§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Maclean]2.32 pm
§ Mr. John Hughes (Coventry, North-East)
I am grateful for the opportunity to raise a matter of great importance—new evidence which has been presented to me about the sale of the Royal Ordnance factories by the Ministry of Defence to British Aerospace and, in particular, the sale of the former Royal Ordnance factory at Enfield, north London.
The Enfield factory, which opened in 1811, was one of the best-known rifle factories in the world and its highly skilled work force produced one of the Army's best-known weapons in the Lee Enfield rifle. It was a tragedy when the closure of the Enfield factory, with the loss of 1,200 jobs, was announced in August 1987, four months after British Aerospace had purchased Royal Ordnance for £190 million. At the time, the Enfield factory was valued by the Ministry of Defence at just £1.5 million. However, estimates of its redevelopment value have since ranged from £50 million to £125 million. It is a prime 100-acre site just within the M25, which has become a natural boundary for the green belt. Plans to develop the site for industry, commerce, housing and leisure were announced in May this year.
In a report published last year, the Public Accounts Committee said that it was concerned that the Ministry of Defence did not explore the possibility of redevelopment at Enfield or obtain an alternative valuation of the site based on the assumption that redevelopment might be approved in the future. The report of the Public Accounts Committee warned that British Aerospace could make a substantial gain on the site's sale or development without benefits accuring to taxpayers. Opposition Members and even some Conservative Members believe that these events are an indictment of the Government who have given away Royal Ordnance at a knock-down price and closed their eyes to the development potential at Enfield.
However, new evidence has been passed to me which suggests that the Government actively connived at the closure of the Enfield factory because they knew that the site would be closed and redeveloped before they sold Royal Ordnance to British Aerospace. The evidence also suggests that the Government engaged in a charade of competition in which other companies as well as British Aerospace were supposedly bidding for Royal Ordnance, while the Government had already made up their mind to hand the factories to British Aerospace.
The managing director of an engineering firm which used to make parts for the Enfield factory has informed me that about 30 subcontracting firms were called by the Ministry of Defence to a meeting at the Enfield factory in the autumn of 1986, about seven months before the sale to British Aerospace was announced. During interviews which lasted about four hours, the managing director told me that the subcontractors were told at the meeting that British Aerospace would be purchasing Royal Ordnance and would be closing the Enfield factory because the site was worth a great deal which would cover the cost of the purchase of Royal Ordnance.
All the 30 subcontractors present were asked under no circumstances to report that information and not to allow the closure plan to be known. According to the managing 673 director, British Aerospace officials were present at the meeting. Indeed, they openly discussed the terms and conditions under which the subcontractors would work once British Aerospace had bought Royal Ordnance. British Aerospace officials also had with them full specifications and samples of the SA80 rifle, production of which was to be transferred from Enfield to the Royal Ordnance factory at Nottingham as part of the closure plan.
The Minister may wonder why I have not revealed the name of the engineering firm or the managing director who has told me about the Enfield meeting. The reason is that he passed on the information in confidence although his firm no longer works for the Ministry of Defence. He has no axe to grind with the Ministry because the company decided to expand into other sectors. He wishes to remain anonymous because he fears that going public could jeopardise his chances of winning orders not from the Ministry of Defence, but from other big companies. I can understand his reluctance to allow his name to be made public. Look what happened at the Coventry Webster Machine Tool factory, which was drawn to the attention of the House on 18 June 1980 by my hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker). I am aware that on that occasion the John Brown company brought pressure to bear on the individuals involved with threats of closure and redundancies. Ironically, it has suffered the same fate earmarked for Enfield. In Coventry, a housing estate now exists where the factory once stood.
I cannot overstress the vulnerability of that company director and I repeat that I understand his reluctance to allow his name to be made public. Can Ministers who use their office to carry out this form of grand larceny, and who culpably devalue the parliamentary rights of every hon. Member and the democratic rights of every British citizen, be trusted to protect the trading position of this public-spirited individual and his employees? I must tell the House that I fully believe the managing director's assertions that such a meeting took place at the Enfield factory. All the evidence points to the fact that the Government, who supposedly believe in market forces, stitched up a deal with British Aerospace to ease the company's cash flow problem and to rob the taxpayers of millions of pounds.
The Enfield case is not an isolated one. Last November, a leaked memo from Warburg Securities revealed that British Aerospace was sitting on a land bank worth £1.1 billion, much of which it acquired when Austin Rover and Royal Ordnance were privatised and sold to British Aerospace. The report valued Enfield and the nearby Waltham Abbey Royal Ordnance factories at a total of £450 million. Royal Ordnance had already decided to close the Waltham Abbey site before it was sold to British Aerospace. Despite that, it was still valued at only £2 million.
The leaked Warburg memo gets to the heart of the matter and suggests that British Aerospace shouldmove out of the southern sites where possibleandmove into cheaper labour northern areas.It says thatunemployment in the south is not a political issueand that 674redundancy costs are more than covered by land sales and pension fund surplus.British Aerospace and the Government have connived in nothing less than naked asset-stripping on a massive scale. Yet Ministers at the Ministry of Defence have not been held responsible for deliberately cheating the taxpayer out of millions of pounds and allowing British Aerospace to make a killing. If a local authority had become involved in a scandal remotely like this one, I am pretty sure that the Government and the district auditor would have intervened and the councillors responsible would have been surcharged, disqualified and even sent to prison.
Ministers are fond of talking about local authorities' alleged abuse of power. The Government are currently pushing through Parliament a Bill supposedly designed to tackle the minuscule problem by banning 130,000 council officers from political activity. That is hypocrisy of the highest order because the real abuse of power is carried out by central Government. Nowhere has that been done more openly than with the sale of the Royal Ordnance factories to British Aerospace.
Ministers often say that legislation is needed to reform local government but not central Government because Ministers are accountable to Parliament. That has been exposed as nonsense by the Royal Ordnance sale. Yesterday's National Audit Office report clearly established that the foundation for the privatisation of Royal Ordnance was laid down in 1984. It also established that the Ministry of Defence's degree of commitment for the Government's privatisation philosophy was such that it no longer recognised its responsibility to the House of Commons. The comptroller's report pointed to the blatant contempt which was shown when, having set up a meeting of 30 subcontractors in September 1986, the Ministry then issued an information memorandum to supposed prospective purchasers in October 1986. That is conclusive evidence that the Government, through their Ministries were involved in asset-stripping.
Enfield originally made 115 of the rifle's 140 parts, and only 25 were out-sourced. Since production was transferred to Nottingham, only 12 parts are manufactured in house and 138 are manufactured by the vultures who, in 1986, sat down and tore to pieces the process and the Enfield work force. It is about time that questions were asked inside the Ministry of Defence, which was responsible for the give-away sale, and connived in a plan to close Enfield, which put 1,200 workers out of a job, and redeveloped the factory site. This is a matter of the gravest public concern and warrants an urgent investigation into the conduct of the Government and the Minister.
§ The Parliamentary Under-Secretary of State for Defence Procurement (Mr. Tim Sainsbury)
Any disinterested observer who had not read the National Audit Office report but who read the varying press comment on it might be forgiven for believing that at least two—perhaps even more—reports had been published yesterday. He would have been still more confused if he had heard the hon. Member for Clackmannan (Mr. O'Neill) during the Army debate claiming that the Enfield site had already been sold for between £300 and £400 million.
There is just one report, and the accounting officer, Sir Michael Quinlan, will be giving evidence on it on Monday. We do not of course wish to pre-empt the Public Accounts 675 Committee's study, but the report repays careful study. Indeed, I am tempted to read it aloud, the better to inform those who have apparently not bothered to study it.
It may be of help if I explain the background to the sale.
The first point, and one which seems to be constantly overlooked by critics, is that the sale was not of a piece of land, but of a business. As the report says, it was the Government's aim to sell Royal Ordnance as a going concern; it was sold with a number of assets but also with all its liabilities. The net worth of the company reflects both those elements.
Before any increase in the value of the sites at Enfield and Waltham Abbey can be realised, high costs will have to be incurred. I shall say more about that in a moment. As an illustration, Royal Ordnance provided £100 million in its 1987 accounts for rationalisation and restructuring. Against that background, it is completely unrealistic to look at only one side of the balance sheet.
I must make it quite clear yet again that the Ministry of Defence did not sell the Enfield site for £1.5 million or any other figure: we sold a business which was, and remains, one of our main defence suppliers.
It may help the House if I describe the history of the valuations of the Enfield site. In preparation for the privatisation of Royal Ordnance, the Department commissioned a valuation of all the company's land holdings, from a highly reputable firm of chartered surveyors. That company valued the company's sites on two bases—their existing use value, based on the open market value of the land itself and the depreciated replacement cost of the buildings and other works, and their alternative use value, based on the open market value of the sites taking into account the possibility of use for other purposes. The existing use valuation of Enfield, as at 31 December 1985, was £4.1 million. The alternative use valuation taking into account the possibility of use for other purposes was £2 million—that is, less than half the existing use valuation. The higher, existing use, valuation was made available to prospective purchasers of Royal Ordnance.
For those who are familiar with neither the complexities of property development, nor the site and the difficulities, risks, delays and uncertainties which would be involved in developing it—I fear that they include many of those who commented on the transaction—perhaps I should explain why the alternative use valuation was apparently so low.
In arriving at their valuation, our surveyors took into account a number of factors that seem to have been completely ignored by those who have simply assumed that the entire site would be capable of maximum development and would therefore command a high price for every one of its acres.
First and most important, the assumption ignores the fact that the site is within the metropolitan green belt, and at that time had no planning permission for development. Indeed, it still has no planning permission—nor is any planning application outstanding. It therefore remains to be seen whether permission will be granted, and if so, on what terms, and for what parts of the site.
Secondly, in valuing the site, one has to take into account the likelihood that any planning consents would be restricted as to the type of development which might be permitted.
Thirdly, there are the substantial restructuring and redundancy costs. Enfield was, after all, a manufacturing 676 site, and British Aerospace has estimated that there will be a £40 million cost in closing it and providing the facilities at Nottingham.
Fourthly, there are likely to be significant decontamination costs, particularly at the Waltham Abbey site, although the full extent of these is not yet clear. That is a typical example of the uncertainties that surround any development proposals.
Fifthly, other substantial costs will be involved in preparing the site for development, and for example, in site clearance.
As the report says:The National Audit Office's consultants considered it likely that a developer would be required, as a condition of planning permission, to carry out an abnormal amount of landscaping over an extensive area and to undertake other costly works.Suitable access is a particular problem at Enfield, where there appears to be only one means of access. In such cases, where a specific piece of land has to be purchased for access to an otherwise land-locked site, it is known in the trade as "ransom land". Ransom land is well named. It is commonly the case that its owner can negotiate a price with those who hope to purchase it based on a share of the development value of the entire site to which it gives access. That share can be up to 50 per cent. of the development value in cases such as Enfield, where there is only one possible means of access.
Finally, there is the delay in receiving any returns on all this investment. It is already more than two years since the sale, and no receipts are yet in prospect.
There has been reference to whether there should have been a clawback provision in the sale. Clearly we will be looking carefully at what the report has to say on clawback, both in general and with reference to this case. All clawback arrangements have about them an element of swings and roundabouts. The possibility of more later not surprisingly usually means less now. However, when the sale is just of a piece of land, the inclusion of a clawback provision is relatively straightforward and the advantages and disadvantages comparatively easy to evaluate. The sale of Royal Ordnance was not like that. Nor is there evidence that clawback is at all common when businesses, as distinct from land as such, are sold. That is the view of Rothschild, our merchant bank advisers for the sale, which has wide experience in such matters.
One of the aims of privatisation was to put Royal Ordnance on a full commercial footing, as free as possible from Government restraints on the way it conducted its business. A clawback provision would have had the undesirable result of a continuing involvement by the Department in the rationalisation of the company, because manufacturing facilities would have to be relocated before the site was fully available for redevelopment. Furthermore the Ministry of Defence is its main customer.
As I have said, when selling a business as a going concern a number of judgments have to be made—for example, what land potential purchasers of the company might consider to be surplus to their overall requirements, and different purchasers might have different views on that, depending on the requirements of other parts of their business; what type of redevelopment might maximise the value of such land; and how likely it is that planning permission for that could he obtained. It can take years to 677 obtain a final decision on planning permission, which would inevitably prolong uncertainty and delay the achievement of the wider aims of privatisation.
There may well be some gain to be made from developing the sites, but that would only occur after substantial hurdles in the way of development have been overcome. Given all the risks, uncertainties, delays and costs that will be involved, it is clear that the allegations of enormous windfall profits from such development simply do not stand up to close examination.
§ Mr. Steve Norris (Epping Forest)
I represent one of the significant sites involved, so I am grateful to my hon. Friend for giving way in such a short debate. Does he agree that contrary to all the ludicrous speculation about values amounting to hundreds of millions of pounds attributed to those sites, the NAO report in fact clearly states:The NAO noted that they valued these sites as at 31 March 1989 at no more than 8.3 per cent. of the figures reported by the media in 1988.Does my hon. Friend agree that as the most ludicrous of all those figures was probably about £400 million, the NAO is basically saying that the actual value of those sites has never been more than about £25 million to £30 million —exactly as we assumed when the original sale of Royal Ordnance was made?
§ Mr. Sainsbury
I know that my hon. Friend takes a close interest in those matters, as does our hon. Friend the Member for Enfield, North (Mr. Eggar), in whose constituency lies the Enfield site. The figure that my hon. Friend quotes from the NAO report is the latest valuation, some two years after the date of the sale, since when there has been an increase in property values. The figure of 8.3 per cent. puts the matter in perspective.
The suggestion that in all this the Department neglected to obtain good value for money for the taxpayer from the sale of Royal Ordnance, and was somehow misled into parting with valuable assets at less than their real value, is particularly misguided.
The allegation that appears in the press from time to time that we sold individual sites for their existing use values of a few million is nonsense. At the time of the sale, we were fully aware of the low value of the sites which the National Audit Office's equally expert surveyors have now confirmed, and of the substantial risks and costs of developing them which our surveyors had identified. We withheld from bidders for the company details of the alternative use valuations of the sites precisely because they were lower than the existing use valuations. In fact, the total alternative use valuations of the Royal Ordnance sites was a negative figure.
The hon. Gentleman made allegations about decisions to close taken before the sale. I firmly reject any suggestion that the closure of the Enfield factory was decided before the sale. Although the company had decided before the sale to apply to develop the Waltham Abbey site and the surplus piece of land within the boundaries of the adjacent Enfield site, no decision had been taken to close the Enfield operation. That decision was made after the sale by the new owners, and was announced in August 1987. We have no record of any meeting involving the Ministry of Defence at which the future ownership of Royal Ordnance was discussed with Royal Ordnance subcontractors, as the hon. Gentleman has suggested.
678 At that time, Royal Ordnance Enfield would have been involved in preparing its tender for the second tranche of SA80 production. Tenders were invited in June 1986 for reply by November 1986, and the decision to accept the Royal Ordnance tender, subject to confirmation by the new owners of the company, was made in February 1987. No doubt, Royal Ordnance would be able to say whether it had held any meetings with subcontractors at which the future ownership of the company was raised.
The essential point is that, at no time before the sale of Royal Ordnance was agreed on 2 April 1987, was anyone in a position to make any authoritative statement about the future ownership of the company—neither anyone connected with the Department nor anyone at Royal Ordnance, since that company was not even a party to the sale negotiations.
It is unfortuate that the new evidence that the hon. Gentleman claims to have had in his possession for nearly two weeks, as of yesterday was still not in the hands of the Public Accounts Committee. I hope that he will bring it forward. I assure the hon. Gentleman that neither his constituent nor his business has anything to fear if he does so.
§ Mr. John Hughes
I have already written to the Chairman of the Public Accounts Committee and supplied him with the information.
§ Mr. Sainsbury
I am glad to hear that. As of yesterday, it was not in the hands of the Public Accounts Committee.
In conclusion, I repeat that the various allegations which have been made about the sale of Royal Ordnance are completely unfounded. The company was sold for £190 million in an open and wide-ranging competition to the bidder who made the highest offer—a highly satisfactory return for the taxpayer. The valuations that were made at the time of the sale have been generally endorsed by the surveyors commissioned by the National Audit Office. The company, in its new ownership, has already begun the process of rationalisation and restructuring, which we expect to be of great benefit to the Department and hence to the taxpayer in fostering a more competitive ammunition industry.
The most important point is that it is now absolutely clear that the sale of Royal Ordnance was no "rip-off" of the taxpayer. There was not and is not a "pot of gold" which the Ministry of Defence virtually gave away. The Enfield site has not been sold, has no planning permission and has had no development carried out upon it. The site values that have been quoted by some Opposition Members are nonsense. The reports that appeared in the press about likely development profits were, it is now clear, plainly inaccurate and unjustified.
None of them came from responsible valuers in possession of all the facts. Indeed, I note that, in the case of the figure quoted in the Warburgs report, the company itself, in a statement to the National Audit Office, acknowledges that… there was no suggestion in the report on British Aerospace that the values ascribed to properties represented professional valuations arrived at after examination of the sites and upon the basis of particular assumptions.It was recognised that a proper professional valuation had not been made, that the sites had not been examined and that the necessary assumptions had not been made.
This transaction has been subjected to an unusual degree of scrutiny. The various investigations have 679 concluded that all proper procedures were followed and that due regard for the taxpayers' position was taken. In the words of the National Audit Office report, 680The National Audit Office recognise that the Department and their advisers took account of the relevant considerations in reaching their decisions and arranging for the sale of the company.Question put and agreed to.
Adjourned accordingly at one minute to Three o'clock.