I am happy to go away and have a look. It is a contract, so if Annington wants to stick by the contract, then Annington will no doubt stick by the contract. I mean, it is in contract law. Our main opportunity is, as I say, around these big rent reviews that are coming up, which is where we are looking at the moment. But I will certainly have a look at whether we try to renegotiate the fundamental contract at some point.

Charlie Elphicke

The dialogue that Francis Maude had at that time was based on the factual understanding that if enterprises wanted to make undue profit, they would not necessarily have further work being done with the Government.

Stephen Lovegrove

Yes. I am not aware that Annington has any further contracts with the Government, but it is clearly the case that every extra pound that we pay to Annington is a pound we cannot spend on defence, the estate and the people who live on the estate.

Mrs Trevelyan

Mr Hopkins, I was confused by something being lacking. Perhaps you could give us some of the history of how the relationship has been with the Department. Hopefully you will be keen to encourage a good dialogue as these negotiations come forward, and it will be helpful for us to understand where we are coming from.

Chair

To be clear, Mr Hopkins, you have been with Annington right from the beginning, haven’t you?

James Hopkins

I have been with Annington for 18 years, so I have seen I think 10 Secretaries of State, I don’t know how many CEOs and a lot of changes. I would at some point love to have the opportunity to respond to Mr Lovegrove, because this is very different contract from a lot of other contracts. This is not a service contract, in the sense of CarillionAmey. The Ministry of Defence took a decision in 1996 to sell an asset that it no longer thought that it needed to own, for £1.62 billion[1]. It retained the management and maintenance, which it insisted on—that was a requirement—and it was a contract written and dictated by the Ministry of Defence on a take it or leave it, warts and all-type approach. There was no negotiation here behind closed doors. Annington happened to be one of many people who bid for it, and it bid the most. The NAO reported on that in July 1997, was satisfied that the process had been well run, that it was a competitive process and that the highest bid was achieved, although it was in excess of what the Government advisers’ estimates at the time were. To correct one or two other things as far as that is concerned, we have always had the objective of being fully engaged with the Ministry of Defence, and there is a long history of us coming forward with ideas and initiatives on how to improve and work on the estate. That is very well documented. In 2004, for example, when the Ministry decided that it wanted to privatise the management and maintenance—the forerunner to the CarillionAmey contract, which was with Carillion Enterprise—we were quite keen to put management and maintenance back together with the ownership of the estate, but we were strongly discouraged from bidding at that particular time. While I have every sympathy for the Ministry’s situation, and I am very happy to have discussions in the wider context of the overall arrangements, we need to understand the actual backdrop and that it is not a service-level agreement as such. In terms of where we have got to with discussions, at a local level there is regular contact on, basically, estates issues, which there would obviously need to be on an estate of this size. In respect of the Ministry, with the exception of meeting Graham Dalton last week, which I was very pleased to do—I hope to build a relationship there—I have not spoken to or had communication with the CEO at DIO for over 12 months.

Mrs Trevelyan

Thank you. An interesting question is raised there about contract management, and not only of maintenance. Could you explain how that works? It seems to me that there are a lot of separate contracts for different estate management parts, such as drainage and so on. Is that in your view the DIO’s best way of managing the housing accommodation estate?

Graham Dalton

In managing infrastructure, you have always got to start from where you are. From a managing it point of view, the situation we have got is that the property is owned, but we are managing the maintenance and the lifecycle renewal on them. There is some complexity about some of the contract. At the head level, Annington own the properties and lease them to Defence, and we put in our contractor to do the service and maintenance. As for having one contractor across the country, which has been the subject of your main discussion, we now have got some systems in, which, from the user perspective, means they are getting consistency and some attention across the country. There are some other bits, such as water and waste water, which are subject to a very separate PFI. On any housing development, they do not tend to be major things, but it is another complexity to look at when you are looking at disposal of parts of the estate, for example. It is complex. The contracts were made for good reasons at the time and we will manage them.

Chair

I think that Mr Lovegrove probably summed up—I do not always speak for the Committee as a whole; the view of the Committee, or many of us, is that this was not a great contract to start with. But I hear what you are saying, Mr Hopkins. You got this contract fair and square, even though it wasn’t widely declaimed at the time, if my memory serves me. But we now need to make sure that we are looking at what happens now, so we will probably want to talk to you again. Where will you be at by 20 February with these negotiations, because that’s what—?

Stephen Lovegrove

By 20 February this year? I doubt that we will be very far, if I am absolutely honest.

Chair

When, roughly, do you think you will have covered these negotiations?

Stephen Lovegrove

It will take a long time, because it will be about how the negotiation is done from Annington’s side and how it is done from our side, and there may be different approaches to it. I mean, I look upon this as basically a very, very expensive 200-year bond that we have sold, and it may be that Annington takes a different view to that, but that is the approach that I am taking. Could I get back to you with a sense—?

Chair

If you could, because we want to keep an eye on this, given the history, which you have laid out very clearly, and because it was notorious across Whitehall. Also, for the families—as Anne-Marie Trevelyan has indicated, she has had a lot of contact. We have had contact from a number of colleagues as well, who are concerned about the forces in their constituency, and they want to know what is happening. Will you pledge that the families will get very early notification once you have made the deal?

Stephen Lovegrove

Given the sums of money involved here, because we are paying £170 million a year on rent alone and I would like to see that come down very sharply—

Mrs Trevelyan

Remind me how much of that is actually covered by the increase in rent charges? The new rent level, which is going up, will eventually even out your bill with what you receive, or not?

Stephen Lovegrove

I don’t think it will. I would have to get back to you with the exact calculations on that—

Mrs Trevelyan

That would be helpful, thank you.

Stephen Lovegrove

But we will obviously continue to subsidise the service families and servicemen and women. What I do not want to do is to compromise the negotiations with Annington. We will be working as hard as we possibly can to get the best possible deal for Defence and its people, and indeed for the taxpayer. Exactly how that plays out, I will certainly let you know—

Chair

Just give us an indication. I understand that you cannot absolutely say. We would rather you got a good deal than a quick deal; I think that is fair to say. So we will not hold you to it too hard, but you must have some idea and I’m sure Annington don’t want to be dragged through it for too long either. At least I hope that is the case, Mr Hopkins.

Mrs Trevelyan

Can we just get a bit of clarity in terms of where we are at, because it is raised with me by families a lot? With the future accommodation model, which we will come on to in a moment, if you were to decide that you want to move forwards and that you will build new MOD housing estates in different places—all that sort of stuff—and that you do not want to maintain large chunks of the existing 47,000 Annington homes, you have to hand them back in a state that requires what sort of level of investment from the MOD? That is part of the commitment, I understand.

Stephen Lovegrove

It depends. I think they have to be brought up to decent home standards.

James Hopkins

Good and tenantable condition.

Chair

Is that the same as decent home standard, just to be clear?

Graham Dalton

Not necessarily, no. It is a slightly subjective market condition, but it is one that the market is used to.

Chair

So decent homes does not apply to MOD or Annington properties?

Stephen Lovegrove

It applies to homes that we want to put our service families and servicemen and women in at some stage, but it does not apply to the homes that we have to hand back to Annington.

Chair

Fine. That is okay. So, just to be clear, our service personnel are not getting a lesser standard than other tenants and they have to be decent homes?

Stephen Lovegrove

No.

Mrs Trevelyan

We can have that discussion, but that is a whole other—

Chair

We are not supposed to be.

Stephen Lovegrove

I believe that the average remediation cost for the MOD, before it hands back a home or a set of homes to Annington, is about £14,000 per house.

Philip Boswell

Mr Hopkins, Annington’s stated group profit on ordinary activities after taxation was £607 million in 2016. What percentage of that was made off the Defence estate?

James Hopkins

Annington owns the married quarters estate. But, if you have a look back prior to that, when we were producing our accounts under UK GAAP, Annington has not ever made a profit because the interest repayment on the debt that we have has always exceeded the operational profit. Last year, we moved to FRS 102 accounting standards, and the chief difference there is that it requires you to account for any change in value of your property. So in our reported accounts last year there was a £713 million increase in the value of the property—if that answers your question.

Mrs Trevelyan

Obviously, as part of the future accommodation model programme that is ongoing at the moment, the question of—as we just discussed—whether the existing Annington homes or other houses might be where you want to put families is going to be part of that mix. As far as I understand it, you are responsible for roughly 47,000 Annington homes. Roughly how many of those are void?

Graham Dalton

We are about 20% voids at the moment.

Mrs Trevelyan

So, around 10,000—just under 10,000.

Graham Dalton

Yes, which is a managed level of voids, bearing in mind things like rebasing the army and bringing troops back from Germany.

Mrs Trevelyan

So you are of the view that 50,000 is still the number of homes that you need to have in your mix, or are we looking to shrink that? To drive us forwards, whether you hand back Annington Homes or not, in the future accommodation model—we could have a long conversation about that, but we will not—people will need service family accommodation in whatever that framework is. How you manage that is a question to look at. Looking at FAM, it has been a hugely contentious issue with families. It has caused more distress than we would have expected—Lieutenant General Nugee and I have talked about this at some length and it is very nice to see him here. Could you first give us an idea of when the survey results are likely to be published to give the families some certainty as to when this is going to kick off properly?

Stephen Lovegrove

Quite soon—I look to Richard Nugee to tell me exactly when. I have had a flash headline of some of the surveys. I think they probably have to be checked off by the national statistician to make sure that they are capable of being published as national statistics. Initial results will be on 31 January—the end of this month—and full results will be on 30 March. A couple of highlights from the survey. There were, I think, 28,000 responses to it, and there are a couple of things to say. I would say, two to one, the respondents wanted change because of the differing patterns that people live their lives in at the moment and the way in which they want to live with their families and use their homes. What they really want to do is own a home, so there is a very big strong sense of that.

Mrs Trevelyan

As does every person—not necessarily also living in it while serving, though, if we are precise. Let’s not be disingenuous in that statement.

Stephen Lovegrove

No, though what I think is coming across is that they would like the arrangements that are offered by Defence to enable them sooner rather than later to get on to the home owning ladder. So we would certainly have that in mind as we design FAM. The SFA model, which is the family part of it, is much more popular than the single living accommodation part of it, because of the way in which we define these things. That is something that we want to think quite hard about.

Mrs Trevelyan

Would you say that the reason that is the case is that Army families, in particular, want to live as a family all the time, and want to live in communities of military families? Or is it that single living accommodation is just a bit of a fag?

Stephen Lovegrove

It is certainly partly that, but it is also partly that the way it is organised at the moment is that if you are single—that is, outside a marriage, either because you are divorced or because you are in a relationship that is not a civil partnership or a marriage—it is difficult to live with your children and your family. There are big adjustments that we need to make about that.

Chair

Can I just be clear: you are going to be changing that rule?

Stephen Lovegrove

We will certainly be seeking to reflect across the whole of the future accommodation model the way in which people these days wish to live their lives. I think we are completely missing a trick and being unfair if we do not.

Mrs Trevelyan

But would it be fair to say that the intention of the future accommodation model is not to extend service family accommodation in its present form—living on a patch in a family house with kids—to the modern family unit if marriage or civil partnership is not involved, because you consider that too expensive a model?

Stephen Lovegrove

What we will try to do is extend service family accommodation in a fairer way. If we were to extend it right across the piece to everybody who has a family and wishes to live exactly as a family, that would probably be unaffordable for us, so we are trying to do it in a fairer way that reflects, as I said, how people live their lives now. Out of that, clearly, there is likely to be a group of people who are disadvantaged as a result of the changes, and we are going to have to work through how we make those families and individuals adjust to the new reality in a way that they are comfortable with.

Mrs Trevelyan

Which are they likely to be? Which group is likely to be disadvantaged?

Stephen Lovegrove

Would it be acceptable to turn to General Nugee, who is certainly better—

Mrs Trevelyan

I had hoped that that was the sort of thing you would know, but feel free to ask the general; he knows everything about these matters.

Chair

I am sorry; we cannot have evidence from the gallery. I thought you were asking to turn to him for a bit of advice. Perhaps you could write to us about which groups will be disadvantaged. We had a discussion about witnesses at the table. We do not change witnesses at the last minute—

Stephen Lovegrove

We will certainly write to you.

Chair

I thought you were just turning to him for advice, which I am willing to allow, to a certain extent. I think you hear what Mrs Trevelyan is driving at. If there are going to be groups that are disadvantaged, they need to know sooner rather than later, so we can make alternative plans, at the very least—or maybe there are good reasons why they should not be.

Mrs Trevelyan

The question I will leave you with—we could talk about this for any length of time—is this. Until we have the details of the survey, we cannot really make an assessment of those who have given their views. There are 40,000 who still have not been asked for their views, unless that has happened. There is a core group of people—the special forces in Northern Ireland and others—who have not been asked their opinion, and I put on record that I think that that is still unacceptable. They are a very frustrated and anxious group of people. If you could find a way to make sure their views are gathered officially, that would be helpful.

Chair

Why did the Northern Ireland forces not respond?

Stephen Lovegrove

I am afraid I don’t know the answer.

Chair

If you could write to us with that, it would be very helpful—and special forces, as well. It seems extraordinary: either a geographical mistake, or an omission that we cannot understand.

Stephen Lovegrove

It may well be to do with security—

Chair

I think there are only two accommodation bases remaining in Northern Ireland. I don’t think the families issue is about security as much as many other things that we discuss. Can you commit that we will see the full detail of the survey? It will help inform our further work on this.

Stephen Lovegrove

Yes, of course.

Chair

All the questions to all the answers.

Mrs Trevelyan

Going forward, I ask you to consider how you are going to do a full, real value for money assessment of the future accommodation model: not what is cheapest, but what is sustainable. What is going to avoid a serious retention risk cost? I do not know if you have thought about it yet; I have not. Do you have any sense that there is a holistic perspective on assessing value for money?

Stephen Lovegrove

We have discussed this before, and I am very aware of those views. We are looking at that at the moment to see whether there are ways in which we might be able to capture that. These are obviously quite complex issues. They were talking about Annington earlier on and we will be talking about the defence estate. The move to a smaller number of bigger hubs in its own right brings with it a number of factors that we certainly need to take into account. They are quite difficult to capture in a simple numerical way, so we are looking at that quite carefully at the moment. I am very happy to keep taking advice and observations from you and will certainly let you know how we go forward with that.

Mrs Trevelyan

I would encourage you to find a way to assess that. There are various tools used in the private sector to assess the holistic impact of a policy on the purchase of a corporate entity. To not do that at this point when the people are a key component of our armed forces is unwise. Yes, we need our shiny tanks and planes, but none of them work without the people. If we get this wrong, there is a retention risk. You see the figures, as I do. We are already undermanned. If we do not get that right, the risk to our armed forces and the security of our nation is genuinely impaired in my opinion. Clear guidance on how the Department is thinking about this in a holistic way would be helpful.

Stephen Lovegrove

Certainly.

Chair

I think you know our interest in this subject.

Stephen Lovegrove

I do.

Chair

It is absolutely only right that our personnel get what they signed up for and that they get good quality accommodation. We all understand the pressures about home ownership, but people still have to move and still have to have somewhere to live. They cannot always be upping sticks and selling at short notice.

Stephen Lovegrove

And every family and every individual is different. Indeed, Army families tend to have different types of priorities and thoughts about where they want to live compared with Navy families, for instance, because of the nature of the service involved. It is a complex subject, but I understand the point.

Chair

Thank you for your time on this. We are now moving on to our second panel. And thanks very much to Mr Hopkins. Examination of witnesses

Witnesses

Stephen Lovegrove, Lieutenant General Mark Poffley, Julie Taylor and Graham Dalton.

Chair

Let me introduce the panel for the ease of anyone who may be tuning in for this element of the hearing. We have Julie Taylor, Director General of Head Office and Commissioning Services at the Ministry of Defence. If anyone wants to follow this and they have got the NAO Report in front of them, figure 16 shows where all our witnesses fit in the firmament around managing the DIO. Ms Taylor has oversight of the DIO and reports to the Permanent Secretary. Graham Dalton, Chief Executive of the Defence Infrastructure Organisation, is still here. Mr Dalton, just to be clear, are you still a Capita employee?

Graham Dalton

I am.

Chair

So you are paid by Capita and you are on their payroll.

Graham Dalton

Yes.

Chair

I just want to be clear. We also have Stephen Lovegrove again, the Permanent Secretary at the Ministry of Defence, and Lieutenant General Mark Poffley, Deputy Chief of the Defence Staff, particularly for military capability at the Ministry of Defence. Welcome. Our hashtag for this element of the hearing is #modestate. Before I go into the main section of the hearing, we were interested to know that the Minister made a statement in the House on Friday about the review of this programme. This is the sixth time that the NAO has reported on management of the estate in 30 years, so this time, well done, Mr Lovegrove. There is a strategy and a bit of data, but, worryingly, two years in, there has been a review of that strategy and we now have this statement from the Minister, which seems to indicate that the Defence Board has decided to continue working with Capita. Can you expand on that and tell us whether I have interpreted the statement correctly?

Stephen Lovegrove

The ministerial statement addresses two different aspects. We have taken, after some consideration—

Chair

Sorry to interrupt. Can you answer my question? Are you continuing with Capita as a partner in this operation?

Stephen Lovegrove

We are looking at the nature of the contract at the moment. It is too early to say whether we will or we won’t.

Chair

That’s interesting. That’s fine. Carry on.

Stephen Lovegrove

Two aspects of the written ministerial statement are worth bringing out. We have taken a view, not without considerable thought and analysis, that the right thing to do is, by and large, to delegate control of the estate down to the frontline commands. It was repatriated to the centre some time ago. It had been down with them before, and now we are going to put it back down with them this time. That goes along with the Levene principles. The Peter Levene review suggested that delegation to the frontline commands is best, because they are the best ones to work out the balance of priorities. It goes along with their having delegated to them not only manpower but equipment, so they have the full package. That is one part of it. I am happy to talk about that.

Mrs Trevelyan

Can I just hold you on that? Just for clarity, are you proposing to give them a distressed estate, given the state it is in at the moment—it is seriously underfunded and has had seven years of basic health and safety investment only, and even then at a push—or are they going to get something functional, from which to start managing the maintenance?

Stephen Lovegrove

They will certainly have something that is functional and operational.

Mrs Trevelyan

But not invested in.

Stephen Lovegrove

There is no contention about the fact that parts of the estate have been under-invested in.

Mrs Trevelyan

Absolutely. I think we all agree on that one.

Stephen Lovegrove

We accept that there is a very, very big issue, which has been a long time brewing on the estate, and that it is going to take a while to fix. We believe—as do the frontline commands, very strongly—that the frontline commands are going to be in the best position to take the right kinds of decisions to fix a bit of the estate, maintain a bit of the estate and dispose of a bit of the estate, taking into account the whole of the capability coherence, which General Poffley can talk more about. No doubt we will not be giving them something that they think is absolutely perfect in every possible regard. It would be disingenuous to pretend that the defence estate is in that state.

Mrs Trevelyan

Will they have any chance to say whether they are willing to take on a part of the estate that may be incredibly badly invested in?

Chair

Can they say no? Is it a one-way option?

Mrs Trevelyan

Can they say, “Do you know what? This is unacceptable unless you give me a million quid to fix it”?

Lieutenant General Poffley

Let me try to address that. The answer is yes, they already do. They feed back to me regularly where they have concerns about the estate. It is as part of an overall assessment that we make in the Ministry of Defence as to where their individual capabilities lie. As the defence review set out a series of outputs, the infrastructure line appears as one of the factors that we consider on an annual basis. Indeed, it is regularly updated through a committee that I chair, at which they are all represented.

Stephen Lovegrove

If I may, it is probably right to say that what we are doing is delegating the funding of the estate, rather than the leaseholds and freeholds themselves. I don’t know whether Mr Dalton would like to give more detail on that.

Graham Dalton

A difference at the moment is that I and my people try to determine slightly remotely what the priorities are to spend the available money on. I absolutely support the delegation of the budgets to the frontline commands so they can prioritise across all the things we are spending money on, as Lieutenant General Poffley said. It is then my job to make sure they have got the asset information—information on the condition and the likely future condition of the estate and the assets they have got—so they get better sight of when things are going to need maintenance intervention, and then they can make those decisions, which we will support them on, and then we will go away and procure.

Chair

Just one more point, Mr Lovegrove. I have got Members keen to come in on this, as you can imagine.

Stephen Lovegrove

I just thought I’d go on to the second part of the WMS, if I may. It talks about the DIO itself, which is effectively moving, as Mr Dalton said, away from making these kinds of decisions, so it is a more strategic, more advisory, more assurance and standards type of body. Against that background, we clearly need to work out whether the current arrangements with the strategic business partners—Capita, PA and AECOM—are adequate to achieve the best possible outcomes for the future. Not only that, we also have the experience of the first couple of years of the contract, which has been okay in some parts and not so okay in other parts. We have started looking at any changes that we might want to make to that. There has been, as it were, a first reading of some of that work at the Defence Board, just before Christmas. We should be going back to the Defence Board in March or April when that work has further progressed and we will be making recommendations to it at that point. Nothing is taken off the table at the moment.

Chair

So this statement is actually saying that you are still talking about it. What did the Defence Board actually decide? What does this statement signify was the actual decision?

Stephen Lovegrove

This statement signifies, more than anything else, the proposed delegations. That is really what—

Chair

So that is the decision but, other than that, they have still not been taken.

Stephen Lovegrove

That is correct. We are clearly having to look at the nature of the strategic business partner arrangements against that background.

Chair

The danger of a ministerial statement a couple of days before Committee is that we end up discussing that more than the NAO Report and I don’t want to do that too much. I do want Mr Boswell and Mr Elphicke to chip in on this.

Philip Boswell

The National Audit Office Report paragraph 3.25 concerns the delegation of the estate budget to the commands. This seems to make a fair bit of sense but it is reverting to the 2011 position. It says at the end of that paragraph: “The Department expects to decide on delegation in 2017, after assessing the Commands’ ability to take on these additional responsibilities.” What has changed?

Lieutenant General Poffley

Two or three years ago we delegated the equipment programme down to the TLBs. In that process, we reviewed the maturity of each of the delegated TLBs as to their ability to manage what we were doing centrally at head office. We believe that that similarly needs to occur here. This is very different from when we last saw delegation of the infrastructure programme because, as the Permanent Secretary has just described, that was a point at which we had now delegated the equipment programme, the activity programme, the people programme, and this is an anomaly to the delegated model that Lord Levene set out. The maturity of their architectures and skillsets to be able to accept that responsibility quite clearly needs to be assessed before we allow that delegation to take place.

Chair

We have previously reported on that, raising some concerns, which I hope you will take into account.

Philip Boswell

So Lieutenant General, it is basically that we are not sure. Have you done anything about improving the commands’ expertise in this area?

Lieutenant General Poffley

Absolutely. There is an active training programme underway to ensure that people are competent in those areas. I would also say that the delegation of the equipment programme is similarly already skilling people up in budgetary management and the ability to take the balanced investment decisions that are inevitably required. I should say that we are viewing the DIO as an expert supplier to us, the authority. As a consequence, it is not that I want to turn everybody in the TLBs into a civil engineer competent to make some judgments about a particularly project, quite the counter. That is where we would hope that the DIO have amassed those skills and, therefore, we can tap into that, as can the TLBs.

Stephen Lovegrove

I should say also that frontline commands are acutely aware of the need to improve their capability in this area over the next year and a bit before the delegations actually take effect. They have been speaking to Mr Dalton about whether certain staff should transfer. So there is a lot of work that is going on in this area.

Chair

I think this is going to keep us busy, as ever, for a while to come. I want to bring Mr Elphicke in because we want to get on to the main body of the NAO Report.

Charlie Elphicke

To follow up on a point made by Mr Dalton, I want to understand the decision-making process. Who makes the decisions? Let me give an example. Say you had decided you were going to withdraw all military presence from Dover castle, ending a thousand years of history and defence of the realm and all that stuff. [Interruption.] Exactly. It has already happened. If that was going to be the case, is that a decision made by the frontline south-east command, by you, General Poffley, or you, Mr Dalton? How does that decision come into being? Can you briefly take us through the stages from policy to operational?

Lieutenant General Poffley

The ownership of the decision lies in the first instance with the TLB that might be managing that particular part of the estate.

Chair

The TLB?

Lieutenant General Poffley

The top level budget, in this case the Army, who would have folk already stationed in that facility. If they made a judgment that said, “I wish to remove that unit from a particular location” because they wanted to spend their money in a slightly different way, they would, inevitably, bring that into their annual proposition, which is scrutinised by my staff and the Director General Finance’s staff in the Ministry of Defence. I will scrutinise it for capability coherence and Ms Louise Tulett, who is the DG Finance, will scrutinise it on behalf of the Permanent Secretary for good value for money and the accounting officer function. It is absolutely the case that there may be some political, environmental or output aspects that need to be considered in that judgment, and because we have visibility of it we can then add clarity or direction, if needed, to the frontline command—in this case, the Army—as to whether we think it is a good thing to do.

Charlie Elphicke

Where does that then link across to the DIO? Do you then instruct the DIO or do you consult and they have a say as well?

Lieutenant General Poffley

In the defence plan, annually, we will set that down as a piece of direction to be completed in the following year or, indeed, because our defence plan runs out as a programme over 10 years, at some point in the future.

Charlie Elphicke

So does Mr Dalton do what he is told and you are the decision maker really?

Lieutenant General Poffley

The Ministry of Defence and the Army, Navy and Air Force are effectively the decision makers in terms of the prioritisation of the estate and its lay downs, but we must live within a budget and therefore there is advice that comes back as to the best mechanism we might use in the infrastructure pillar for servicing that set of priorities.

Chair

Given that we have had this statement and that you are reviewing your arrangement with Capita—Mr Dalton confirmed at the beginning of this hearing that he is employed by Capita—I want to ask: were the MOD’s arrangement with Capita to come to an end, would that mean you would have to have a whole new team of personnel at the top of the DIO, as Mr Dalton and a number of his colleagues are employed directly by Capita?

Stephen Lovegrove

As we think through what the arrangements need to be, I am quite keen that we give sufficient weight to continuity in senior leadership, which we have not had for the last couple of years in the DIO. So that would be one of the things that we will need to think about.

Chair

Remind us how many leaders you have had? How many people in your position, Mr Dalton, have there been before you?

Julie Taylor

Graham is the third permanent Chief Executive of the DIO

Chair

In two years.

Julie Taylor

Yes, and there have been some acting Chief Executives in the meantime. What is probably worth saying though is that the contract that we have with Capita is quite strong in allowing us to make changes and/or, if necessary, terminate the arrangement, and it gives us rights to take on Capita’s staff—

Chair

Yes, it is all listed in the Report, so we will not go into it in detail here.

Julie Taylor

That is an important feature of the contract—

Chair

We are going to come on to the contract under section 3 of the Report in a little while. Before we go further, I just want to acknowledge the interest of a number of colleagues. In particular, I would like to welcome the hon. Member for Twickenham to the room—she is so interested that she is sitting through our hearing. There are other Members who are unable to attend but have sent us some evidence, in particular the hon. Member for York Central and the hon. Member for Gosport—others have talked to us as well.

Charlie Elphicke

Can I ask a question about those particular colleagues?

Chair

Absolutely. In a moment, Mr Elphicke. I would like to let Anne-Marie Trevelyan kick off—we are now moving into the main body of the NAO Report.

Mrs Trevelyan

Thank you, Chair. I think that the NAO Report is very clear and although we all support the fact that there is, at last, a plan to turn the military estate into one that is fit for the 21st century—it is no mean feat; it is a dynamic environment; we get all that—the reality is that the Footprint strategy, which seems to have coalesced, is by the Department’s own figures and the NAO’s Report far short of being anything that is financially viable. We are looking at a more than £8 billion black hole in terms of management of what the Footprint strategy expects to take us to. I understand that this is a challenging prospect but, with the plans—91 sites have been identified publicly as being removed and have been discussed over the last few months—you are now saying, following the ministerial statement last week, that this will be within the commands’ control pretty soon. So will all that Footprint strategy roll-out be in the hands of command?

Lieutenant General Poffley

Each of the frontline commands has been actively engaged in drawing up the plan that is associated with those sites. It is already agreed that we would establish a series of what we are terming “capability clusters”. They have been actively engaged in that process and, stand fast, we have not seen one area, particularly in terms of rotary provision, where there has been any demurring from the position that we have agreed over the past year. From the point of view of the commands delivering against that plan, I anticipate that that should proceed without too much disruption, but inevitably, as we get into this and review the business cases and our operational requirements potentially change, it will be a dynamic process, as you suggest.

Mrs Trevelyan

Perhaps you can explain to us how the business cases for each of the sites have been reached. What principles have you worked on? Is it about sites that you may not want to be in it at all, capability changes and that bigger value for money versus capability question? There have been one or two that I have seen where it seems like the DIO has said, “It’s really expensive to run. Let’s split the stuff up and put it somewhere else”, but the local view has been that that is not necessarily the best value-for-money solution, holistically. Perhaps you can talk about the principles of how you got to these decisions.

Lieutenant General Poffley

The principles were set out originally for us to look, with the DIO providing some counsel, at the state of the estate and, from an infrastructure point of view, what would be the perfect lay-down from a rationalised estate. It went to utilities, usage, geography and the condition of the estate. Having started on that premise, we then flushed across that analysis a capability judgment as to how you would now accommodate people. That was looking at whether people want to live there, whether it was a sensible place for recruiting and what the terms and conditions were that we would be asking our people to live in that were associated with that estate. We looked at our ability to generate forces, such as proximity to training facilities and that sort of thing, and then we looked at the operational requirement in terms of equipment. Was it suitable for those sorts of things? The distillation of that is the plan that you have seen with those disposals in mind, and that will of course be continually refined as we go through the business cases. We are in the process at the moment of engaging with local authorities to see what the local dynamics would be against that proposition. We have a proposition. We have assessed it in terms of its strategic balance of investment and value for money, and that work needs to be refined as we go forward.

Mrs Trevelyan

So the reality is that some of them may not close, some of them may not raise the money you hope and some of them may end up costing you a great deal as you move and have to put the capability somewhere else.

Lieutenant General Poffley

Absolutely.

Mrs Trevelyan

So Ms Taylor, in terms of the deal agreed with the Treasury that there would be £1 billion of capital receipts as part of this roll-out—is there confidence in the Department that that is even likely to be achieved?

Julie Taylor

We still have a degree of confidence that that is a reasonable expectation. As the Report sets out, there are financing questions about how we finance the re-provision. That is something that we are looking quite hard at in terms of potentially novel methods of financing. We may be dependent on those in order to release the estate to generate the disposals. At the moment, we are proceeding on the basis that those will be possible.

Mrs Trevelyan

Is it likely—I don’t think anyone disagrees that while there is a history, Stonehouse barracks is not fit for purpose for our Royal Marines to work and live in and they are going to need a modern, 21st-century, fit-for-purpose unit where you bring everyone from Chivenor across, so that you have a super socking great Royal Marines set-up, but that is going to cost a great deal of money to set up—that you may not get any money from the barracks for many, many years, if anything at all? You might be lucky if someone takes it off your hands, because there is a historical cost. How can you have any confidence that those sorts of decisions, which must surely be based on capability, are going to roll out and meet the financial commitment that you have made to the Treasury?

Julie Taylor

Obviously in the planning we have made some assumptions that we think are reasonable about who might be interested in our sites. I take your point that some of those are very uncertain, but we have made a reasonable judgment that we think will stand up. I think the point that General Poffley would make is that this is a very complex set of moves, so one small thing going wrong could delay quite a lot and have a domino effect. We have a degree of confidence in the work that the DIO has done in this space. It is as good as it can be at this point in time. We need to do some more work to make sure all these things can now be delivered.

Mrs Trevelyan

Is it likely that the London properties that are identified for disposal and sale will be the profit generators across the board?

Julie Taylor

Some of them are worth the vast majority of the disposal receipts.

Mrs Trevelyan

In terms of the holistic view for the whole force, for instance, the Cavalry barracks in Hounslow and Kneller Hall have been identified for sale. Both are in an area where there is a complex BME relationship and where the military presence at the moment is a really important part of community strength. Are those sorts of issues being taken into account or is it a question of, “Let’s be honest: Kneller Hall is a fantastic site. We’re going to turn it into fancy apartments, so let’s just flog it, because we can put musicians somewhere else”?

Lieutenant General Poffley

These are inevitably judgments that will need to be taken on a case-by-case basis. For some of the sites that you describe, absolutely there will be the net benefit from a potential receipt being washed through the rest of the defence programme or, indeed, ameliorating some of the challenges we have in sustaining the remaining estate. It would be wrong for us to say that infrastructure is the key driver. In some cases, it is absolutely going to be, because that is the most efficient use of the estate. In some cases, there will be softer effects, such as the implications for local communities. As we go through each of the business cases, so we will make a judgment on that basis and then progress against a target that has been set by the Treasury—indeed, we think it is a legitimate target. We are under no illusions that it is quite challenging—that does not make it a bad target—and that it will be quite difficult to get to it.

Stephen Lovegrove

It will be case by case. Woolwich barracks is a good example of the type of facility you are talking about. Clearly it is not in great condition, but local leaders and the local MP have very clear views about the importance of the barracks to the local economy. We will have to engage with that before any final decisions are taken about it.

Mrs Trevelyan

What happens if those that have the chance to generate some of that £1 billion of profit do not come off because you decide to rehouse people and say, “We should have a battalion here rather than shipping it all to Andover”?

Lieutenant General Poffley

What is absolutely the case is that there are some sites where it is clearly riskier against that target than others. It draws you to the conclusion, quite rightly, that we need to continue to work to go further, beyond those sites we have already identified. That plays to delegation, where we would hope we can incentivise each of the frontline commands to actively seek out opportunities to release estate for two reasons: first, for the obvious receipts and therefore militating against other sites that do not materialise in the way we would hope; and secondly, because it will reduce the amount we are having to spend on an annual basis to sustain that estate going forward. That will allow us to wash that financing through the rest of their programme, ideally, and where necessary, pull into the Ministry of Defence prioritisations that may trump it from a defence point of view.

Mrs Trevelyan

So if the Air Force agrees that a disused airfield, which perhaps is not yet identified, is not required, will it get to keep that receipt?

Lieutenant General Poffley

We are looking closely at the incentivisation that would make sure they seek that out. Absolutely, the intention is for them to reap some of the benefits, to attend to their strategic priorities.

Mrs Trevelyan

That doesn’t quite answer my question. If the commands have equipment, personnel and infrastructure and they say, “That airfield is no longer required,” will they get to keep the receipts? If the local commander has a good relationship with the local council and comes up with a really good housing scheme—you are telling me that that command will be determining those decisions and DIO will help with the technical stuff, but will the Air Force get to keep that money or will it come back into MOD?

Lieutenant General Poffley

All three services will be allowed—and will be encouraged—to push that delegation down to the very local level. Quite clearly, it is that station commander—

Chair

Answer Mrs Trevelyan’s question—who gets to keep the money?

Lieutenant General Poffley

It is to be determined on a case-by-case basis whether that money should stay inside a frontline command, or whether it needs to service a higher priority at the defence level. The defence budget is delegated in its current form.

Chair

Just to be clear: we understand that, but we don’t have a clear answer.

Lieutenant General Poffley

There can be no guarantees.

Charlie Elphicke

I want to pick up the issue that was raised by my colleague, Mrs Trevelyan, on the matter of Kneller Hall, which, you will know, is where the Royal Military School of Music is located. This is an issue, because it is a great example of the tension one has between wanting to deal with the estate but also wanting to make sure that capability is preserved. My colleague, Dr Tania Mathias, who is the MP for Twickenham and is a hard-working, energetic, campaigning champion for the area, tells me that this works very well as a school of music, but that it was allowed to fall into disrepair in the ‘90s—it was not kept up or maintained—and now the MOD are saying, “Let’s just flog it for housing and move somewhere else outside London.” Have you taken into account the dislocation of the history, or the effectiveness of an already-working establishment?

Lieutenant General Poffley

It is absolutely the case that people are conscious of the effect that that will have, not only on the local community but on the heritage that we may have built up on a site such as that. It is also absolutely the case that balancing the delivery of musicians—across the Army in this case, but potentially defence more broadly—may be better serviced in a more up-to-date series of facilities that we simply cannot afford to provide on that site. If that is the case, it would clearly lead you to a conclusion that you either find an alternative military use for that particular site, or you dispose of it. Quite clearly, a judgment has been taken with regard to Kneller Hall in that way.

Charlie Elphicke

How many facilities are you talking about moving it into—one single facility or several facilities around the country?

Lieutenant General Poffley

I can’t give you a precise answer on that particular subject, but I can come back to you with the detail. My understanding is that the vast majority of the school of army musicians will be going down to Winchester into a bespoke series of facilities that better provide for them.

Charlie Elphicke

Is that not the issue I’m highlighting? You have one central, well located school of music that works well and is a centre of excellence—a concentration of expertise who people can consult—and you are going to blast it into a whole load of different sites around the country, meaning you will lose that gossamer thread of excellence. It is a bit like turning a single, big teaching hospital into a whole load of community hospitals. You lose the excellence and quality.

Lieutenant General Poffley

I can’t give you an assurance that it is more than one site or not, because I don’t know; I would need to come back to you. My understanding is that it is on to one site, and that it will continue to centre not only the Army but, more broadly, defence’s musicians in one location, which better provides for them than the current facilities at Kneller Hall.

Philip Boswell

This is something that ties into what my colleagues have said on all the facilities. In Scotland there are 22 facilities, some of which are closing. My hon. Friend from Edinburgh South West is concerned about the Redford barracks. It is on the flight path for Edinburgh airport. There is a shortage of housing in Edinburgh. It is a substantial piece of land, although there is a burn running through it, so it does have issues. What does the DIO intend? Does the DIO intend to gain at least outline planning approval before selling on, or will this go in its current form to some private investor, like Annington Homes?

Graham Dalton

For any site, DIO will make an assessment of the potential use of the site. In particular, it will work with local authorities to see how the use of the site fits with their local plans, whatever their local planning arrangements are. We will then use a range of options. Some will be straight disposal of the land as it is; some will need some remediation clearance; some of it will work with a lead developer over time—if it is a large site, for example—to secure detailed planning consent and build phases, which optimises return for the taxpayer.

Philip Boswell

The general mentioned that there will be additional expertise in the commands. This can hugely increase the value of the land. Who gets the profit? Does the public purse lose out to chumocracy?

Graham Dalton

We are working clearly within managing public money and the rules, so we don’t just dispose for someone else to make a windfall, if we think there is an easy windfall to be made. We work out to secure the right level of whatever the development is. It might be that it is just cleared, and competition—the site is free for access for someone else. More often it is securing either outline planning consent or detailed planning consent, or in phases, or even working with a developer on a gain share as time goes through. We work through with the developer. What we don’t do is speculate on what might happen in future.

Philip Boswell

And if this does happen does the buck stop with you, Mr Dalton? Are you accountable if this happens?

Graham Dalton

I am sitting with the accounting officer, and he will raise it pretty clearly with me, yes.

Philip Boswell

So you are accountable for it. Okay, thank you.

Chair

I will bring Anne-Marie Trevelyan back in, but we will be raising a few other examples like this.

Mrs Trevelyan

A concern I have, Mr Lovegrove, is the management of the risk. You are starting with a Footprint strategy, which is not economically viable. While I commend the fact that there is at least a plan—I am new here: 30 years of not doing this is a damning indictment on the Department. You are at least trying to do that, but we are not at a stable starting point from which to tackle this financial black hole in terms of infrastructure, investment and maintenance. How are you proposing to monitor and manage the risks going forward, understanding that this will be a continuing conversation? When you find that you can’t sell “RAF this” because of something, and you find that you can shift something in Shrewsbury, how will you be managing the risks that this impacts for the whole Department in terms of both capability and finances? I don’t think the Treasury is looking to give you another £10 billion a year.

Stephen Lovegrove

No, I am sure it is not. Your question goes to the very heart of what we are trying to do here. As I said, this is a problem which had its genesis over many decades and it will no doubt take a couple of decades to fix it. I do not think that the Footprint strategy or, as it has morphed into, the better defence estate strategy, really, should be looked upon as anything other than the first step in what is going to be a very significant and ambitious programme. But I think we do accept, absolutely, that it doesn’t go far enough to be able to put the financing of the Defence estate on to a sustainable footing. But we have to start somewhere. There is a very high level of execution risk in this plan. It is very ambitious, notwithstanding the fact that we will probably—almost certainly, in fact— have to go further. What I want to do at the moment is not embed this plan but certainly ground the plan clearly, and make sure that we have the right operational apparatus and framework around it, so that we can start making progress on it. We are changing the nature of our management information quite profoundly at the moment; and there is some discussion in the Report that actually we weren’t capable of changing it quickly enough before the strategic business partner came in, and that is absolutely right. We want to continue to improve that.

Mrs Trevelyan

How much are you investing to get that to a point where you think it is something robust?

Stephen Lovegrove

I don’t have that figure on me—

Julie Taylor

Over 10 years the new information technology system will have about £90 million to £100 million invested in it.

Stephen Lovegrove

There is a lot more information about lifecycle replacement, assessment—the delegation to the frontline command, the top-level budget holders, will certainly, assuming that it is incentivised properly and we are looking at it properly, drive different types of outcomes.

Chair

I think that is one of our concerns. The statement—that is why we were probing you quite hard on it at the beginning—on Friday seems to have ripped up a lot of what the NAO has been looking at, in terms of the strategy and the management of it so far, because all the balls are in the air again. It will be, as Lieutenant General Poffley has indicated several times, down to the individual commands to decide their priorities. How can you be sure that that won’t just tear it all up and start all over again? Is there an alignment with where you are now and where the commands are going to be?

Stephen Lovegrove

Yes. Two reasons, principally: although the DIO will not be taking the kinds of decisions that it used to take, and those will be delegated down to frontline commands, it will be very much keeping a strategic overview of what we do with the estate, and whether the kind of standards that are being applied over here are the same standards as are being applied over there. If it is the case that we need at some point to go further than 30% by 2040, who do I look to to tell me what the right number in the right date is? It will be the DIO. That is our area of expertise—property expertise within, effectively, head office. There is still very clear, central oversight there. On the other side, I would look to General Poffley’s unit. We have upgraded the military capability coherence function in the area that General Poffley runs. Delegation in this kind of system can only go so far. There has to be a control in mind, because the really big decisions about what capability means for equipment, premises, manpower or training—all the other areas that go to make up an efficient defence establishment in the UK—cannot be made down in the individual silos. It is that balance that we have to get right. I am not saying that the latest incarnation will be perfect, but we think—

Mrs Trevelyan

It is an incarnation. It is a great start. My question is, who then is responsible at the end of the day for these decisions, and who therefore is managing the risks for estates, equipment and people, taking that holistic view of risk with each of those decisions? RAF Halton: it was announced in September that the airfield was going to be sold. Fine, no one bats an eyelid, good decision, great place to have some housing. Then—this is in my understanding—someone realised that Aylesbury council was having a closure date for its land-banking access and, with a week’s notice, the whole of RAF Halton was informed that it would be shutting down. That is the RAF’s basic training centre. There are buildings that you have had to close in the past few months because the roof is falling in. So there is a quick decision to make. The impact on those people, those experienced trainers, has been catastrophic. How are you going to manage the risks as this dynamic programme rolls forward so that that sort of poor decision making, based on perfectly valid reasons, does not happen, because the impact across the board will be enormous?

Stephen Lovegrove

We will have to continue to improve the way in which the two really big elements of the defence estate are integrated. They are, fundamentally, about a civilian, professional assessment of the right thing to do against prevailing market conditions and so on; and a professional military assessment of the right thing to do for our people and our capability—our capability very broadly defined. When you have those two broad thrusts, it is always perfectly possible that incomplete or inadequate decisions are made, but we are working very hard—ultimately, they come together in me and in the Chief of the Defence Staff, particularly, obviously, for capability—to be responsible for making sure that defence works properly.

Mrs Trevelyan

I keep asking questions because I still cannot understand how you are going to manage those risks. What are you actively doing so that you and CDS are on top of it?

Lieutenant General Poffley

Let us take the case you are describing. I would have expected the Royal Air Force to come back to me in its annual judgment about the plans for that particular site and to declare either contentment or otherwise. At that juncture, there is a conscious decision to be taken and some negotiation to be made to confirm whether we are prepared to find a different solution. By the way, inside the Royal Air Force’s budget and with the Chief of the Air Staff in control of this judgment, if he has not got a provision for taking forward those capabilities that are compromised by that site’s disposal, then he has not got a strategic plan for that year, in which case it is challenged by me for a lack of coherence. I have a number of committees at various levels that bring that forward, and then ultimately I submit to the collective wisdom of the Chiefs—and, through the Permanent Secretary, to the defence board—as to whether that is a good decision or a bad decision, and then we can promulgate it one way or the other.

Mrs Trevelyan

Going forward, we might hope that there will be no sudden shocks like the one at RAF Halton in terms of the impact on retention of high-quality staff, because there will be a much more coherent management of this estate change.

Lieutenant General Poffley

One would hope that that is absolutely the case. The Chief of the Air Staff should be absolutely worried about his people, as I know he is. The consequences of an estate action impacting on those people will undoubtedly be very much at the forefront of his mind.

Mrs Trevelyan

In a practical sense, I think the concern is that these initial business plans have been made, but there is much work to do before any sale happens. You might find that there are covenants on a lovely old property that was gifted to the RAF, for instance—I am not particularly picking on the RAF—after the war because all the boys were killed, and that it will cost you a fortune to dispose of it, and/or you cannot, for any number of reasons. Why is that thought process and all that investigative work not being done before the decision to sell, with all the destabilisation, actually takes place? Why is it being done in reverse?

Lieutenant General Poffley

We certainly have a better visibility of those sorts of issues as a consequence of the work that has gone on over the course of this year, and I anticipate that level of understanding maturing exponentially as we go forward this year.

Mrs Trevelyan

Will you maintain it in the Department? We are not going to send people off to go and do other things—we are going to keep them.

Lieutenant General Poffley

Absolutely. I will have a dedicated portfolio office that will purely be responsible for monitoring the implementation of this strategy.

Stephen Lovegrove

It is really important that the DIO maintains its role as a centre of expertise and gravity in this area. Graham and his colleagues need very clear visibility as to what the top level budget holders of frontline command are aiming to do, and ask them the kinds of question that you have just asked—“Have you considered whether or not the local authority, given its public statements, is going to be prepared to do this, that or the other?” This is a balance between delegation and a degree of central control, and it will fluctuate a bit. I should say that the other thing that is going to fluctuate—you mentioned it earlier on—is the £8.5 billion. It is obviously a very alarming sum to see there, but in a sense it is an artificial sum. What it shows you is that if we do a fairly crude like-for-like replacement cycle on pretty much everything we have at the moment at a sticker price that has not been interrogated, without thinking about utilisation rates and sale rates and all the rest of it, that is what you end up with. It is a necessary minatory shot across our bows, to say “Okay; clearly what we must not do is pursue a policy that leads to that kind of outcome, because that will simply be unsustainable.”

Mrs Trevelyan

It certainly indicates that the last 10 or 15 years of total under-investment in estates has not worked. That is not a sustainable way of running MOD assets. You are now going to ask commands to take responsibility for those assets. Certainly all those I speak to think that that is great, but as I asked at the beginning, how are they supposed to ensure that the assets get to a good state and are maintained, if according to the Report you have at least a £435 million deficit in terms of investment? That is money that you now do not have to chuck into those assets.

Stephen Lovegrove

Again, that is a work in progress in its own right. That number—I think it is £425 million—is not going to be the number spat out at the end of the process. In the course of working out how that headline number can be managed, the frontline commands will take views on what they can do to maintain a level of coherent capability, using all the various levers that they can now pull—manpower, equipment and so on—to make sure that it becomes coherent. Across the top of that, the centre of the Department—the head office, effectively, as it is represented around me—will take a broader Defence-wide view as to whether or not that represents real capability coherence across Defence.

Chair

It just seems to us that a lot of those decisions will have to be made because the maintenance costs have been ratcheted up so highly because of the deficit. I want to pause for a moment because I want to say that we hope to finish the bulk of this hearing by 6 o’clock, so can we bear that in mind in both questions and answers? Remember that we have the NAO Report and we have read it, so we don’t need to have it read out to us. We have it in the record anyway, so you can refer to it, rather than quote, if that is helpful. I turn to Mr Philip Boswell, and then we will come back to Anne-Marie Trevelyan.

Philip Boswell

Moving on to the model for managing the estate—question 13—this is to Stephen Lovegrove and Julie Taylor. Who is ultimately responsible for decisions undertaken by the Defence Infrastructure Organisation? Mr Lovegrove first.

Chair

Perhaps we can look at figure 16 of the Report.

Stephen Lovegrove

Ultimately, I am. I am the accounting officer. Ms Taylor is accountable to me, and I am accountable to Parliament. Ultimately, it is me. Clearly, I delegate quite a lot of the day-to-day activity, and I will hold—

Philip Boswell

Okay, Mr Lovegrove. Why did the NAO find that the roles and responsibilities are unclear and that the governance arrangements are confused?

Stephen Lovegrove

I think that some of the confusion in their mind may have been injected by virtue of the role of the strategic business partner. When you are asking an outside entity to run an important organisation such as this, there is the capacity for a degree of confusion. I think that we also need to have a look at some of the top structures in the Ministry of Defence, which have grown up over a number of years and might need a bit of rationalisation. In fact, there is a small amount of work happening on that subject at the moment.

Philip Boswell

So, Mr Lovegrove, you are saying that it may be unclear or confused in their minds, but not in yours.

Stephen Lovegrove

It is not unclear in my mind, because ultimately I am responsible. I should also say that I absolutely do not look upon the fact that there is a board at DIO as injecting any degree of unhelpful complexity into this area at all. We are very keen on boards. There is a great deal of precedent on having boards of that type. Ultimately, they are advisory, rather than executive.

Philip Boswell

Thank you, Mr Lovegrove. Julie Taylor, same question. Why did the NAO find that the roles and responsibilities are not clear and that the governance arrangements are confused?

Julie Taylor

To follow on, there is a requirement to manage the Defence Infrastructure Organisation, and there is a requirement to manage the contract for the strategic business partner. As Stephen said, ultimately we are all accountable to the accounting officer—the Permanent Secretary—so it comes together there. At the moment, the top management of DIO are managed through a contract, and the work of DIO is managed through a board. We have made sense of that arrangement, but I think that is something that the NAO was querying. It is something that we expect to look at as part of the new arrangements, because clearly, under a delegated model, our relationship with Capita will need to change.

Philip Boswell

Okay, Ms Taylor. Why has the operating model for the Defence Infrastructure Organisation not worked as it was intended when it was established?

Julie Taylor

I am not completely sure we would put it like that ourselves, although we did not query the wording. There are a number of things about why the Defence Infrastructure Organisation was set up that did not go as intended. There was a transformation programme that was not delivered before we started the contract. There were unintended consequences of the contract, in terms of how we incentivised the strategic business partner. In those days, we were in a less mature state, both in terms of the management of the information we had and in terms of not having a very clear defence estate strategy. I would argue that our new model will address those issues. Indeed, the NAO contributed to that thinking as we put the new model together. We are confident that the new model will address that.

Philip Boswell

We will come on to that in more detail later. Again, this is to Ms Taylor. What are the results of your review of the best model for managing the defence estate?

Julie Taylor

That review is the one that was referred to by the Chair as having been announced through the written ministerial statement on Friday, so, as we began this session by saying, we should put more decision making into the frontline commands, that DIO will need to change, and—

Chair

Which we have covered, yes.

Philip Boswell

Finally, how are you keeping your staff motivated when the operating model keeps changing?

Julie Taylor

We have kept staff engaged in this process. I might ask Mr Dalton to comment on that, because he has been directly responsible for communicating with the DIO staff.

Chair

To be clear, the DIO staff, apart from the senior management, are mostly MOD staff. They’re MOD employees.

Julie Taylor

Nearly all of them, yes.

Chair

This is where the hybrid gets quite confusing. They report into Mr Dalton and then he, through various routes, reports to you and—

Julie Taylor

Yes.

Philip Boswell

Do you think there is a large lack of facilities management experience in your department?

Julie Taylor

One of the reasons why we brought the strategic business partner in was that we had a very serious lack of skills in some key areas, and facilities management was one of those areas.

Philip Boswell

But General Poffley said that you are going to upskill and get better, so are you going to take some of this role on for yourself?

Julie Taylor

Well, within the DIO.

Graham Dalton

Estate management is DIO core skill. The thing that we need to get better at within the DIO is having the information and data on all the assets around the estate, predicting what maintenance they are going to need and what the cost of that is going to be, and then presenting that to the frontline commands.

Philip Boswell

Okay. We will come on to more of that later.

Chair

Just to pick up Ms Trevelyan’s point, it is not just the cost of maintenance; it is the cost of re-provision. Do you want to pick up on that at this point?

Mrs Trevelyan

My first question about what you have just said, Mr Dalton, is: how much of the estate do you think you now understand, have identified, have valued and have costed in terms of running costs? You have not done 100% of it yet, presumably. It is a big job; I get that. It is 1.8% of the whole nation’s—

Chair

You have two questions there: first, are you looking at the re-provision costs as well as the actual running costs, and secondly—

Graham Dalton

There is a series of points; let us see whether I can punch them off nice and quickly. We have good knowledge of what assets there are, which is quite a long way from when this Committee and the NAO looked in 2010. It is a long move from that. DIO is—

Mrs Trevelyan

So I understand. So you have a balance sheet that is the 1.8% of Great Britain that belongs to the MOD.

Graham Dalton

Yes, so we have good knowledge of what we have. We have fair knowledge at high level of the condition on the target sites that we have been looking at around the Footprint strategy, so the more expensive—

Mrs Trevelyan

Which is what percentage of the whole?

Graham Dalton

The more expensive sites. It is around 80% to 85% of the cost, but nowhere near 80% of the number of assets. It is the expensive assets. We have relatively poor information—we are collecting information now—at system level. It is not just a building; you go by lighting systems, fire detection systems, drainage systems, roofing—you break it down to those levels. We are collecting that data and information now, and it is vital that we keep going on that.

Mrs Trevelyan

Mr Lovegrove, you are proposing under the new ministerial statement to hand over these assets to command authority even though there really isn’t that information yet.

Stephen Lovegrove

No, we are handing over the funding for them.

Mrs Trevelyan

Without an assessment of what it is they are taking on.

Graham Dalton

As DIO, we continue to manage those assets, but at the moment, under the existing arrangement, I second-guess within a confined infrastructure budget with which we can afford to do a mess building or a hangar or a security fence. I will have the same data, I will have assessments of what those three functions might need, but it becomes the command’s decision what they prioritise and whether they want to take money from other operations or other areas to do all of those or none of them.

Mrs Trevelyan

But do you have that level of system detail yet for commands to be able to make those decisions about funding?

Graham Dalton

That is what I am building at the moment.

Mrs Trevelyan

And how long do you expect that to take?

Graham Dalton

That is active in the course of the current financial year and running into the next financial year.

Chair

Just briefly on the cost of re-provision, are you factoring in, if you close a facility, the cost of having to re-provide it? You are confident those figures are right. You are nodding, General Poffley.

Lieutenant General Poffley

We are confident that there is an assessment made of what the re-provision costs would be if you were going to go like-for-like. Quite clearly, what we are now doing is challenging everyone who has made that assessment by saying, “Do you need to re-provide at exactly the same level, or are there some compromises you can make?” It is a capability-informed judgment as to precisely what the re-provisioning costs will be going forward.

Chair

I will come back to that in a moment, but I do not want to interrupt Mr Boswell for too long.

Philip Boswell

Thank you, Chair. Back to Ms Taylor. How will delegation of the estate budgets to the commands enable more cost-effective use of the estates? I refer specifically to page 40, paragraph 3.26, which stipulates: “Delegation in itself will not address the shortfall in funding because Commands’ budgets are already stretched.” It goes on to say that “strong controls will be required to ensure that the Commands attach sufficient priority to the estate.” How will you enable more cost-effective use of estates, and what will you do, Ms Taylor, to ensure that the commands attach sufficient priority to investing in the estate, given that we know how much boys like new toys?

Julie Taylor

Indeed. We touched on some of this earlier. The value for money of this must ultimately be measured by the value for money across the whole of the capability, not just the estate part of it. We are expecting the commands to be much more mature in making those decisions. We will have the central safeguards that my colleagues have spoken about in terms of both the capability coherence function, but also DIO’s assurance. That said, we recognise that it is easy to be short-termist about the estates and it can be somewhere to go if you have a short-term problem. It takes years for estate issues to materialise so we are not complacent at all about the need for maturing that. One of the things we are going to say is that the commands will not be asked to take this on until such time as they demonstrate to us that they have the long-term maturity, will be making the right decisions, and have the management information that we just talked about. There will be a big milestone in the summer about getting condition information—

Philip Boswell

You mentioned “more mature” and “central safeguards”. Can you give a specific example of the central safeguards that will enable this?

Julie Taylor

The two main central safeguards will be, first, through our annual planning process and the capability coherence function we will ensure that we can see what our commands are intending to do with the estate and the condition of the estate, and that it is coherent and in line with our strategy. That is a very important safeguard. Secondly, DIO has responsibilities as an expert adviser to pull the whole picture together and to give advice back to the Permanent Secretary about whether the whole estate is being managed to a suitable level. Those will be the two primary safeguards.

Stephen Lovegrove

Ultimately, I should say I have no doubt this is the right way to go, but if, in the final analysis when we have had enough time to look at it, it doesn’t work, delegations can be withdrawn.

Chair

Individually?

Stephen Lovegrove

They can be withdrawn individually. They can be withdrawn en masse.

Chair

So if you find that one of the forces hasn’t got the capability and is doing a bad job, you will just withdraw it. Yes or no?

Stephen Lovegrove

There are some very big things that the centre reserves to itself all the time. Complex weapons are one and obviously the successor is another.

Chair

But you can withdraw them very quickly.

Stephen Lovegrove

Yes. We want to let the system settle down.

Mrs Trevelyan

What you are saying is that on the basis that centrally the Department has completely failed to look after its superstructure, commands will be shouted at if in one year they decide not to invest because they make a balance-of-risk decision or a balance-of-capability decision. That is quite interesting, even in a Department that has realised it needs to get it right.

Stephen Lovegrove

I would not characterise it as shouting, but we will certainly have a discussion as to whether we think the commands are properly discharging the responsibilities we are giving to them.

Mrs Trevelyan

Which the Department has singularly failed to do itself for many years.

Stephen Lovegrove

There is no argument that the estate is in comparatively poor condition in certain areas, but for much of the time that has been to do with the frontline commands who were in charge of the estate in 2011. Some of these problems have been in gestation for many decades. We are trying to find the right answer.

Philip Boswell

Moving on to the specifics of the contract, which give me some serious concern, I refer to the NAO Report, paragraphs 3.6 to 3.12 on pages 34 and 35: “In 2014 the Department signed a 10-year gain-share contract with Capita, supported by AECOM and PA Consulting. However, there were fundamental weaknesses in its approach, in particular…DIO had not yet transformed and started operating effectively before the strategic business partner became involved. These conditions were essential to gaining maximum value from its decision to engage the private sector in this way (paragraphs 3.7 and 3.8)”. So why go ahead, Ms Taylor? Was it because you were out of your depth?

Julie Taylor

The decision was a balance of judgment at the time. I am not saying that we think we would make the same decision with the benefit of hindsight, but the decision was a balance of judgment about the urgent need to get some expertise in, in order to start making the sorts of savings we needed to make, against the completion of the transformation and then entering the contract. The actual nature of the arrangement with Capita was that Capita were happy to take on completing the transformation—

Philip Boswell

I’m sure they were. We’ll come on to that in a minute.

Julie Taylor

So the mitigation was that although—the key transformation milestones that had not been met were to do with the management information and also the nature of the organisation, but it was part of the negotiation that Capita agreed our transformation plan and then took on that job themselves. I think it is probably fair to say that there were some very good areas of performance within the contract and some less good areas. I think Capita would agree with us that the transformation side of it has not been as strong as perhaps some of the delivery side has been.

Philip Boswell

Another core element is that “the Department had not maintained a robust baseline of costs within the contract, and contractual safeguards do not ensure that savings from how DIO operates are sustainable, which was the primary aim of the contract, rather than one-off cost-cutting.” This goes to the heart of the contract. “The contract does also allow the partner to agree one-off savings with the Department (paragraphs 3.9 and 3.10)”. So why did the Department decide to proceed with the contract when it had not completed its planned transformation? Why go ahead?

Julie Taylor

I think you have pointed out two issues. The completion of the planned transformation I have hopefully just covered. We felt the transformation could be completed by Capita. That has not completely happened in the way we were expecting. But on your second set of points, around the sustainability of the savings, it is the case that, going forward, we would be able to see whether savings were sustainable when we had better management information. We have had a period of two years where we probably have not had enough management information to actually determine whether that saving is truly sustainable.

Philip Boswell

How did the decision to go ahead when you were not ready impact on the benefit that the Department could achieve through the contract?

Julie Taylor

It is not calculable.

Philip Boswell

Correct. You can’t know, which is shocking, quite frankly. Mr Lovegrove, why did the Department fail in terms of basic contract management by not setting appropriate safeguards and having all KPIs in place before the start of the contract?

Stephen Lovegrove

I think we would accept that it would have been much better to have had all the KPIs in place. The decision at the time, as Ms Taylor was indicating—

Philip Boswell

If they were the right ones, of course.

Stephen Lovegrove

The balance of advantage, it was deemed, was with going ahead with the contract because we had an urgent need for that kind of capability in DIO. I think all the KPIs bar two have now been settled. That is still not an ideal situation by any stretch of the imagination, but as I say, it was a fine judgment at the time.

Philip Boswell

I have not seen the contract. Was it a schedule of rates? Did you have variation rates?

Stephen Lovegrove

Julie, you have seen more of the contract—

Julie Taylor

Could you just clarify the question for me?

Philip Boswell

Was there a schedule of rates? Did you have labour mark-up for variations—

Julie Taylor

Yes. The contract is quite a complex contract. Some things are done on time and materials and mark-up; some other things are done on gain-share.[2] The gain-share—

Philip Boswell

What is the highest percentage mark-up on variations for any item? 100% or—