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Disposal by Sale of Defence Surplus Equipment and Stores

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Disposal by Sale of Defence Surplus Equipment and Stores NATIONAL AUDIT OFFICE REPORTBY THE COMPTROLLERAND AUDITOR GENERAL Disposal by Sale of Defence Surplus Equipmentand Stores ORDEREDBY THE HOUSEOFCOMMONS TO BE PRINTED 16 MARCH1993 LONDON: HMSO 557 f7.40 NET DISPOSALBY SALE OF DEFENCESURPLUS EQUPMENT AND STORES This report has been prepared under Section 6 of the National Audit Act 1983 for presentation to the House of Commons in accordance with Section 9 of the Act. John Bourn National Audit Office Comptroller and Auditor General 2.4 February 1993 The Comptroller and Auditor General is the head of the National Audit Office employing some 800 staff. He, and the NAO, are totally independent of Government. He certifies the accounts of all Government departments and a widerange of other public sector bodies: and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources. DISPOSALBY SALE OF DEFENCESURPLUS EQUIPMENT AND STORES Contents Pages Summary and conclusions 1 Part 1: Background 4 Part 2: Organisation and administration of disposal by sale 8 Part 3: Disposal by sale of major capital equipment 13 Part 4: Disposal by sale of other surpluses 19 Part 5: The collection of disposal receipts 25 Appendices 1. The Gulf conflict 30 2. Sale of unusual disposal items 31 DISPOSALBY SALE OF DEFENCESURPLUS EQUIPMENT AND STORES Summary and conclusions 1 The Ministry of Defence (the Department) run the biggest centralised sales disposal operation in the United Kingdom. Their aim is to dispose of surplus equipment and stores as quickly as possible whilst maximising the return. As well as generating receipts, disposal releases storage space and reduces “holding” costs. 2 In the five years 1987-88 to 1991-92 inclusive the Department raised E264.4 million gross at current prices, E196.5 million net. Over the next few years the items available for sale will rise dramatically. Entire types of equipment are being phased out, for example, all Leander frigates and Oberon submarines and all Phantom and Buccaneer aircraft. Overall holdings of front line equipment will reduce by about 20 per cent. Stockholdings of a wide range of other material, in particular spare parts, will reduce by 33 to 50 per cent. 3 The National Audit Office examined the Department’s arrangements for selling surplus items and for collecting disposal receipts. Disposal of waste material, which is at a cost to the Department, was not part of the examination. The National Audit Office’s main findings and cbnclusions are set out below. On the sale of 4 The Directorate of Sales (Disposals) are responsible for the sale of surpluses. surpluses They were formed in April 1990 to centralise disposal by sale and are part of the Defence Export Services Organisation. In August 1991 the Directorate took over responsibility for the disposal by sale operation of the British Forces in Germany where the most significant force reductions are occurring. The sales depot there is performing an important role in the drawdown. The National Audit Office concluded that the Department have made good progress in establishing a unified organisation for disposal by sale: they have set objectives and improved their procedures for handling an increasing level of business (paragraphs 1.6 and 2.2 to 2.12). 5 The Directorate are pursuing a number of major initiatives with United Kingdom industry aimed at tackling the extraordinary volume of major capital equipments and spares which will be declared surplus over the next 4-5 years. These may take the form of either buy back arrangements with the original supplier or storage, refurbishment, and marketing of the equipment with a view to profit-sharing arrangements. A profit-sharing arrangement has been reached with one contractor for the storage and marketing of naval spares, and similar arrangements are intended for Royal Air Force and Army spares (paragraphs 3.20 to 3.26 and 3.28). 6 The Directorate operate under a number of external constraints. In selling major capital equipments overseas they must ensure sales objectives are compatible with security interests and export licences are obtained. In selling miscellaneous material in the United Kingdom they must have regard to environmental factors and have proper safeguards as laid down in DlSPOSAL BY SALE OF DEFENCESURPLUS EQUIPMENT AND STORES the Environmental Protection Act 1990. Moreover, the Directorate are confronted with increased competition from overseas-the United Kingdom’s competitors in the second-hand Defence markets at home and abroad now include our allies and the former Warsaw Pact countries (paragraphs 3.6, 3.20, 3.21, 4.23 and 4.24). 7 The Department recognise that in view of the expanded scope for sales over the coming years they will need to: . have a clearer idea of the relationship between prices achieved and the costs incurred for individual categories or ranges of item to determine whether there is a net benefit or cost. For items such as major capital equipment, the net benefit will be obvious but for some other items it may be more economic to dispose of them as waste. However, total disposal receipts exceeded costs by a margin of 74 per cent over the five years 1987-88 to 1991-92 inclusive (paragraphs 1.6, 1.7, 2.16 and 2.17); . have better information on items becoming available for sale; on how long it takes to clear items declared for sale: and on the size of backlogs of unsold items. To cope with the increased supply, the Department are considering ways of speeding up disposal by sale for high volume/low value items (paragraphs 2.11, 2.18, 3.8, 3.11, 3.13, 3.15, 3.18, 3.19, 4.2, 4.6, 4.7 and 4.19 to 4.22); . continue their efforts to resolve the problems affecting the Directorate’s computer system and consider whether enhancements are necessary in the light of current information needs (paragraphs 2.14, 2.15 and 2.17 to 2.21): . consider whether any or all aspects of disposal work are suitable for contractorisation. There is already extensive private sector involvement in areas such as auctions and for recovery, recycling and reclamation work and marketing of spares (paragraphs 2.4, 2.5, 2.23 and 3.23 to 3.26): . where possible, sell major capital equipment such as ships and aircraft as complete operational items-their value has often been reduced by the removal of equipment for spares; and sell the operational primary equipment along with any available spares-currently, spares are often put on the market later, detracting from the overall price realised. Any financial and operational gains from the retention of spares needs to be weighedagainst sales potential (paragraphs 3.9 to 3.11, and3.13 to 3.17); . extend the database of the Defence Export Services Organisation to encompass the second hand market for major capital equipment, and make greater use of their expertise and that of Service Attaches on British Missions abroad (paragraphs 3.20, 3.21 and 3.27 to 3.31); and . extend their assessments of the relative merits of sale by competitive tender or sale by public auction for different types of high volume/low value items, for example, by trialling both approaches for a selection of “test” items (paragraphs 4.8 and 4.9). On collection of 8 To help ensure that payments for disposals are full and prompt the disposal receipts Department work to the sound general rule that goods are not collected before payment is received. Nonetheless, they could continue to strengthen their control procedures, for example, to: 2 DISPOSALBY SALE OF DEFENCESURPLUS EQUIPMENT AND STORES . safeguard against theft and fraud by ensuring full, independent and properly documented checks on issues of items for disposal, and on sales receipts. The need for adequate safeguards is highlighted by a major investigation by the Department’s police who are visiting several disposal depots and units (paragraph 5.4 to 5.15); . ensure receipts are paid in without undue delay. For example, in a random sample of auction receipts for 1990 and 1991 the National Audit Office found that about 25 per cent of auction proceeds were paid in late. By January 1992 the Department introduced new contracts for auctioneers to remedy the position (paragraphs 5.16-5.19). Overall conclusions 9 Reductions in the front line and associated reductions in the support area will give rise to exceptional disposal activity in the next few years on a scale unprecedented since the period following the Second World War. It is important, therefore, that the Department continue to make progress in developing a strong organisation for disposal by sale whilst pursuing joint venture schemes with industry. The main challenge facing the Department will be to cope with the volume and range of items becoming available for disposal whilst maximising the return. This will be in the face of greater competition in the United Kingdom and overseas markets following the improved international climate among the major power countries. 3 DISPOSALBY SALE OF DEFENCESURPLUS EQUIPMENT AND STORES Part 1: Background 1.1 The Ministry of Defence (the Department) “holding” costs. If surpluses cannot be sold run the biggest centralised disposal by sale the Department have to pay for disposal as operation in the United Kingdom. Items sold waste. range through clothing, household furniture, office and laboratory equipment, scrap and precious metals, vehicles, aircraft and ships. Responsibilities The Department’s customers include individuals. large and small companies, and 1.4 Responsibility for identifying and declaring defence forces from other countries. surplus equipment and stores rests with equipment and supply managers, at all levels, 1.2 Reductions in the front-line and associated throughout the Department.
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