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 DlSPOSALBY 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. Most surpluses reductions in the support area will give rise relate to equipment and stores of the armed to exceptional disposal activity in the next forces. Where necessary Service units in the few years, on a scale unprecedented since United Kingdom transport items to one of 13 the period following the Second World War. major regional disposal depots to await sale and collection (Figure 1). These depots are 1.3 Under Government Accounting rules managed on single Service lines but they surpluses should be sold as quickly as generally accept items from all units in their possible, subject to value for money area. For the British Forces in Germany there considerations, and for the best possible is a sales depot at M6nchengladbach. price. As well as generating receipts disposal also releases storage space and rqdduces
Figure 1: Locations of major regional disposal depots
Figure1 showsthe locationsof the 13 majorregional disposal depots which are managed on singleService lines but generallyaccept items from all unitsin their area.
4 DISPOSALBY SALE OF DEFENCESURPLUS EQUIPMENT AND STORES
1.5 The business of organising the sale of second- Receipts from disposal by sale hand equipment and stores is undertaken by the Directorate of Sales (Disposals)-“the 1.6 The Directorate prepare an annual Directorate”, formed in April 1990. Under memorandum trading account of disposal by authority delegated by the Directorate, some sale. This is a simple statement of disposal local sales are undertaken by individual receipts and costs. On the basis of the units. The Directorate are part of the Defence Department’s current figures, disposal by sale Export Services Organisation, whose main is producing a significant net profit. In the objective is to support the United Kingdom period 1987-88 to 1991-92 inclusive, receipts defence industry in selling services and new totalled f264.4 million gross at current prices, equipment overseas. Responsibility for the f196.5 million net. However, over these years collection of disposal receipts lies mainly annual gross receipts fell from C31.4 million with the Directorate General of Defence to f32.8 million [Figure 2) for the reasons at Accounts in Liverpool. paragraphs 1.7 and 1.6.
Fiaure 2: Tradino results for disoosal bv sale 1987-88 to 1992-93 f million (at 1991-92 prices)
1987-88 1988-89 1989-90 1990-91 1991-92 1992-93
fm fm q Gross receipts 43.1 33.3
;..,, + 14.8 12.1(2)
Source: The Depanmenf’smemorandum trading accounfsfor disposal by sale. Notes: (1) The forecastreceipts for 1992-93 include about f9 mfllfonslipped from 1991-92 due to delays in conhact signature. (2) A 1992Departmental review reassessed the basis for fhe cosf of disposal by sale activity. This resulfed in a reductionin cosf of some f2 million (at 1991-92 prices) due to fess coveredstorage being employed than formerly. Figure1 shows that over the period 1987-88 to 1991.92 inclusive, receipts from the sale of disposal items totalled f264.4 million gross. f196.5 million net, and annualgross receipts fell from f81.4 million to f32.8 million.
5 DISPOSALBY SALE OF DEFENCESURPLUS EQUIPMENT AND STORES
1.7 Figure 3 shows the split between sales of inclusive. They are forecast to increase to surplus major capital equipment and other f23 million in 1992-93; this includes about surpluses over 1987-88 to 1992-93. It f9 million slipped from 1991-92 because of demonstrates that the fall in receipts is delays in contract signature. Receipts from largely due to a trough in sales of surplus other surpluses have fallen in the period major capital equipment (nearly all ships) from an average of f35 million over the three with gross receipts dropping from around f42 years 1987438 to 1989-90 to an average of million in 1987-88 and in 1988-89 (reflecting some f24 million in 1990-91 and 1991-92, two large ship sales) to an average of f8.8 and are forecast to remain at that level for million during the years 1989-90 to 1991-92 1992-93.
Figure 3: Gross receipts from sale of surplus capital equipments and other surpluses, 1987-88 to 1992-93
f million (at 1991-92 prices) 50
\ 40 ‘..__ ‘...., ‘.-_. -.__, ‘.... “._, ‘k., Other surpluses “..., “.....,. 30 .. . . .
20 Surplus capital equipment
10
0 1987-88 19sa-89 1989.90 1996-91 1991-92 1992-93 Year
1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 OUttUrn outturn Outturn outturn 0unurn Estimate
Income from: fm fm fm fm fm fm
Surplus capital equipment 41.7 42.2 9.4 8.6 8.4 22.7
Other surpluses 39.7 31.6 33.7 24.7 24.4 24.9
Gross receipts 81.4 73.8 43.1 33.3 32.8 47.6
Source:Ministry of Defence Figure 3 shows the split between sales of surplus major capital equipment and other surpluses over 198748 to 1992-93. It illustrates the trough in sales of surplus major equipment (nearly all ships) and the trend in receipts from sales of other surpluses.
6 DISPOSAL BY SALE OF DEFENCE SURPLUS EQUIPMENT AND STORES
1.8 Nonetheless, Table 1 shows how the volume . disposal by sale of other surpluses (Part of items disposed of by sale has increased 4); and sharply between 1990-91 and 1991-92. By far l the collection of disposal receipts (Part 5). the biggest increase (240 per cent] was in respect of aircraft-numbers sold r”se from 1.10 The disposal of equipment and stores 30 in 1990-91 to 102 in 1991-92 but these following the Gulf conflict was a special were mainly scrap. In 1991-92 the volume of situation and is described briefly at Appendix sales of ferrous scrap increased by 43 per 1. A team from the Directorate visited the cent, non-ferrous scrap by 59 per cent, and region immediately after the ceasefire to give plant and machinery by 38 per cent. The advice on disposal sales procedures. number of vehicles sold increased by 2,000 Authority for disposal by sale was delegated (27 per cent) to 9,500. This increased activity to the military. The main lesson to emerge was not reflected in increased receipts. The from two subsequent Departmental reports Department explained that this was due to was the need for clear, timely and commodity prices being lower “ver the last comprehensive instructions on disposal, even three years than in previous years. in times of crisis.
1.11 The National Audit Office examination did The National Audit Office not c”ver the Department’s procedures for examination identifying items for disposal because of the need to avoid overlap with a concurrent Departmental study. But this report does take 1.9 Given the importance of maximising value into account the results of that study. for money through disposal by sale of items Disposal of waste material, which is at a cost surplus to Departmental requirements, and to the Department, was not part of the the opportunity to generate nmre income National Audit Office examination. from the expected increase in disposal activity, the National Audit Office examined: 1.12 Touche Ross management consultants l the organisation and administration of assisted the National Audit Office in disposal by sale (Part 2); examining the Directorate’s marketing arrangements. l disposal by sale of major capital equipment (Part 3);
Table 1: Examples of items sold and their volumes in 1990-91 and 1991-92 Percentage Tvoe of Item 1990-91 Volumes 1991-92 Volumes Increasem?creasel Ferrous scrap 17,600 tonrw 25,200 tonnes 43 Non-ferrous scrap 3.500 tOnneS 5,550 tonnes 59 Plant and machinery 824 items 1,140 items Railway wagons etc 194 items 137 items Lubricating oil 1.870,OOOlitres 2.287.000 litres Recycled paper 1.600 tOnneS 1,620 tOnneS 1 Ships 19 vessels 22 vessels 16 Aircraft 30 aircraft 102 aircraft 240 Miscellaneous lots at auction 23.200 lots 25,500 lots Vehicles 7,500 vehicles 9,500 vehicles :: source: Directorateof S&S (Disposa/s) Table 1 gives examples of the type of disposal item sold and shows that between 1990-91 and 1991-92 volumes sold increased far all items other than railway wagons. Increases ranged from 1 per cent for recycled paper and 10 per cent for miscellaneous auction lots to 59 per cent for non-ferrous scrap and 240 per cent for aircraft.
7 DISPOSALBY SALEOF DEFENCESURPLUS EQUIPMENT AND STORES
Part 2: Organisation and administration of disposal by sale
Introduction two more clearing sites should be established, one of which would be in the 2.1 This Part considers the progress made by the North; and whether the three clearing sites Department in their efforts to stimulate should be managed by the Directorate. The improvements in disposal by sale through re- 13 regional disposal depots would remain organisation. and the impact of the upsurge with the Services (paragraph 1.4), but the aim in disposal activity. It also considers the would be to reduce the Services’ role when scope for improving the general the peak of disposal activity subsides after administration of disposal by sale. the mid-1990s (paragraph 2.7). By 1 April 1993 the Department intend to have an outline implementation plan for the changes. Re-organisation of the disposal by 2.4 In the light of the November 1991 White sale function Paper “Competing for Quality” (Cm 17301, the disposal by sale task may be an area 2.2 In 1988 the Department recognised that which offers scope for contractorisation. In disposal had a low priority within the 1988 the Department considered contracting Services and that there were no consistent or out of the disposal by sale operation. They co-ordinated methods for disposing of items. concluded that the full financial implications They concluded that potential income could only be considered by selecting a generating opportunities were being missed. representative area in the United Kingdom As a result, in April 1990 the Department set and exposing it to competition. The National up the new Directorate to centralise the Audit Office noted that this had not been disposal by sale of all surplus ships, aircraft, done. equipment and associated spares. and other material. Previously responsibility for selling 2.5 However. there is private sector involvement these items had been dispersed among a in the following areas: number of branches. Responsibility for the disposal by sale operation of the British much of the sales task is already Forces in Germany, including the sales depot contracted out with commercial at Monchengladbach. was transferred to the auctioneers being employed and recovery, new Directorate in August 1991. recycling and reclamation contractors being used extensively:
2.3 Further expansion of the Directorate’s the main disposal depot at Aston Down is responsbilities to include the management of almost entirely operated by contractors’ scnne disposal sites is being considered. The labour; and Procurement Executive Regional Stores Depot at Aston Down, Gloucestershire, acts joint venture initiatives with industry on as a clearing site for all disposal material the marketing and storage of equipment arising from nearby units and the depot and stores are being explored (paragraphs itself. Since 1988 vehicle sales for the South, 2.11, 3.5 and 3.23 to 3.26). South West and Wales have been centralised In April 1992 an internal review concluded there; and the Department estimate that as a that further contractorisation of activity in result vehicle receipts have increased by 30 the Directorate should be considered, along per cent. In 1988 an internal report with the possibility of converting the recommended that an investment appraisal Directorate into a Defence Support Agency. be undertaken for a similar site in the North. On the basis of an appraisal undertaken in 1992 the Department are considering whether
8 DISPOSALBY SALE OF DEFENCESURPLUS EQUIPMENT AND STORES
Upsurge in disposal activity 2.8 The most significant force reductions are occurring in Germany; and the sales disposal 2.6 The Directorate’s main challenge in the depot there is performing an important role coming years will be the upsurge in disposal in the drawdown. Substantial quantities of activity arising from: material are being returned for use in the United Kingdom but surpluses, mainly (a) Options for Change accommodation stores and non-armoured vehicles, are being disposed of locally in In July 1990 the Secretary of State for Germany (paragraphs 4.13, 5.9(a), (d] and (f]). Defence outlined a major restructuring of the armed forces under “Options for Change”, reflecting developments in the Progress towards an effective Soviet Union and Eastern and Central sales organisation Europe river the previous 18 months. The resultant equipment and manpower reductions, and base closures, are giving 2.9 The establishment of the Directorate in 1990 rise to large scale declarations of was a vital step towards improving the surpluses. efficiency of the disposal process and maximising sales proceeds. At that time, the The main equipment reductions in the Directorate established short-term objectives front-line will include: six Tornado GRl which recognised past problems and recent squadrons, four Phantom squadrons, developments. These objectives, against two Buccaneer squadrons, part of one which progress is reviewed regularly, are to: squadron of Nimrod maritime patrol aircraft, about 11 submarines and eight determine the long-term structure and destroyers/frigates, and about 140 location of the Directorate, having regard Chieftain main battle tanks. Final to the projected increase in workload; decisions on how front-line reductions achieve forecast levels of receipts; will be achieved have yet to be made. develop liaison with the three Services to Some of the equipments will be held in improve declaration policies and reserve. for example, Tornado aircraft. marketing; However, entire types of equipment are being phased out, for example Phantom develop strategy and key areas for and Buccaneer aircraft, Leander frigates marketing initiatives with and Oberon submarines. Commonwealth and foreign governments, and with industry; and (II) Rationalisation of support functions determine policy on disposal by sale in In view of the significant reductions in the light of the Environmental Protection the armed forces envisaged in “Options Act 1990. for Change”, the Department’s New longer term objectives are currently “Prospect” studies have been looking being developed by the Directorate. for reductions to the order of 20 per cent in support areas. Large surpluses, 2.10 The Directorate have made good progress particularly of stockholdings, will towards achieving their objectives. They result. have drawn together a wide range of actlivities and developed a broad internal 2.7 The full impact of these developments in structure which splits responsibility for high terms of the nature and volume of material value capital items-mainly sold abroad, for disposal is not yet clear. The Department from responsibility for lower value/high estimate, however, that front-line equipment volume items-mainly sold on the home will reduce by approximately 20 per cent, market. This structure enables them to and stockholdings by 33-50 per cent. maintain a focus on both these key areas, Wherever possible surplus stockholdings will which is essential if they are to be successful be avoided by, for example reducing or both at generating income and preventing a postponing replenishment orders. By the mid- build-up of surplus holdings at Service units. 1990s the Department expect a new steady But in 1990-91 and 1991-92, the Directorate’s state of disposal, at least 20 per cent lower first two years of trading, gross receipts were than in the 1980s. a quarter less than those forecast, for the reasons in paragraphs 1.7 and 1.8.
9 DISPOSAL BY SALE OF DEFENCE SURPLUS EQUPMENT AND STORES
2.11 Since the full extent of the imminent tender and contracts awarded, and increase in disposal activity has not been commodity and financial data. However, it identified, the Directorate have been unable will not produce data on miscellaneous to make firm plans for dealing with it by auctions. At the sales depot in Germany a setting priorities and assessing staffing separate management information system requirements. Nonetheless, they have been contains vehicle data for valuation, stock engaged in joint venture initiatives with control and statistical purposes. industry on the marketing and storage of equipment and stores aimed at tackling the (b) Analysis of soles receipts and costs likely task (paragraphs 3.5 and 3.23 to 3.26). 2.16 The Treasury have delegated authority to the Directorate to agree the selling price of 2.12 The Directorate have also been liaising with surplus stores and equipment provided the the Services to obtain more information agreed selling price exceeds the opportunity about the supply of items being released for cost*, which is defined as the value in the disposal, particularly as regards major capital best alternative use. For most items, this will equipment (Part 3). In addition, the effects of be the net proceeds obtainable by scrapping. recent environmental and safety legislation The delegated authority is conditional upon have been addressed (Part 4). competitive tendering, auctions, and other appropriate procedures being used to ensure Scope for improvement in the best value for money; and upon full payment being received before collection. The general administration of disposal Directorate explained that, although the by sale application of opportunity cost relates to all major capital equipments, in practice it has 2.13 The National Audit Office considered that applied mostly to ships being sold in there were aspects of the general operational condition (paragraph 3.9). For administration of disposal by sale where most other items, there would be no there was scope for improvements. Such alternative use because if they were to improvements might enhance the remain unsold disposal would have to be Directorate’s ability to maximise the return paid for as waste. and to cope with the upsurge in disposal activity. These aspects relate to management 2.17 The Directorate’s memorandum trading information, staffing, and raising the profile account shows that overall, sales receipts of disposal by sale. exceeed the cost of sale by a significant margin (paragraph 1.6). But generally, the Management information Directorate have insufficient information on the prices achieved and the costs incurred in lo) Computerisation selling a particular range of item to know 2.14 A new computer system was installed in whether they are covering their costs and if April 1991 to aid the efficiency of the not, whether the net cost of sale is less than Directorate, but the systemis not yet the costof disposalas waste.Accordingly, functioning properly. Problems experienced they are also unable to predetermine a level include hardware lock-ups, a lack of proper of sales effort which is commensurate with trunking and cabling, inadequate training and the likely sale price. The Directorate believe insufficient professional support. These that the costs involved in contracting for difficulties have been brought about partly by disposal as waste are similar to those for funding limitations and a lack of appreciation disposal by sale and that any income gained of the Directorate’s requirements. As a result is a bonus. However, the Directorate’s new they do not have an adequate computerised computer system will not provide details of information system. Currently they rely on a largely manual database which hinders the *Opportunity cost. The value to the Ministry of Defence of the items sold in the best alternative use. timely extraction of information for For most surplus items this will be the net proceeds management purposes. obtainable hy scrapping. assessedas a combination of the estimated scrap value of non-reusable items; plus the value to the Ministry of Defence of reusable 2.15 The new system is expected to be operational weapons. stores or other items returned to stock for by April 1993. It will produce details of items further use: plusthe incidental costs directly related declared available for disposal, vehicle to the sale (eg packaging. transport. etc). auction data, lists of companies authorised to
10 DlSPOSALBY SALE OF DEFENCESURPLUS EQUIPMENT AND STORES
the cost of selling any items. Moreover, 2.21 There is no prescribed method of market details of the cost of disposing items as a segmentation, and the Directorate already waste are not readily available in the employ a basic form by maintaining trade Department. lists for sale by tender. These lists will shortly be computer based [paragraph 4.11). Cc) Monitoring the speed of disposal The Directorate accept, however, that they 2.18 The Directorate have currently neither the need a m”re refined and structured approach. procedures “or the data on which to monitor A structured form of segmentation would be the type and volume of items awaiting sale, the type of matrix at Figure 4 overleaf. which and the length of time items remain unsold. is included for illustrative purposes only, and Accordingly, they do not know the extent of would not, as it stands, necessarily meet all any backlog. The timetabling of auctions and of the Directorate’s requirements. collections under running contracts (paragraphs 4.21 and 4.22), are, however, designed to clear any backlog. As the volume Staffing of disposal items increases the Directorate 2.22 The Directorate currently have 55 staff in the recognise that they need to monitor progress United Kingdom, mainly London based, and closely. The new computer system should 10 in Germany who carry out work analogous help in this respect for those items intended to the rest of the Directorate. Some senior for sale by tender or at vehicle auctions. marketing posts have been filled by staff with previous marketing experience in the Id) Establishing efficiency targets/ Defence Export Services Organisation. Other performance indicators senior staff have technical contracts and 2.19 The 1988 Departmental report which management accounting experience gained recommended the setting up of a centralised both in the Directorate and elsewhere in the disposal by sale organisation also Department. Training is mainly on the job, recommended that efficiency targets should although sane staff attend internal marketing be set. It recommended that if agreed targets courses run by the Organisation. were not achieved the organisation should be exposed to competition (paragraph 2.2]. The 2.23 In April 1992 an internal review of the Directorate recognise that they need much Defence Export Services Organisation better management information to enable concluded that consideration should be given them to set efficiency targets and produce to the filling of a few m”re posts in the meaningful performance indicators, such as Organisation as a whole with secondees from trends on the time taken to sell an item and industry or commerce. The Department run the price achieved-although these are an Interchange with Industry Programme but dependent on market conditions at any given there has so far been no interchange of staff time. The new computer system should aid between the Directorate and the private production of these. sector which might provide wider marketing knowledge and experience. [e) Strengthening the customer database Raising the profile of disposal activity 2.20 One difficulty faced by the Directorate is the sheer range of goods for disposal and the 2.24 Since being formed, the Directorate have variety of new potential customers. A fully been working to create a greater awareness of functioning and expanded computerised their role and services amongst potential information system could help the suppliers and customers of disposal items. Directorate to develop a mnre targeted The Department’s guidance on procedures to customer database, for example, by be followed by Service units and expanding existing market segmentation, and establishments on the disposal by sale of allow readier access. Market segmentation is their surplus material is being amended to the process of dividing up the market into recognise the wider responsibilities of the different groups of wnsumers to enable new Directorate. For example, key items marketing of specific items to be directed at such as ships, hovercraft, marine equipment, those groups. However. in the second-hand serviceable aircraft, aircraft engines and business many potential customers are equipment, and oils and lubricants are not interested in m”re than one type or range of item.
11 DISPOSALBY SALEOF DEFENCESURPLUS EQUIPMENT AND STORES
Figure 4: Market segmentation matrix
Tanks J J J
Vehicles J J J J J
Etc
Source:Natimal Audit Officeconsultants Figure4 shows a ~twctured form of market segmentation which could help identify cwtomers who are particularly interested in certain types of disposal items.
presently covered by the guidance. However, Directorate’s profile with suppliers and there are Departmental committees for potential customers is considered further in reviewing the disposal of surplus ships and Parts 3 and 4. aircraft (paragraphs 3.8 and 3.15). 2.26 The Department’s New Management 2.25 Following National Audit Office observations Strategy, with its devolved budgetary in the COUI‘SBof their examination, the responsibilities and freedoms, may help to Directorate are adding to their specific focus managers’ attention on the need to business objectives the need to create greater dispose of surplus material in order to release awareness of, and publicity for, their storage space, save on costs, and make land activities-both within and outside the and buildings available for disposal or Department (paragraph 2.9). Raising the alternative use.
12 DISPOSALBY SALEOF DEFENCESURPLUS EQUIPMENT AND STORES
Part 3: Disposal by sale of major capital equipment
Introduction sales prospects are now emerging. There have been significant successes in achieving 3.1 This Part covers the disposal by sale of major sales to cwerseas governments of other capital equipment. It considers achievements equipments. These have included Chieftain in this area, the interface between the tank spares to Kuwait; MK 46 torpedo spares Directorate and the Services on the supply of to Australia, France and the Netherlands; and equipment surpluses, the extent of overseas various types of ammunition to New competition and the development of new Zealand, Chile and Sri Lanka. markets. 3.5 There have also been sales to commercial customers overseas. Sales in 1990-91 and Sales achievements 1991-92 included: l two patrol vessels, a floating dock, and 3.2 The largest individual receipts from disposal torpedo recovery vessels to Dutch by sale usually result from overseas sales of companies: major capital equipment. particularly ships. . two patrol vessels to a Maltese company; the markets for which have been mainly governments in South America and South l other ships sold as scrap to overseas East Asia. Over the ten years to the start of buyers; 1992 the Directorate sold 35 ships to other l two Pembroke aircraft (the first overseas governments, raising El35 million- sale of aircraft), lightweight torpedoes excluding ancillary equipment and related with associated spares and equipment, services. Two large ship sales alone and a missile test frame to American generated income of more than E40 million. firms; and 3.3 Additional benefit arises to the United . Canberra aircraft wings to a German Kingdom when a ship sale to an Overseas company. government includes refit work to be And there have been some sales to United undertaken by a United Kingdom Kingdom industry: Jet Provost aircraft in shipbuilding company. Refits are not 1990-91, and mine clearing vehicles, an ice included in the price negotiated by the patrol ship, a survey ship and three fleet Directorate. Instead the customer is provided tenders in 1991-92. Other initiatives are with details of companies capable of carrying being developed with the defence industry in out the work. A current ship sale with the United Kingdom (paragraphs 3.23-3.261. accompanying refit is that of RFA Green Rover to Indonesia. Swan Hunter have 3.6 The Department informed the National Audit secured the refit. Office that they sell abroad only when this is compatible with the United Kingdom’s 3.4 Until Options for Change, the Directorate had political, strategic and security interests and little opportunity to market surplus aircraft does not conflict with the United Kingdom’s and major Army equipment because these international obligations. Such sales are equipments were used for training and other subject to normal export control procedures. purposes. The Services are now making the buyer having to apply for an export substantial declarations of such equipment licence from the Department of Trade and and sales prospects are being actively Industry. pursued by the Directorate. While, therefore. to date there have been no government to government sales of aircraft, Army tanks or combat vehicles, a number of substantial
13 DISPOSAL BY SALE OF DEFENCE SURPLUS EQUIPMENT AND STORES
The supply of major capital to Ministers seeking final endorsement of the equipment surpluses individual ship’s disposal date.
3.9 Ship sales have several stages. First, the The National Audit Office examined the 3.7 Directorate seek to sell vessels as complete interface between the Directorate and the operational units: warships to overseas Services as regards the supply of major governments, and support vessels to both capital equipment. The main focus was the overseas governments and the commercial extent to which the Directorate are involved sector. Handover arrangements are geared to in decisions about how to dispose of surplus the transfer by the Royal Navy crew to the equipments, and whether they receive purchaser. These are known as “hot” sales sufficient advance information about and are the most financially rewarding, equipment becoming available for disposal. particularly in the case of major ships. Once This is essential for forward planning and ships have reached their non-operational effective marketing. date and been “paid off”, they are said to have gone “cold”, their stores and equipment Ships having been removed by the Royal Navy for 3.8 Through chairing the Department’s Surplus alternative use. Finally, when the likelihood Ships Committee (Defence Sales], the of “cold” sales has been exhausted, tenders Directorate are involved in decisions on how are invited with the expectation that the best to dispose of surpluses. The Naval Staff ships will be sold as scrap. But even at this advise the Committee of ships expected to stage a purchase may be made by a become non-operational over the following preservation group or by a scrap dealer with two years. The Committee, having considered a view on onward sale. among other things the ship’s condition and the potential market, decide the sale route. 3.10 Table 2 shows that of the 28 ships available This decision is included in the submission for sale as operational vessels in 1990-91 and 1991-92, 24 have been sold. “Hot” sales were
Table 2: Ships available for sale as operational vessels in 1990-91 and 1991-92 Title of vessel Type of vessel Non-operational date Sale date Type of sale ,,10” n,, H\ HMS CHALLENGER - Seabe”” “yr,a,,“,,a--^~“*~--^ ,,^^“^’YrDIrl I ‘I.,” “I” \.I HMS “NW - SUbIll. ..~~~arine 12/90 B/91 Preservation group HMS_ ““,N__ - Submarine 12190 B/91 scrap HMS ON-.SI4UGHT - Submarine 12/90 a/91 scrap HMS OTUS - Submarine 3191 3192 Preservation group HMS HECATE - Survey ship 3191 n/a (1) HMS SANDPIPER - Patrol craft 12/90 3/91 "Cdd" HMS PETEREL - Patrol craff 12/90 3191 “Cold” HMS CORMORANT - Patrol craft 3/91 4191 “Hot” HMS HART - Patrol craft 3/9i 4191 “Hot“ HMS PHOEBE - Frigate 1z/90 9192 scrap HMS_ PFNFLOPE_ _. _ - Frioate 2j91 4/91 “HO?’ HMS DANAE - Frigate 491 $91 "Hot" HMS OTIER - Submarine 7191 3192 scrap HMS_ “CFI__ _ _ nr_ - Sllhmarins B/91 3192 Preservation 4mup HMS FAWN sIIrvP”Shi” ‘,Hot” RFA TIDESF...... ““. ._..__. HMS CHARYBOIS - Frigate (2) HMS ATTACKER - Patrol craft (3) “Cold” HMS HUNTER - Patrol craft (3) “Cold” HMS STRIKER - Patrol craft (3) “Cold” HMS ENDURANCE - Ice patrol ship “Cold” HMS MANLY - Fleet tender (4) “Cold” HMS MENTOR - Fleet tender (4) “Cold” HMS MILBROOK - Fleet tender (4) “Cold” ~~:~~.. HMS CLEOF’-“’ 11s HMS FENOL.. .“.,“.“.“,.l-, HMS CHASER - Ddrnl rr,ft I?, Source:National Audit Office. Note: (1) “Cold” sale in prospect. (2) Not sold-likely to be SW lped. (3) A packagesale to a” oversew2s go”ernment. (4) A packagesale to an averse;2s commercialbuyer. Table 2 shows that cIf the 28 vessels for sale as operational vessels in 1990-91 and 1991-92 “hot” sales were achieved in five cases.
14 DISPOSAL BY SALE OF DEFENCE SURPLUS EQUIPMENT AND STORES
achieved in five cases. There were II “cold” 3.14 In February 1991, 183 aircraft were initially sales; five vessels were sold as scrap; and considered available for disposal: 76 were three others were sold to preservation subsequently retained for further in-service groups. The Directorate are currently use. Of the remaining 107, 32 were allotted pursuing “cold” sale prospects for two of the for training and 75 for disposal by sale, four vessels which remain unsold. although equipment had been removed from the majority of these. About half of the 32 3.11 In a competitive market, factors external to aircraft allotted for training replaced in- the Department influence the degree of service aircraft which will be disposed of by success they have in selling ships. But the sale. The aircraft currently available for sale National Audit Office noted that the sales include three helicopters, six Buccaneers, ten potential and value of ships have often been Phantoms and 22 Jet Provosts. reduced by the removal of equipment and stores before the vessels have become non- 3.15 A second batch of some 170 aircraft is likely operational. Also, to maintain operational to become surplus over the next two to three flexibility active marketing of named major years but it is not year clear how many of ships does not begin until Ministerial these are for disposal. Through the approval for disposal is given. This is a Directorate’s membership of the Joint maximum of eight months before the vessel’s Services Aircraft Disposal Committee, the non-operational date, and is frequently less, need for the Directorate to be given advance as was the case for I8 of the vessels in Table notice of surplus aircraft has been 2 where “hot” sales were not achieved. This recognised. As a result, they are well placed timeframe is shorter than the time often to advise at an early stage on sales potential required for potential overseas government and value. buyers to arrange the necessary funding. The Department are considering the scope for 3.16 The prospects for maximising income from beginning marketing earlier where it is disposal of aircraft are best if the Directorate known in advance that whole classes of are able to offer “packages” of equipment vessels are likely to be withdrawn (paragraph and spares. But package sales have not 2/3(a)). occurred because spares have usually been made available after the last of the primary 3.12 The Royal Navy have first call on vessels not equipment. Gnat, Wasp, Lightning, earmarked for “hot” sale. For example, they Shackleton and Pembroke spares all became may be used for harbour training. trials, available for disposal well after the Services accommodation or as a scarce of spares-but ceased to fly the aircraft. The Shackleton case their main use is as targets. Decisions about at Figure 5 overleaf illustrates the difficulty such alternative uses are informed by an in achieving co-ordinated release to allow assessment of the “cold” sale potential or assembly of a package sale. The Directorate. scrap value of the vessel. however, were recently able to offer a package sale of Phantom aircraft and spares Aircraft to another country. Although the sale has fallen through, the Directorate have gained 3.13 Surplus aircraft sold by the Directorate to valuable marketing experience. date have generally reached the end of their Service life. Given their poor condition, 3.17 The Department recognise that to training requirements and other uses have complement the Directorate’s efforts to raise tended to take priority. But their disposal the profile of disposal by sale (paragraphs value has often been reduced by the removal 2.24 to 2.26], there is a need for senior of equipment as part of the Royal Air Force’s managers throughout the Department to spares recovery programme. If an aircraft is promote disposals more actively. In out of production but still in service, the September 1991 the Royal Air Force’s start-up cost for a spares line is considerable, Director of Support Management Services and the savings made by removing the items issued instructions requiring the earliest may outweigh the sales return. The possible identification of assets for disposal, Directorate have had little opportunity to particularly with regard to the sale of whole advise on sales potential before spares aircraft and associated spares. Where the recovery has occurred because aircraft have decision is to retain equipment and stock, tended to be made available for disposal with little advance notice.
I5 DISPOSALBY SALE OF DEFENCE SURPLUS EQUIPMENT AND STORES
Figure 5: Sale of the last four Shackleton aircraft In February 1991. the Directorate of Sales (Disposals) were notified that the last four of the Shackleton aircraft were to be taken out of service on 30 June 1991. In April 1991. the Air Force Department agreed to notify the Directorate of all known spares and ground support equipment. The Directorate decided that the most profitable method of sale would be by auction So that the sale would receive greater exposure, Sotheby’s Auction House recommended that the Shackleton aircraft should be included in their Aircratt and Aeronautica sale which was omorammed for Seotember 1991. However. since the Air Force Dewtment wanted the sale to take olace as quickly as possible, the Shackletons heri sold in Sothebks July 1991 au&on sale for fi96.000 even tiaugh the Royal Air Force had not released the ?.pares and ground suppolt equipment.
Shackleton surplus spares were made available for disposal in August 1991 and sold to the purchaser of the aircraft in September 1991. Shackleton jigs and tools were sold in December 1991. Source:Nat;o&4 Audit Officeexamination Figure 5 illustrates the need for the Directorate of Sales (Disposals) to have sufficient time to market and the need for the timely release of spares etc alonoside the orimarv eouioment.
this must be fully justified on operational and strategies, strengths and weaknesses. In cost grounds. The Department are response to National Audit Office enquiries considering similar disposal instructions for the Directorate produced a broad appraisal of the Royal Navy and the Army potential overseas competition, using the database of the Defence Export Services Major Army equipment Organisation. The results confirmed that ex- military equipment has started to saturate 3.18 There is no single forum for considering the the world market in response to the general disposal of major Army equipment, such as easing of East West tensions and the demise those for considering the disposal of ships of the Warsaw Pact (Figure 6). The British and aircraft [paragraphs 3.8 and 3.15). The defence industry are also concerned about Department acknowledge that some Army the competition from abroad from nearly new equipment managers have not always second-hand defence equipment coming on complied with regulations requiring the the market. They asked the Organisation to involvement of the Directorate in disposal undertake an analysis of the overseas market decisions. In this regard the National Audit on their behalf (paragraph 3.28). Office noted that training requirements. such as the need for hard targets, had taken up 3.21 Overseas competition is also having an effect equipment which might otherwise have been on the home market. Defence equipment declared surplus. Given the age and from overseas has already been appearing, condition of these equipments they were and helping to drive scrap metal prices likely to fetch only scrap prices. As a result, downwards, for example, ex-Soviet tanks. few Army major capital equipments such as “A” vehicles [armoured fighting vehicles) had been sold in recent years but a number of The development of new markets substantial prospects are now emerging. Following the Gulf conflict, the Directorate 3.22 With a greater variety and quantity of major sold a number of mine clearingvehicles. capital equipment becoming available for disposal, and increasing competition from 3.19 Recent improvements in liaison have overseas, the Directorate recognise the need resulted in notification to the Directorate of to develop new marketing techniques and increased numbers of armoured fighting explore new markets. There are several vehicles, artillery, and other major avenues, outlined below, which the equipments, for disposal in the period Directorate are already exploring. 1992-95. There will be further numbers of main battle tanks, armoured fighting vehicles Initiatives with industry and artillery pieces to be declared to the Directorate. 3.23 Some United Kingdom suppliers of new defence equipment are concerned that the sale of second-hand equipment may affect Competition from overseas overseas markets. The Directorate have, therefore, entered into a dialogue with 3.20 The National Audit Office noted that the British industry. They have held discussions Directorate had not made a full assessment of with a wide range of companies in the fields who their competitors are and their of aircraft and aircraft engines, ammunition,
16 DISPOSALBY SALEOF DEFENCESURPLUS EQUIPMENT AND STORES
missile systems, ships and armoured a better return on the sales of surplus vehicles. This initiative will take the form of spares to overseas Navies because of their either buy back arrangements with the continuing availability. (Previously original manufacturer/supplier or a joint surpluses were offered to overseas marketing approach. customers as a one-off buy and only scrap value sales were achieved]; and 3.24 The joint marketing approach would be on a spin-off for other firms via sub-contract profit-sharing basis aimed at selling work for Leafield on the refurbishment of equipments to those countries which cannot spares and equipment. afford new. Industry would be responsible for storage, refurbishment and marketing with Further contracts are currently being the Directorate being guaranteed any residual negotiated for the storage and marketing of scrap value if the equipment were unsold. In Royal Air Force spares with a book value many cases the Directorate are dealing with (not sale value) of f2 billion. Similar the original manufacturer to avoid problems arrangements are intended for Army spares. of intellectual property rights. A byproduct of this initiative is likely to be the increased specialisation in the sale of 3.25 As an extension of this initiative, in May lesser value items to the trade such as test 1992 the Directorate entered a profit-sharing equipment and machine tools. arrangement with Leafield Logistics and Technical Services for the storage and 3.26 The Directorate have exhibited at the marketing of spares for Leander frigates and Farnborough Air Show. In December 1992 Oberon submarines and other Royal Navy they also held a seminar for the defence equipment and stores. Spares with an industry on the opportunities arising from estimated book value (not sale value) of up to the disposal of surplus equipment and spares. EZOOmillion will be transferred to the It was attended by 92 companies who showed company’s premises by 1994. The benefits of interest in the opportunities to upgrade this agreement are as follows: equipment for onward sale and follow-up with spares and technical support. l release of 120,000 cubic metres of storage space; Liaison within the Defence Export Services l reduction in ‘holding’ costs; Organisation
l depot rundown plans can be met on time: 3.27 The Defence Export Services Organisation, of which the Directorate are part. are the focal l continuity in the supply of spares to point for the various sources of Government overseas Navies which have bought ships support to defence exporters. They carry out from the Royal Navy; worldwide market research and surveys, and collate data on overseas markets and trends
Figure 6: Overseas competitors
United Slates of America The United States is the major supplier of surplus equipment. In 1991 surplus F-16 aircraft were sold to Morocco and other Similar sales can be expected. Significant numbers of surplus tanks and F-15 aircraft were also sold in August 1991.
Eastern Europe Countries in Eastern Europe have large surpluses of defence equipment. The low cost of this equipment, both new and second-hand. make it an attractive alternative to the purchase of Western surplus items.
Germany A large quantity of farmer East German equipment is available for disposal and Germany has won contracts to supply surplus naval vessels to Paraguay and electronic equipment to Finland. Other such sales are expected ta follow. One potential sale of note is an offer to Indonesia of 39 naval vessels at low prices.
In the past, France has successfully sold surplus military aircraft and naval vessels. Source: DefenceExporr Services Organisationdatabase. Figure 6 shows that second-hand defence equipment has started to saturate the world market.
17 DISPOSALBY SALEOF DEFENCESURPLUS EQUIPMENT AND STORES
on behalf of the United Kingdom defence exhibitions being staged in the United industry. They also help the Directorate Kingdom and overseas. obtain overseas customer contacts, but their customer database is geared to the market for Service Attach& new equipment. 3.30 In their 40th Report 1988-89 on Support for Defence Exports the Committee of Public 3.28 The Organisation’s overseas research and Accounts concluded that Attach& needed to surveys have not in the past included the be made fully aware of the objectives of sales market for second-hand Defence equipment. support work and the best way of achieving But as a result of requests from the British these objectives. In response, the Treasury Defence industry, an analysis was Minute dated January 1990 (Cmnd 964) stated undertaken of the world defence export that a series of “core” objectives had been market for both new and second-hand identified for incorporation into individual equipment over the period 1987-1991. It was country objectives. presented as part of the seminar held by the Directorate and revealed that second-hand 3.31 In marketing equipment to foreign sales are worth three per cent of the overall governments the Directorate use Service market. The top exporter of second-hand Attaches as the first line of contact. This has equipment is the United States with 69 per been mainly in respect of ships because to cent of the world market followed by the date there has not been much opportunity to United Kingdom with four per cent sell other major capital equipment overseas. (paragraphs 3.20 and 3.26). However, they have not been used to assess the extent of overseas competition. Moreover, 3.29 The Defence Export Services Organisation the Directorate’s objectives are not included have arranged demonstrations of second- in country “core” objectives. Attaches who hand equipment to prospective buyers. and serve in countries which have been have organised stands for the Directorate at traditional customers for United Kingdom the British Army and Royal Navy second-hand defence sales are fully aware ul exhibitions. The Directorate are examining the Directorate’s role and purpose but other whether they might also benefit from the Service Attach& may not be so Organisation’s participation in other major knowledgeable.
18 DISPOSALBY SALE OF DEFENCESURPLUS EQUIPMENT AND STORES
Part 4: Disposal by sale of other surpluses
Introduction remained inactive for around a decade: and many others are held in quantities which 4.1 This Part considers the disposal by sale of would last over ten years at anticipated usage other surpluses, the bulk of the Directorate’s rates. The study also concluded that the v business in terms of volume. Specific areas review and identification of items for addressed are the interface between the disposal tends to be low priority, and tackled Directorate and the Services on the supply of piecemeal. other surpluses, the sale of surpluses by competitive tender or by public auction, the 4.5 The study’s recommendations include the speed of disposal by sale, and environmental setting of demanding targets for identifying and safety matters. surpluses, and close monitoring of achievements. Targets have already been set by the Royal Navy’s Director General Supply of other surpluses Supplies and Transport, and the Army’s Director General Equipment Support. Within the Royal Air Force specific targets for 4.2 The increase in disposal activity is likely to disposal are to be set as part of a planned be most noticeable in the area of rolling programme. stockholdings, which are due to reduce by 33-50 per cent (paragraph 2.7). Therefore, as 4.6 Supply managers are responsibile for disposal activity increases a forecast of the identifying surplus items and notifying the volume and timing of disposal items arising Directorate. But the Directorate tend to by location would give the Directorate a receive little or no advance notice of such firmer basis for planning. But none of the items because declaration has in the past Services maintains comprehensive data on often been piecemeal. Advance notice is the volume of disposals. nmre important for items intended for tender action than those for auction, because the 4.3 Following concerns expressed by the tendering process can take several months Committee of Public Accounts on the level of whereas auctions are held at frequent the Department’s stockholdings (33rd Report, intervals. 1983-84 and 18th Report, 1985-t%), there has been an increase in disposal. The book 4.7 Departmental instructions require that values (not sale values) of stockholding items disposal declarations sent to the Directorate disposed of in recent years have been: include a full description of the item, and E million specify the quantity and/or weight. 1986-87 301 Condition is of key importance for disposal 198748 493 by sale but the instructions do not include a 1988439 436 requirement for this information. There is no 1989-90 432 standard form of declaration and the National 1990-91 334 Audit Office found that the quality of 1991-92 462 information provided by units varied. Their examination of a random sample of 46 The Department attribute the dip in 1990-91 declarations from the three Services found to diversion of effort to the Gulf conflict, and that (Table 3): to the cumulative impact of previous years’ disposals. Not all of the items involved would l an adequate description was given in only have been sold-many would have been about half of the cases; disposed of as waste. l details of quantities were usually provided; 4.4 A recent Departmental study concluded that stockholding policies were very conservative. l details of condition were supplied in only Many hundreds of thousands of items have about a third of the cases.
19 DISPOSAL BY SALE OF DEFENCE SURPLUS EQUIPMENT AND STORES
Thus, the Directorate did not always receive competitively. The Directorate do not the data that they needed to assess the best advertise items for sale by tender other than approach to selling and often had to press occasionally in specialist magazines. Drawing units for further information. on their customer database, they invite tenders from individuals and organisations Table 3: The adequacy of informalion provided likely to be interested. on items for disposal Number of cases (out of 46 tested) 4.11 For the competitive process to be targeted Audit criteria where information was adequate and fully effective, the Directorate need easy Full description 48% access to an extensive customer Quantities stated ;; 85% Condition 16 39% database- with infvrnrativn about past and potential customers. For tenders let from the Source:National Audit Ofriceexamination. United Kingdom, the Directorate have an Table 3 shows that there is a need for improvement in the quality of information supplied to the Directorate of Sales extensive database of over 4,000 individuals (Disposals) to give them a firm basis for marketing action. This and organisations covering scnne 17 trade applies palticularly to information about the condition of items. groups with many new firms applying each week. But it does not include more general market information to assist in the Sale by competitive tender or identification of potential customers: it is public auction mostly manual: and it is not in a form which allows ready access to the bidding and buying history of individual customers. 4.8 The Directorate operate on the broad basis Computerisation of the database in April that low value/high volume items are 1993 should help remedy this situation. traditionally of interest to the general trade and are sold by public auction, whereas high 4.12 The National Audit Office examined the value/specialist items attract a known competitive process in 23 disposal cases competitive market and are sold by tender. chosen at random and found that the number Over 90 per cent of miscellaneous items sold of invitations to tender ranged from tive to by the Department at public auction are sent over 500. Over 20 firms were invited to to the auction site directly by individual tender in mnre than half of the cases and the Service units. But to maximise disposal number of bids received ranged from nil to proceeds, a wide range of mainly higher 55 (Table 4). Whilst acknowledging the value items must be referred to the Directorate’s strenuous efforts to ensure Directorate for decision. The National Audit competition, the National Audit Office Office noted that the Directorate had adopted suggest that more focused tendering, aided by a number of imaginative approaches to a more targeted customer database, might be getting the best price for surpluses, especially more cost-effective in scme cases. This may unusual items (Appendix 21. become more important as the volume of material for disposal increases. The 4.9 Although the Directorate have considerable Directorate accept that the incidence of very experience of the market, they have high numbersof invitations to tender should compared only on a limited basis the relative be reduced, but point out that these have merits-such as sales success, profitability and speed-of sale by competitive tender or auction for particular types of items. Table 4: Number of invitations to tender issued Comparison of the two methods of sale have and the number of bids received been made for vehicles from Northern Number of Ireland, vehicle engines, and gear boxes. Number of ln”ltatlO”S Number of Recent difficulties in disposing of sane cases to tender bids received aircraft spares by competitive tender suggest 4 5-8 1-5 that nmre of these assessments may be 6 Ii-20 O-4 4 31-49 14-16 beneficial (paragraph 4.20). 9 69-513 16-65 Source:National Audit Office Sale by tender Table 4 shows that in a random sample of 23 items sold by tender about half had invitations to tender issued to 5-20 4.10 In 1990-91, tender sales in the United prospective cwtomers with a response rate of O-5 bids. The Kingdom raised f9 million, with 98 per cent remainder had invitations to tender issued to 31.500 plus of tenders in terms of value being let prospective customers with a response rate of 14-55 bids.
20 DISPOSAL BY SALE OF DEFENCE SURPLUS EQUfPMENT AND STORES
Figure 7: Location of miscellaneous and vehicle auctions
0 Measham .Telford 2,0 Peterborough J . Banbury
3
Source:Ministry of Defence Figure 7 shows the locations of the six miscellaneous auctions and the five vehicle auctions.
21 DISPOSAL BY SALE OF DEFENCE SURPLUS EQUIPMENT AND STORES
occurred in areas new to the Directorate 4.16 Vehicle auctions at Aston Down attract the where the intention was to widen interest in highest attendances (paragraph 2.3). Some S&S. two thirds of vehicle sales are handled through Aston Down and as many as 1.000 4.13 All s&s in Ccrmany arc by tender because. people attend any one auction. Other. for reasons of security. auctions are not smaller, vehicle auctions may attract 30 to 50 permitted. In 1991-92, 81 per cent (by value) people. Attendances at miscellaneous of all tender sales in Germany were auctions range from 120 to 200 people. competitive: 75 per cent of vehicle tenders Recent advertising and installation of a sales and 66 per cent of miscellaneous tenders “hot line” at the Directorate’s headquarters were on this basis. The Directorate are re- have helped to increase attendance numbers examining the possibility of introducing at miscellaneous auctions by about 30 per auction sales in Germany. Since August 1991. cent. when the Directorate took over responsibility for disposal sales in Germany, there has been 4.17 Although each auction is open to the public, a great increase in activity with vehicle sales customers are mainly dealers. This is because rising from 1,495 in 1990-91 to 4,530 in of the sheer bulk and condition of the 1991-92. There was a similar rise in the miscellaneous goods sold, and because volume of miscellaneous stores handled. vehicles are sold without any guarantee w Gross receipts increased from E3.2 million in “MOT” test. The Directorate set reserve 1990-91 to f5.7 million in 1991-92. prices for items going to miscellaneous auction, and for vehicles sold at the Aston Sale by auction Down auction. The Directorate told the National Audit Office that they do not set 4.14 In 1990-91 E4.5 million was realised at reserve prices for vehicles sold at other miscellaneous auctions and f6 million at locations because of insufficient staff vehicle auctions. Figure 7 shows the resources. However prices achieved are locations where miscellaneous and vehicle regularly monitored and compared with auctions are held. Miscellaneous auctions, those achieved at Aston Down. Table 5 below held quarterly. are conducted by professional gives examples of the average prices auctioneers at local hotels in six achieved at auctions in 1991-92 for vehicles locations- the goods themselves mainly and miscellaneous lots. remain at the disposal depots and are sold “as lying”. Most surplus vehicles including trailers, mobile plant and mechanical Table 5: Examples of average prices achieved handling equipment, but excluding combat at auctions in 1991-92 vehicles, are sold by commercial motor auction companies at five sites. Vehicles are (a) Vehicles driven through at the time of the auction. Average Average price The frequency of vehicle sales ranges from Average mileage (W.-VAT] twice a month at Measham to cmce every Description age (years) (000s) f four months at Kinross. In January 1992, Bedford 14.50 50.75 1,400 contracts with auctioneers were let for a Landrover 9.75 52.80 1,700 Sherpa Crewbus 7.50 83.80 650 three year period following competitive Metro 6.50 76.70 700 tendering. Vauxhall Cavalier 6.50 76.30 1.500 1 Ford Escolt 5.50 89.70 2.100 4.15 Auctions are effective only if they generate competition between potential buyers. Until (b) Miscellaneous lots a few years ago auctions were advertised in Average the national press but the Directorate decided rag..“MR that local and specialist press advertising was Items more cost effective. In addition, each Description per IO1 @Y’ auctioneer has his own customer mailing list Landrover petrol engines 6 390 4.Drawerfiling cabinets 12 90 for auction catalogues. The main firm of Combat jackets 100 530 vehicle auctioneers runs a “hotline” for Combat boats 100 pairs 700 vehicle enquiries and informs all of their source: D;rectorateOf sales (Disposals) customers of forthcoming auctions. Table 5 gives examples of the average prices achieved at auctions in 1991-92 for vehicles and miscellaneous lots.
22 DISPOSALBY SALEOF DEFENCESURPLUS EQUIPMENT AND STORES
4.18 Using their consultants (Touche Ross) the National Audit Office enquired of three large Table 6: The lime taken to sell items auction houses who have contracts with the Months Number of items sold Department whether any steps might be O-I 1 taken to enhance disposal proceeds. These 4 auctioneers made suggestions for improving 4 the attractiveness of goods to buyers and thus 6 4 increasing revenue (Figure 8). The - Directorate are following up these suggestions with the auctioneers. Suggestions, particularly on the “lotting” of IO-11 goods, would require greater dedication of 11-12 : 12.13 - restiurces at depot level and this extra cost 11-14 - would have to be weighed up against the possible additional revenue generated. Source: National Audit Office Table 6 shows that in the cases examined by the National Audit Office the average time taken tq sell disposal items was three/four months. All but three of the items were sold within The speed of disposal by sale the six month Departmental target.
4.19 Prompt disposal provides early revenue, 4.20 A recent internal review by the Department maximises sales throughput and reduces analysed 250 declarations of surplus aircraft stores holding costs. Speed will be vital if the spares arising at RAF Carlisle over the past Directorate are to cope with the large four years and found that 43 per cent were increase in disposal activity. For sales by eventually withdrawn from sale by tender tender the Directorate’s aim is to let contracts and sold by auction. Where sale by tender within six months of an item becoming was successfully pursued the average time to available for disposal. The National Audit complete the sale was just over five months Office examined a small random sample of but 38 per cent took over six months and 1’2 sales contracts and found that of the 25 items per cent over nine months. Because of the sold, 22 had been sold in six months or less. high withdrawal rate, the review questioned The average elapsed time between items the appropriateness of sale by tender of these being declared available for disposal and the items. Since the review the Directorate have contract being placed was three/four months issued instructions to suppliers that aircraft (Table 6). spares of under f200 per item or under f11,000 in total stock value should be sent directly to auction.
Figure 8: Suggestions for improving the saleability of goods at public auction Preparation01 “lots” at miscellaneous auctions: . Instead of having different commodities scheduled far sale throughout the auction. each category of item should be sold in order eg first engine spares. then furniture, clothing etc. This would ensure that all interested specialist bidders would be there at the same time, and would have to spend less time at the auction-thus making it mqre attractive and convenient for them. . “Like” should be put with “like” and quantities stated. Material should be sorted into separate lots of “like” items and quantities in each Iat stated, for example, 20 pairs of tmusers. 30 sweaters and SO on. Instead of being confronted with bundles of “mixed clothing” and vague quantities such as “pallets”, bidders would have a better idea of what they are buying. l Celtain items such as computers and their accessories could be packaged together as a Iqt instead of being sold separately. l Interesting and mqre valuable items could be sold in smaller lots to attract the private buyer who can usually outbid the dealer. l Items in a very pow state of repair should be discarded before the auction process. Their inclusion in lots with material in good condition only reduces prices. l To attract the general public, specialist auctions should be held for domestic items such as furniture and clothing.
Vehicle auctions:
l The valeting of cars before auction would be very cost-effective. (The Directorate are currently undertaking an exercise into the value of valeting.) . An engineer’s inspection should be perfarmed on each car before sale tO increase its value and also CuStOmerconfidence. Source: Threelarge auction houses contractedto the Oepartment Figure 8 contains suggestions for enhancing the attractiveness tq customers of goods sold at auction.
23 DISPOSALBY SALEOF DEFENCESURPLUS EQUIPMENT AND STORES
4.21 The Directorate have recognised that there legislation on safety and environmental will be increased pressure from the armed matters. The following are the main areas of forces to cut corners and speed up the sales COIlCMYX process. As a result of the case in paragraph Health and safety at work. The Health 4.20 they are considering setting a strict time and Safety Executive are of the view that limit of five months for sales by tender, after the Department need to take more which items would in future be sold by precautions to ensure that items such as auction to avoid backlogs. They are also machine tools are safe to use; considering reducing the interval between miscellaneous auctions, and reviewing the Consumer protection. Recent legislation case for greater use of local sale by has increased the obligations to the public individual Service units. Few requests for of the sellers of second-hand goods. One authority to make local sales are received by county council trading standards officer the Directorate because of the administration drew attention to alleged breaches of the required and at present they account for only law at an auction of electrical appliances one per cent of disposal receipts. by the Department conducted in 1990. The Department have now agreed that 4.22 It seemed to the National Audit Office that sales should be confined to traders there might be some risk of effort being capable of refurbishing such goods before diverted from potentially more rewarding their re-sale to consumers; and business by the administration of an Environmental protection. In one incident increasing number of low value items for the Cleveland and Durham local miscellaneous auction. The Directorate might authorities regarded the sale of paints, also, therefore, wish to consider whether solvents and chemicals at public auction some of these items could be sold by running as a breach of the Control of Pollution contract-particularly scrap and recyclable Acts. The Department now sell these materials. To reduce administration time the commodities only to licensed dealers Department could consider running some of [paragraph 4.24). The issue has been these contracts over a longer period than the brought into sharper focus by the present six months. The Department told the withdrawal of Crown Immunity for acts National Audit Office, however, that of pollution and the provisions of the extended time frames can be unpopular with Environmental Protection Act 1990 which the trade because, in the uncertain market came into force on 1 April 1992. conditions which currently pertain, prices are unlikely to remain static. 4.24 The impact of the new Environmental Protection Act on the Department’s disposal Environmental and safety activities will be substantial. The duty of care responsibilities will have a major impact concerns on how items defined as waste are sold and certain items will be sold only to specialised 4.23 Determining policy on disposal by sale in the dealers licensed by local authorities. This light of the Environmental Protection Act might lead to reduced prices since there will 1990 is one of the Directorate’s main be less competition. Much more material objectives [paragraph 2.9). In recent years might have to be disposed of at a cost to the there has been increasing pressure on them Department. from bodies concerned with enforcing
24 DISPOSALBY SALEOF DEFENCESURPLUS EQUIPMENT AND STORES
Part 5: The collection of disposal receipts
Introduction instalment to facilitate sales of ships to overseas governments. There has been one 5.1 This Pert considers the Department’s such instance in recent years with interest arrangements for collection of disposal being charged above the current bank receipts. It covers the sources of disposal lending rate. Other exceptions to the revenue, the completeness of disposal “payment first” rule are precious metal receipts, the Department’s consideration of recovery contracts, where minimum simplified accounting procedures to cope guaranteed payments are received, end with the upsurge in disposal activity, a contracts where items are sold by weight end current Ministry of Defence police deposit payments are received (paragraphs investigation, end the promptness of 5.9(b) end (cl). collection. Completeness of disposal receipts Sources of disposal revenue 5.5 For receipts from disposal to be brought to 5.2 Revenue from disposal sales comes from a account in full the Department need effective number of sources: control arrangements. The National Audit Office examined the following areas of the sale of large capital equipment to control. overseas governments end commercial companies; Control over sums due from contract sales the sale by tender end et public auction and overseas sales of other surpluses to a wide variety of 5.6 Liverpool Accounts receive from the commercial end other organisations end Directorate a copy of the contract or. in the to individuals; case of overseas sales, a request for invoicing. sale by tender et the sales disposal depot This triggers the billing/collection in M0nchengladbach. Germany; end procedures. The Directorate do not maintain any control record to ensure that all local sales by tender et individual units appropriate cases are referred to Liverpool end depots under delegated authority Accounts for action end there is no formal from the Directorate. reconciliation of Directorate end Liverpool Accounts records. However, the safeguard 5.3 Receipts from the Germany sales depot, the exists that no goods are released before vehicle auctions et Aston Down end local payments While the possibility exists unit sales are brought to account through therefore that all claims for disposal monies local imprest accounts. Receipts from all might not be received end pursued by other sales are collected by the Directorate Liverpool Accounts, the likelihood is that any General of Defence Accounts in Liverpool absent claim would be brought to the (“Liverpool Accounts”). Proceeds from Department’s attention by the customer. auctions are collected initially by the auctioneers end then, other then Aston Control over auction proceeds Down, paid over to Liverpool Accounts. 5.7 Responsibility for ensuring the completeness 5.4 To help ensure that payments for disposal by of sums due from miscellaneous auctions lies sale are full end prompt the Department with the Directorate, whose representative work on the general rule that goods may not attends each sale to assist the auctioneer be collected before payment is with advice or guidance if required. The received-either the full amount or a Department’s instructions require that deposit. The Directorate, with Treasury miscellaneous auctions should also normally approval, occasionally agree payment by be attended by a witness unconnected with the disposal function. The witness should
25 DISPOSALBY SALEOF DEFENCESURPLUS EQUlPMENT AND STORES
record the prices achieved end pass the the transaction giving rise to the information to the Directorate for receipts. In Germany the National Audit reconciliation with the sale account provided Office found that the cashier et the sales by the auctioneer, end with the receipts paid depot was also responsible for the over by the auctioneer to Liverpool Accounts. letting of contracts, accounting for The National Audit Office examined the receipts, end the release of disposal records of 13 miscellaneous auctions selected items to customers. Whilst recognising et random. In three cases there was no the practical difficulties which can arise evidence of witness-prices having been in locations with few staff, the National received by the Directorate end in no case Audit Office suggested that the was there documentary evidence that the Directorate consider the scope for Directorate had reconciled the witness greeter separation of duties et the depot. catalogue to the auctioneers’ sales accounts. The recommendations in a recent although the Directorate state that this was Departmental staff inspection report done. should now enable full separation of duties. 5.6 Vehicle auctions generate more income then (b) Precious metal recovery. Precious miscellaneous auctions (f6 million end Ea.5 metals such es gold, silver end platinum million respectively in 1990-91). At vehicle are present in some radio, radar auctions, unlike miscellaneous auctions, no telecommunications end computer witness independent of the disposal function equipments. The Directorate have is present. This is because of limited staff contracts with contractors who resources. Instead, the Directorate are specialise in the extraction end required to undertake a spot-check covering processing of these precious metals. 10 per cent of all vehicles which should Material collected by the contractor is include a comparison of prices achieved with weighed et the unit or nearest those later reported by the auctioneer. At weighbridge. A minimum guaranteed Aston Down, which comprises 65 per cent of price is paid initially by the contractor vehicle sales, a Directorate representative is es agreed by the Directorate. A further always present, whose duties include sum should be paid after processing if recording prices achieved end reconciling more precious metal is extracted then these to the auction receipts. For other had been estimated, end the National vehicle auctions the Directorate advised that Audit Office examination confirmed each site had been visited in 1991. However, that additional payments had been the National Audit Office noted that a report made by contractors. Clearly, it is had been produced for only one of these difficult for the Directorate to verify the visits end it made no reference to a check on amount of precious metal actually prices achieved. The Directorate told the extracted. They are. nonetheless, National Audit Office that to achieve considering whether there are ways of standardised reporting a proforma report will strengthening control in this area, such be used for spot checking purposes. es on-site inspection. Other controls over disposal receipts and [c) Items sold by weight. For continuous disposal items disposal of identical material over a period, running contracts are let for six 5.9 Disposal sales are made from 200 units end months to one year. The contractor pays depots. General stores accounting en initial deposit based on en estimated arrangements were not a pert of the National overall weight for the period. Further Audit Office examination. But es a result of sums are then paid according to the visits to three Service units, three regional actual weight of material collected. The disposal depots, end to the sales depot in National Audit Office examined 19 Germany, the National Audit Office had the collections end found that in 10 cases following observations. payment was not supported by (a) Separation of duties. The Government weighbridge tickets showing the weight Accounting manual states that of material actually collected. Moreover, whenever possible the duty of receiving the sale by weight arrangement had payments should be performed by been extended to one unit where there officers other then those whose function was no weighbridge facility. The it is to initiate, handle or account for Department have reminded all declaring
26 DISPOSAL BY SALE OF DEFENCE SURPLUS EQUIPMENT AND STORES
units that they must provide there was no recorded evidence that weighbridge tickets and Liverpool any checks had bee” undertaken. Accounts should report any Moreover, at one unit and two depots irregularities to the Directorate. the information on the release note was not sufficient to provide a” adequate (d) Pursuit of items declared available for gate check. disposal. The sales disposal depot in Germany maintain a listing of vehicles National Audit Office test check of the declared available for disposal by the completeness of disposal receipts Services but which have not yet been received at the depot. As at the end of 5.10 The National Audit Office examined a January 1992, this ‘Dues In’ register random sample of items authorised for showed that 292 vehicles had not been disposal by sale at a unit of each of the received after three months; and 56 of Services and attempted to follow them these had been outstanding for over a through to Departmental receipt records. A year (14 for “ver two years and two for total of 100 items was tested. Payment by the over three years). There had been no customer could be established in 33 of the 39 reconciliation between the depot’s cases where a contract was let by the record of outstanding vehicles and Directorate, in all 26 cases where a contract equipment manager records. This is was let locally by the “nit, in all 12 cases now being undertaken by the where vehicles were sold by public auction, Department. and in four of the 23 cases where goods were sold at miscellaneous auction (Table 7). The (e) Release notes. Responsibility for issuing total receipts were f200,OOO. release notes authorising the collection of items purchased lies with the 5.11 However, payment could not be traced for auctioneers, Liverpool Accounts for six items which were sold in “lots” as part of items sold by contract, and for local a running contract let by the Directorate. sales a” appointed sales officer Similarly, 19 items intended for sale as part independent of staff responsible for “lots” at miscellaneous auctions could not be disposal items. However, at one unit traced to payment: for six there was no and at one disposal depot, the National record of the items being received at the Audit Office found that the stores disposal depot: the remaining 13 could be disposal staff were raising their own traced to the disposal depot but not release notes. individually to the auction catalogue (Table (0 Gate checks. At one “nit visited by the 7). The items authorised and released for National Audit Office there was no gate disposal which the National Audit Office security. At another “nit and at a were unable to trace included spares, disposal depot, there were no gate accommodation stores and scrap metals checks of contractors’ vehicles leaving (aluminium, copper, brass). the site; and at the Germany sales depot
Table 7: Audit trail of items from authorisation for disposal by sale through to payment by the customer Number of items Number of items Number traced to traced to contract Number of items Method of sale Of cases disoosal deoot or auction cataloaue traced to ~awnenf Contract let by the Directorate of Sales (Disposals) 39 Sold “as lying” at the unit Contract let locally by unit 26 Sold “as lying” at the unit Vehicle auction 12 Transferred to auction site Miscellaneous auction 23 17 4 4
Table 7 shows that payment could not be traced for six items which were part of a running conbact let by weight and far 19 items intended for sale at a miscellaneous auction.
27 DISPOSAL BY SALE OF DEFENCE SURPLUS EQUIPMENT AND STORES
5.12 When transferred to a disposal site the Department and disposal by sale is just one description of an item often changes-for element. Therefore they do not have a example, from equipment to scrap metal or separate record of the full extent and age of from clothing to rags. This would apply when outstanding receipts from disposal by sale. an item ceases being capable of its original function. The Department, therefore, accept 5.17 For sale by contract the Department normally that for high volume/low value items it is require that payment by made within seven not always possible to reconcile all items to days of the invoice date. However, there “lots”. were delays of about three weeks in the issue of invoices because of problems with Liverpool Accounts’ new computerised Simplification of accounting system. Therefore, as a temporary procedures arrangement, from December 1990 the requirement was payment within seven days of the contract being let. 5.13 To cope with the expected surge of disposal activity, the Department are considering 5.16 From a random sample of 40 contracts let simplifying their accounting procedures for during 1990 and 1991 the National Audit sales items. They estimate that having no Office found that in river half of the cases formal accounting procedures when disposal payment was received mure than three items from units are received at regional weeks after the contract was let and in 12 disposal depots would result in savings of cases it took more than five weeks (Table 8). f300.000 a year. The Department would Once invoices were issued, payment was safeguard against fraud by carrying out made within the week for more than half the sample checks and control of theft would be cases and within a fortnight for three through depot spot-checks. Existing controls quarters of them. These findings suggest that would be maintained for valuable and contractors in the main await the invoice attractive items. before making payment. This highlights the need for prompt issue of invoices so that 5.14 During 1992-93, the Department’s internal items are paid for and collected quickly. audit will undertake a review of disposal Since the National Audit Office examination, activity. They will concentrate on the the computer difficulties at Liverpool adequacy and effectiveness of internal Accounts have been resolved and invoices control. In the light of that review the are now being raised promptly. Department will decide whether or not accounting procedures should be simplified. Table 8: Time taken to pay sums due on disposal contracts Ministry of Defence police Days From contract date From invoice date investigation 8-141-7 Ii ;fil 15-21 7 2 22-28 a - 5.15 The need for adequate safeguards against 29-35 1 2 theft and fraud has been highlighted by a 36-49 7 2 major investigation into the disposal area over 50 5 2 recently mounted by the Ministry of Defence Source: NafionalAudit Ofriceana/ysis. Notes: (i) Includes IO cases wherepayment was made before police. The investigation follows allegations issue of the invoice. of fraud and theft. The police are visiting (ii) The sample excludespayments made on overseas several disposal units and depots. Depots at sales and on running contracts. three locations have given rise to particular Table 8 shows that in half the cakes payment was made within three weeks of the contract date but within a week of the concern. A recent conviction involved invoice date. collusion between a depot employee and a dealer on the disposal of a tank track. 5.19 For vehicle auctions, auctioneers are required to pay sums due to the Department Promptness of collection within 14 days. Receipts from only 20 out of a sample of 70 vehicle auctions held in 1990 5.16 Liverpool Accounts are responsible for the and 1991 were received within the due collection of all monies due to the period. Until January 1992 in England and
28 DISPOSAL BY SALE OF DEFENCE SURPLUS EQUIPMENT AND STORES
Wales auctioneers had 28 days to remit frame. Since January 1992, with new receipts from miscellaneous auctions. This contracts the Department have required all was achieved for only 13 out of a sample of auction receipts to be paid over within 14 45 auctions held over the previous two years. days. The Directorate now remind However, three-quarters of auction monies auctioneers a few days before the money is due were paid over within the specified time due.
29 DISPOSAL BY SALE OF DEFENCE SURPLUS EQUIPMENT AND STORES
Appendix 1 The Gulf conflict
1 The Gulf ceasefire came into effect in April 1991 and the Directorate of Sales (Disposals) visited the region in the same month. They concluded that limited sales opportunities existed and were satisfied that in the circumstances disposal sales were being dealt with effectively. The Commander, Supply Logistics Support Group (Middle East), was therefore given delegated authority for disposal by sale of up to f250,OOO for competitive tendering and of up to f5.000 for single tender. Most of the 12,000 vehicles shipped to Saudi Arabia were returned to the United Kingdom and British Forces Germany. Those vehicles beyond economic repair were disposed of locally.
2 The military achieved local sales to the value of f1.5 million. Headquarters Logistics Support Group (Middle East) in its July 1991 post operation report concluded that an effective in theatre disposals organisation was essential for an operation of this scale, and had a joint civil military disposal team been established from the outset, it would have provided a focal point for unwanted equipment and maximised the return. The main lesson on disposal emerging from this report was that sales of surplus equipment can generate a lot of revenue. particularly in countries short of natural resources, and clear and timely guidance needed to be provided.
3 A subsequent Internal Audit report concluded that:
l Army instructions made no mention of the reporting of surpluses: and
l there was need for comprehensive and timely instructions on the disposal of captured Iraqi equipment since considerable amounts of equipment had already left the theatre or had not been declared.
4 In the National Audit Office’s view the message from these reports is that even in times of crisis there should be clear, comprehensive and timely guidance on the disposal of both United Kingdom and captured enemy equipment.
30 DISPOSAL BY SALE OF DEFENCE SURPLUS EQUIPMENT AND STORES
Appendix 2 Sale of unusual disposal items
Radar station In 1988 the Royal Air Force paid f70,OOO to a civilian contractor for the dismantling equipment and removal of equipment from a radar station. Subsequently, the Directorate of Sales (Disposals) disposed of equipment at four other radar stations, again using a civilian contractor, but who dismantled and processed the equipment to give a return to the Department. This resulted in a saving to the Department in excess of f $ million.
Canteen vouchers British Armed Forces Special Vouchers were currency printed by the Army for use in canteens in Germany until the mid-1970s. As paper money, these were collectors’ items. Seventeen million unused surplus vouchers were sold in February 1991 at a Phillips auction for fl90,OOO. The sale realised more money than any other single lot banknote sale ever recorded. It is believed that the purchaser gave the vouchers to prospective customers as part of a sales promotion campaign.
Yachts In 1990 nine Halcyon yachts belonging to the Royal Navy Joint Services Adventurous Sail Training Centre were sold at a Christies auction for f60,OOO.
Ship engines During 1990 HM Customs and Excise passed to the Department the cargo vessel the “Sultan Sea” which had been used for drug smuggling and was subsequently confiscated. HM Customs and Excise suspected that drugs still remained concealed within the structure of the ship and therefore gave the vessel to the Royal Navy to be used as target practice during NATO exercises. Before the vessel was sunk, the Directorate of Sales (Disposals) extracted the engines and sold them for fl4,OOO. half the proceeds being returned to HM Customs and Excise.
Diesel generating A large diesel generating plant at the Royal Naval Armaments Depot, Coulport, was plant blocking the route of a new access road. It was sold for f80,OOO in 1990.
Books The Department’s library at Great Scotland Yard had a large quantity of unwanted books which were taking up space. The Directorate of Sales (Disposals) realised that some could be of value and approached Sothebys who auctioned them for f40,OOO in April 1990.
Demilitarised Army Many demilitarised Army vehicles have been sold to museums and also to film and vehicles TV companies for use in battle scenes (in films such as “Crossfire”, “Rules of Engagement” and “Knights of God”).
Ration pack biscuits Several hundred tonnes of time expired ration pack biscuits were sold to pet food processors and zoos throughout the country.
31