Report by the Comptroller and Auditor General

Ministry of Defence: Further Examination of the Sale of plc

Ordered by the House of Commons to be printed 20 June 1989 Her Majesty’s Stationery Office, S7.90 net 448 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

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 Comptroller and Auditor General National Audit Office 19 June 1989

The Comptmller and Auditor General is the head of the National Audit Office employing some 900 staff. He, and the NAO, are totally independent of Government. He certifies the accounts of all Government departments and a wide range 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 use their resources. MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

Contents

Pages Summary and conclusions 1

Part I: Background and Scope of NAO Examination 8

Part 2: Site Valuations before Sale 11

Part 3: Post-Sale Developments 18

Part 4: Intellectual Property Rights 21

Glossary of Abbreviations 22

Annexes

A. Report by Gerald Eve and Healey and Baker 23

B. Report by Royal Institution of Chartered Surveyors 67

C. Statement by S G Warburg Securities 69 iMINISTRY OF DEFENCE F”ETHSR E- ATION OF m SALE OF ROYAL ORDNANCE PLC

Summary and conclusions

Background 1. In April 1987 the Government completed the privatisation of the Royal Ordnance Factories by selling Royal Ordnance plc to plc by private treaty, following competition. The Public Accounts Committee (PAC), in their 48th Report of Session 1987-88 (HC 206), reviewed the Ministry of Defence [the Department)‘s arrangements for the sale on the basis of a Report by the National Audit Office (NAO) published in November 1987 (HC 162). The Committee recognised that the sale achieved the Government’s objective of transferring the Company to the private sector within the prescribed timescale and noted that certain offsetting expenses had to be placed against the realised price of El99 million. The Committee noted the possibility that the Royal Ordnance sites at and Enfield might be redeveloped and expressed concern that British Aerospace could make a substantial gain on the sale or re-development of these sites without benefits accruing to the taxpayer beyond the amount received for the sale of Royal Ordnance as a whole.

2. In late 1988, there were various media reports on speculation on the possible under-valuation of assets owned by Royal Ordnance at the time the Company was sold to British Aerospace. These comments were based on a research report produced in August 1988 by a securities firm which attributed values totalling !Z462 million to the three Royal Ordnance sites at Enfield, Waltham Abbey and Patricroft. The media also commented on the claimed under-valuation of certain Intellectual Property Rights transferred by the Department to Royal Ordnance prior to its sale. The NAO have carried out a further examination of these aspects of the sale of Royal Ordnance.

Findings 3. The issues examined and the main findings and conclusions are summarised below. (a) Whether the Department made adequate arrangements for the valuation of Royal Ordnance sites prior to the sale of the Company and for the protection of the taxpayers’ interest (i) The Department and Royal Ordnance obtained professional valuations of Royal Ordnance land and buildings, on both an existing use and alternative use basis, as at 31 March 1984. An updating of these as at 31 December 1985 was commissioned in preparation for the proposed public flotation of the Company; this was produced in July 1986 (paragraphs 2.1-2.10). (ii) After the Government’s decision, announced in June 1986, not to proceed with the proposed flotation, and the sale of the factory to on 4 October 1986, the Department’s Merchant Bankers, Rothschild, prepared an Information Memorandum which was issued to 17 prospective purchasers of Royal Ordnance in October 1986. This showed the existing use valuations at 31 December 1985 but not the alternative use valuations, because although by then the closure of Waltham Abbey had been announced

1 MINW’RY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

and some other rationalisation of factories was likely, the alternative use valuations for Waltham Abbey and for all sites were less than the corresponding existing use valuations (paragraph 2.15). (iii) The Department recognised that a higher immediate return might be realised by selling assets piecemeal, but since the Government’s intention was to sell Royal Ordnance as a going concern, they invited bids for the Company on this basis. Rothschild advised the Department that in these circumstances it was for the prospective purchasers to make their own assessment of the value of the Company’s assets (paragraph 2.11). (iv) British Aerospace and two of the other bidders, GKN plc and Trafalgar House plc, have confirmed to the NAO that they had been interested in purchasing Royal Ordnance as a going concern, not for property speculation. They were all aware of the probable need for some rationalisation of sites; they saw the existing use valuations: they were given all necessary information, for example on planning applications, by Royal Ordnance; they were given the opportunity to inspect all the sites and to take into account the potential for development in making their offers. In general their view was that, although there was potential for development of some sites, there would be substantial costs involved and difficulties to be overcome, including the potential need to decontaminate sites on which toxic substances had been used for many years going back in some cases to well before the First World War (paragraphs 2.4, 2.15-2.20). (v) Consultant surveyors, Gerald Eve and Healey and Baker, appointed jointly by the NAO, reviewed the earlier valuations of Royal Ordnance sites by Weatherall, Green and Smith and confirmed that in general terms the valuations were at acceptable levels. The Royal Institution of Chartered Surveyors also reviewed the earlier valuations for the NAO and confirmed that they were in accordance with the standards of the Institution (paragraphs 2.12-2.14). (vi) The NAO’s consultants’ view was that, because important changes in circumstances occurred between the dates of the earlier valuations and the date of sale of Royal Ordnance to British Aerospace, full consideration by the parties involved should have led to updating of the valuations and further advice being sought from Weatherall, Green and Smith shortly before the sale date. The Department told the NAO that, particularly in the absence of any major reason to suppose that alternative use valuations would have altered radically in relation to existing use valuations, it was proper to look to the pressure of competition to guard against any risk of under-valuation, and that accordingly it was for the bidders to make their own assessments in drawing up their offers [paragraphs 2.22 - 2.23). [vii] At the date of sale the closure of the Waltham Abbey site had been announced and planning applications had been submitted in respect of Waltham Abbey and the adjacent derelict northern part of the Enfield site; closure of the Enfield factory was announced in August 1987. The NAO’s consultants considered that, in the circumstances, it would have been prudent and appropriate for the Department to have insisted on a clawback provision in the contract for the sale of Royal Ordnance; or alternatively, it might have been

2 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

advantageous, if it was practicable, to exclude the Waltham Abbey site and the Enfield site from the sale to British Aerospace. The view of the Department and Rothschild was that the Government’s policy was to sell Royal Ordnance as a whole with all its assets and liabilities and a piecemeal approach would have carried the risk of the less attractive parts remaining unsold and would have involved considerable management, industrial relations and commercial difficulties. They pointed out that both sites were still operating at the time of the sale, as an integral part of the Company’s manufacturing activities. They did not consider any proposals for the Department to retain a financial interest in the Company after its sale. Whilst land transactions in the commercial sector sometimes include clawback provisions, and the NAO noted that the privatisation of the National Bus Company also made use of them in appropriate cases, the Department and their advisers said that there is no evidence that such provisions are other than very rare when a business is sold as a going concern. In the particular circumstances of Royal Ordnance, they considered that the inclusion of a clawback provision would have been regarded by bidders as a significant negative feature in their assessment of the Company, and so would have depressed the proceeds without promising a real prospect of enhanced total value. . The Department said that it would also have run counter to their policy of maximising the freedom of the Company to develop its business independently of the Department, which would continue to be a major customer. Royal Ordnance told the NAO that it was still operating at the Waltham Abbey and Enfield sites at the time of the sale and still doing so during 1988; and that, in their view, the Company would have had great difficulty being sold as a going concern without these sites (paragraphs 2.24-2.28).

(II) Whether the sites at Waltham Abbey, Enfield and Patricroft are worth significantly more than the pre-sale valuations (viii) Land values have to be considered in the context of plans for the business as a whole, taking account of such matters as the substantial costs of rationalisation and restructuring, for which the Company provided flO0 million in their 1987 Accounts, and the substantial costs, risks, uncertainties and delays which would be involved in development of sites for alternative use [paragraph 3.9). (ix) The existing use valuations at 31 December 1985 of the W&ham Abbey, Enfield and Patricroft sites assessed by Weatherall, Green and Smith and shown in the Information Memorandum were g8.5 million, E4.1 million and El.0 million respectively, in total E13.6 million. The corresponding alternative use valuations at that date, calculated by Weatherall, Green and Smith but not shown in the Information Memorandum, were 63 million, Z? million and E0.25 million respectively. Decontamination and clearance costs at Waltbam Abbey were estimated at ~1.3 million (paragraphs 2.10, 3.5). (x) The NAO’s consultants considered that, with regard to the alternative use valuation of Waltham Abbey at 31 December 1985, Weatherall, Green and Smith had taken a more pessimistic view of the prospects of development than might have been justified and that a value of the order of E6 million might have been justified. However the difference of E3 million was of no material consequence since

3 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SAL!3 OF ROYAL ORDNANCE PLC

Weatherall, Green and Smith’s existing use valuation was higher. The consultants confirmed that the valuations of Enfield and Patricroft sites were substantially accurate (paragraph 2.12(e) and (f)). (xi) The NAO’s consultants assessed the approximate alternative use values as at 2 April 1987, the date of sale of Royal Ordnance, as Waltham Abbey ?Z9to 13 million, Enfield E4.5 to 6.5 million and Patricroft SO.5 million, in total El4 to 20 million. In arriving at these valuations, the consultants took account of changes in circumstances by the date of sale, including preliminary consideration by then by local authorities of the future planning uses of the Waltham Abbey site and the northern part of the Enfield site (paragraph 2.21(a), (d), (g) and (h)). The NAO noted that these valuations are not materially different from the existing use valuations of these sites as at 31 December 1985 which were made available to prospective purchasers of Royal Ordnance (paragraph 3(b) (ix)). (xii) In August 1988 a securities firm, S G Warburg, Akroyd, Rowe and Pitman, Mullens Securities Ltd (Warburg Securities], prepared for private circulation to institutional clients a report on British Aerospace in which estimates were made of the value of the Company’s properties. In that report the value of the Waltham Abbey and Enfield sites was estimated at jX50 million and Patricroft at ~52 million. These figures were subsequently widely reported in the media. Warburg Securities told the NAO that there was no suggestion in their report that their figures represented professional valuations on which interested purchasers could place reliance. The estimates were based on available public information on reported property transactions in similar areas and were made with a view to obtaining a reasonable estimate of the overall surplus over book value of British Aerospace properties as a feature relevant to share valuation. In the Department’s view simply multiplying the total acreage by a large valuation per acre was highly questionable, assuming as it did that all land was capable of maximum redevelopment, and would be given planning clearance to match, and ignoring the substantial costs which would be incurred (paragraphs 3.1-3.3). (xiii) Royal Ordnance had no planning applications for alternative use awaiting consideration by planning authorities at March 1989. The NAO’s consultants estimated the total alternative use values of the three sites as at 31 March 1989 at between E26 million and E38.5 million. The consultants stated that the future open market values of these sites would be higher after planning consent had been granted, substantial preparatory costs had been incurred and the sites had been prepared for development. Royal Ordnance pointed out that in addition considerable commercial costs covering redundancies, restructuring and relocation would need to be incurred before sites could become available for development and their values increased. The Department also commented that there might be considerable delays before the obstacles to redevelopment were removed (paragraphs 3.7-3.9). (xiv) On 30 May 1989, British Aerospace announced plans for the Enfield and Waltham Abbey sites. An agreement has been entered into between British Aerospace and Trafalgar House for the future development of these sites under a jointly owned company (paragraph 3.14).

4 MINISTRY OF DEFRNCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

(c) Whether the Department made adequate financial arrangements for the transfer of certain Intellectual Property Rights to Royal Ordnance (xv) The Scheme made by the Secretary of State for Defence under the Ordnance Factories and Military Services Act 1984, to transfer the assets and liabilities of the Royal Ordnance Factories to Royal Ordnance plc on 2 January 1985, included the transfer of certain listed Intellectual Property Rights and other intangible assets which were assigned a nil book value. Subsequently a supplementary agreement between the Department and Royal Ordnance provided for the transfer to the Company for a nominal sum of El of certain Intellectual Property Rights, the eventual ownership of which had not been decided when the original Scheme was prepared. The Crown retained certain Intellectual Property Rights. The Government’s view was that the Intellectual Property Rights transferred were needed by the Company to generate future trade, turnover and profits and thus allow it to operate on a commercial basis and would be reflected in the price obtained for the Company (paragraphs 4.145). (xvi) No separate valuation of Intellectual Property Rights has been made. Potential bidders for Royal Ordnance were informed of the position on Intellectual Property Rights and were thus able to take account of this in making their offers (paragraphs 4.64.9).

Specific conclusions 4. The Government’s aim was to sell Royal Ordnance as a going concern and they therefore decided against a piecemeal sale, with the exception of the earlier sale of Royal Ordnance Leeds where special circumstances applied. The instructions by the Department for the property valuations as at 31 March 1984 and 31 December 1985 were appropriate for the purpose for which they were given, ie the proposed flotation of the Company in 1986, and the valuations were properly carried out in accordance with the standards of the Royal Institution of Chartered Surveyors. The Department omitted details of the alternative use valuations from the Information Memorandum issued to prospective bidders but since they were lower than the existing use valuations, their inclusion would not have increased and might have reduced the bids made.

5. Before the sale to British Aerospace was agreed, Royal Ordnance announced the closure of Waltham Abbey and had submitted planning applications for that site and the adjoining northern pert of the Enfield site. In these circumstances a revised valuation would have established, at the time, whether changes in circumstances had led to a significant change in land values since the 1985 valuation. The NAO’s consultants estimated that the alternative use values of the entire Enfield, Waltham Abbey and Patricroft sites were markedly higher in April 1987 than in December 1985, but they were not significantly higher than the existing use values in December 1985; indeed for Patricroft it remained lower. There is no evidence therefore to suggest that m-assessing and publicising alternative use values at the time would have significantly affected the bids; especially since the potential bidders were making their own assessments of the situation.

6. It was also open to the Department to include in the sale contract a clawback provision to protect the taxpayers’ interest and cover the possibility that there would later be a substantial increase in the value of

5 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

the sites sold. The NAO’s consultants considered that a clawback provision would have been prudent and appropriate in the circumstances of the Royal Ordnance sale and the NAO noted that it had been considered appropriate in the circumstances of the sale of parts of the National Bus Company. The Department and Rothschild did not consider the possibility of a clawback provision. Their view is that although such a provision is not uncommon when land as such is being sold, there is no evidence that such provisions are other than very rare when a company is being sold as a going concern and when, accordingly, more than purely property considerations are involved. In the circumstances of the sale of Royal Ordnance, they believe that any such proposal would have reduced the immediate proceeds with no real prospect of an increased total return to the taxpayer and it would have been necessary to take into consideration closure costs, such as redundancy and relocation costs. The Department also believe a clawback provision would have reduced the Company’s freedom to develop its commercial business and would have led to a potential conflict of interest for the Department in that it would have retained a financial interest in one of its principal contractors. The Department suggested to the NAO that more weight should be given to the judgement of Rothschild on this question, in view of their particular experience and expertise in the sale of companies. 7. The NAO’s consultants pointed out that there appear to be good prospects for planning permissions being given for some development at Enfield, Waltham Abbey and Patricroft. At 31 March 1989 no such permissions had been granted and no applications from Royal Ordnance were awaiting a decision. However, the local authorities for the Waltham Abbey, Enfield and Patricroft sites were all considering the future use of the sites. At Waltham Abbey and Enfield there are substantial difficulties to be overcome and considerable costs to be incurred before the sites are ready for development. Nevertheless the view of the NAO’s consultants was that there have been substantial increases in the value of the three sites since the conclusion of the sale to British Aerospace. The NAO noted that they valued these sites as at 31 March 1989 at no more than 8.3 per cent of the figures reported by the media in 1988. 8. Intellectual Property Rights in Royal Ordnance Factories products have beendealt with in accordancewith the Schememade under the legislation which provided for the incorporation and subsequent privatisation of the organisation. No separate valuation has been made of them but potential buyers would have taken them into account in assessing the value of the business. Overall conclusions 9. In considering the value for money obtained from the matters described above, it is important to bear in mind that the sale of Royal Ordnance was competitive and the price received was the highest any bidder was prepared to pay. In assessing the commercial potential of the Company as a going concern, the potential purchasers had to make their own assessment of the value of its assets and liabilities. They were made aware of the potential for site redevelopment and also of the position on Intellectual Property Rights. These aspects had to be considered in the context of plans for the business as a whole, taking account of such matters as the substantial costs of rationalisation, restructuring and redevelopment and the risks, uncertainties and delays which would be

6 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC involved in seeking to develop sites for alternative use. The NAO notes British Aerospace’s recent announcement of plans for the future development of the Enfield and W&ham Abbey sites through a joint venture company to be jointly owned by British Aerospace and Trafalgar House. This commercial development is in line with the Company’s earlier comments to the NAO [paragraph 2.18).

IO. Against this background the increases in site values based on the current planning position reported by the NAO’s consultants are not significant. In the longer term there is clearly some prospect, on certain hypotheses, of a more significant increase in values, although this would be offset to a greater or lesser extent by the significant expenditure and time required to realise this increase. The inclusion of a clawback provision in the sale contract as suggested by the NAO’s consultants might have enabled the taxpayer to share in the benefits arising from such an increase. The Department and their advisers believe, however, that such an arrangement would have added substantially to the difficulty of the sale with no assurance of net gain to the taxpayer, would have reduced the Company’s future independence from the Department and would have led to potential conflicts of interest for the Department. The NAO recognise that the Department and their advisers took account of the relevant considerations in reaching their decisions and arranging for the sale of the Company. At the same time, the NAO believe, as a precaution in any future case of the sale of public land holdings as part of a continuing business, that those responsible should carefully consider in good time on the basis of professional advice, if necessary, whether clawback provisions or other arrangements would work to protect the taxpayers’ interest. MINISTRY OF DEFEWCE: FURTHER EXAMINATION OF THE SALG OF ROYAL ORDNANCE PLC

Part 1: Background and Scope of National Audit Office (NAO) Examination

Background Session 1985-86, reviewed the arrangements for incorporation and for conimlling the Company 1.1 Royal Ordnance plc is the principal and accounting to Parliament after incorporation. manufacturer in the of land based In the second of these Reports, the Committee systems, hand and munitions. The welcomed the assurance from the Depariment Government first announced its intention to privatise that achieving a satisfactory return to the the Royal Ordnance Factories, then part of the taxpayer would remain an important Mini&y of Defence (the Department), in 1982. In consideration in determining the timing of preparation for the introduction of private capital, privatisation of Royal Ordnance. But the they were vested, together with certain of tbe Committee stated that they would want to be Department’s Research and Development satisfied after privatisation that due weight had Establishments, in Royal Ordnance plc on been given to the taxpayers’ interest. The 2 January 1985. Following the abandonment of the Treasury Minute on their Report (Cmnd 9859, planned flotation in Summer 1986, the Government paragraphs 32-35) stated that the need to obtain agreed to the sale of Royal Ordnance Leeds to Vickers a satisfactory return for the taxpayer would be plc. given due weight when the Company was privatised, though this would not be the only B 1.2 In October 1986 the Department invited bids factor to be taken into account. from 17 concerns judged to be potential purchasers for the remainder of Royal Ordnance on the basis of 1.5 The Committee, in their 48th Report an Information Memorandum drawn up by their Session 1987-88 (HC 206), reviewed the Merchant Bankers - Rothschild. The Memorandum arrangements for tbe sale of Royal Ordnance and reflected the Government’s intention to sell the the adequacy of the price obtained, on the basis Company as a going concern to a single industrial of a further report by the NAO (HC 162) buyer. It set out, among other things, the Company’s published in November 1987. The Committee plans relating to the future of each site. The recognised that the sale of Royal Ordnance had Memorandum stated that Royal Ordnance had achieved the Government’s objective of announced the closure of its Waltham Abbey site and transferring the Company to the private sector was preparing planning applications for that and the within the prescribed timescale and noted that derelict northern part of the adjacent Enfield site certain offsetting expenses had to be placed which was part of the site. against the realised price of El99 million. 1.3 Six initial bids eventually resulted in two conditional offers from GKN and British Aerospace. 1.6 The Committee observed that in assessing After negotiations with both Companies, the the value of Royal Ordnance, potential buyers Department decided to accept British Aerospace’s would have taken account of the disposal value offer on the grounds that it was the highest and the of land and property which might become most commercial bid. The Secretary of State for surplus to requirements. They noted that the Defence completed the sale of the Company to British Department accepted the possibility that the Aerospace in April 1987 at the offered price of Waltham Abbey and Enfield sites might be El90 million. redeveloped, which could result in a vary considerable increase in their value.. They Previous NAO and Public Accounts expressed concern that, prior to deciding on the Committee Reports sale of the Company, the Department left it to Royal Ordnance to conduct consultations with 1.4 The NAO Report published in April 1985 the local authority over possible planning (HC 343) described the arrangements for the approval, and did not themselves explore this incorporation of the Royal Ordnance Factories. possibility or obtain an alternative valuation of The Public Accounts Committee, in their 31st tbe Waltham Abbey and Enfield sites based on Report Session 1984-85 and 22nd Report the assumption that their redevelopment might

8 MINISTRY OF DEFENCE: F”RT’KER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC be approved in the future. The Committee were also of assets owned by Royal Ordnance at the time the concerned that British Aerospace, as owners of Royal Company was sold to British Aerospace. These were Ordnance, could make a substantial gain on the sale based on a report produced in August 1988 by a or development of these prime sites without benefits securities firm - S G Warburg Securities - which accruing to the taxpayer beyond the sale price paid attributed a value totalling g462 million to three by British Aerospace. They recommended that in any Royal Ordnance sites at Enfield, Waltham Abbey and similar sales in the future, any feasible planning Patricroft. In response to a request by the Public permission likely to increase property values should Accounts Committee, the Comptroller and Auditor be obtained before offers are invited. General (C&AG) agreed to a further examination of property valuations by the NAO. Other media 1.7 In the Treasury Minute (Cmnd 563) responding comments concerned the claimed under-valuation of to the Committee’s Report, the Treasury and the certain Intellectual Property Rights transferred by the Department stated that, before the sale, Royal Department to Royal Ordnance prior to its sale. The Ordnance had been exploring the possibility of NAO also covered this subject in its further redevelopment at Waltham Abbey and part of the examination. Enfield site, but had reached no definite conclusions about the future of these sites. Bidders had been 1.10 The NAO examined the following main issues: provided with an existing use valuation of land and buildings but had not been given the alternative use - whether the Department made adequate valuation. This was because, after taking account of arrangements for the valuation of Royal decontamination costs, it was less than the existing Ordnance sites prior to the sale of the Company use valuation and might have reduced the price in April 1987, taking account of the possibility offered. The Department considered that any of site development for alternative use, and for assessment of the price which might be realised from the protection of the taxpayers’ interest; the sale or disposal of surplus land must be purely conjectural; it would have to take into account a - whether the sites at Waltham Abbey, Enfield realistic view of the scale and type of redevelopment and Patricroft are currently worth significantly which might be permitted and on what terms; site more than the valuations placed on them prior preparation costs; and Royal Ordnance’s restructuring to the date of the sale of the Company; COStS. - whether the Department made adequate financial arrangements for the transfer of certain 1.8 On the suggestion that feasible planning Intellectual Property Rights to Royal Ordnance permission should be obtained before inviting offers, prior to the sale of the Company. the Treasury Minute stated that, when a business was being sold as a going concern, as was Royal Ordnance, this would require a number of 1.11 The NAO commissioned two firms of judgements to be made: as to what land potential Consultant Surveyors - Gerald Eve, Chartered purchasers might consider to be surplus to their total Surveyors, and He&y and Baker, International requirements; what type of redevelopment might Surveyors and Valuers - to jointly assist with the maximise its value; and how likely it was that examination of the first two issues. The firms were planning permission for this could be obtained. This instructed to report upon the adequacy of the site could involve much nugatory time and effort, prolong valuations commissioned jointly by the Department uncertainty over the future of the company and delay and Ruyal Ordn~~ulcr:prior to the sale of the Company; the realisation of the wider benefits which such the value of the Waltham Abbey, Enfield and privatisations are intended to achieve, since it can Patricrofi sites at the time of sale and currently; and take several years to obtain a final decision on the position on planning applications and consents planning permission. The Government would for all Royal Ordnance sites. The full instructions are continue to obtain professional advice on the value of reproduced at Appendix 1 to the Consultant a company’s tangible assets, including land, before a Surveyors’ Report at Annex A. The NAO also privatisation, so that these could be folly taken into obtained the opinion of the Royal Institution of account where appropriate in negotiations with Chartered Surveyors on the adequacy of the basis and potential bidders. methodology of the site valuations undertaken prior to the sale of Royal Ordnance. Scope of further NAO examination 1.12 The NAO examined the Department’s records. 1.9 In late 1988, there were various media reports They also had discussions with the Department and on speculation on the possible under-valuation other parties involved in the sale and the subsequent

9 MINISTRY OF DEFENCE: FURTHER EXAM34ATION OF THE SALE OF ROYAL ORDNANCE PLC publicity concerning site values, ie with the the London Borough of Enfield; and with S G Department’s merchant bankers, Rothschild; with Warburg Securities. All these organisations co- British Aerospace and Royal Ordnance; with GKN operated with the NAO and provided valuable and Trafalgar House, two of the four firms invited by information for this Report. In particular, although the the Department to bid for Royal Ordnance and C&AG has no rights of access, British Aerospace and allowed access to the Company’s books and records; Royal Ordnance allowed NAO staff and their with Weatherall, Green and Smith, the surveyors who consultants to visit the W&ham Abbey, Enfield and conducted the earlier valuations for Royal Ordnance Patricroft sites for the purposes of the valuations and the Department; with the Local Planning referred to in paragraph 1.11. The Companies’ co- Authorities for Council and operation in this matter is much appreciated.

“, .,~..~~,.i!Ji!.< i I~;.-” :;i : : .Ifi:~...~;,, ,.,~ MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

Part 2: Site Valuations before Sale

Pre-incorporation valuation ~154 million, compared with the net book value of f35 million. 2.1 In May 1984 Rothschild advised the Department that, while not strictly required by the Stock 2.4 Their assessment of the alternative use value of Exchange, re-valuations of land and buildings prior to each site reflected the open market value of the flotation of a company were invariably undertaken, property at the relevant date, assuming that the except where the investment in land and buildings existing business had closed and the site was to be was insignificant. As the Royal Ordnance Factories used for some alternative purpose but not allowing were contemplating a substantial reorganisation and for the extensive costs of decontamination (toxic rationalisation programme, which might result in substances had been used for many years going back certain properties being surplus to requirements, in some cases to well before the First World War), as Rothschild considered it particularly important to assessed by a consultant, and clearance of buildings have as accurate a valuation as possible of surplus and plant which would be incurred. They pointed out properties. They also recommended that the that the alternative use of sites in rural or Green Belt revaluation should be carried out before locations would present major issues to be resolved incorporation and that, wherever possible, properties by the Local Planning Authorities. They made should be valued on an open market, existing use assumptions in their alternative use valuations as to basis. the views which a purchaser would take regarding the possibility of obtaining consent for 2.2 The Department and the Royal Ordnance redevelopment. In many cases, if the factories were Factories jointly appointed Weatherall, Green and actually to be closed, they envisaged lengthy Smith to prepare a valuation report as at 31 March negotiations, almost certainly leading to appeals to 1984 of all the land and buildings to be vested in the Minister. Royal Ordnance. The instructions required valuations to be made in accordance with the Guidance Notes of the Royal Institution of Chartered Surveyors: an 2.5 Their valuations represented the price which a existing use valuation, either on an open market single purchaser would pay as at 31 March 1984 for value basis or, where open market value was not each property, having regard to the size of site and appropriate, on a depreciated replacement cost basis; uncertainty as to future use. They stated that having and an alternative use valuation, representing net regard to these factors it was likely that a realisable value on disposal, after taking into considerable marketing period would be required in account relevant decontamination costs. order to achieve a disposal. They had therefore built into their valuation substantial allowances for delay before development could start, for the risk and 2.3 The valuation report was submitted jointly to uncertainty as to what that development would be the Department and Royal Ordnance in February and for the lengthy period which development of 1985. It stated that, with one minor exception, all the such large areas of land would take. They said that factories and outlying sites came within the category of property which was rarely, if ever, sold for a they would expect substantially higher figures to be obtained from the sale of smaller parcels of land ripe continuation of the existing use except by sale of the for immediate development, as and when the business as a whole. Weatherall, Green and Smith uncertainty had been removed and planning consent were therefore unable to determine the existing use obtained. value on an open market basis but prepared a valuation by reference to depreciated replacement cost; that is an estimate of the market value of the 2.8 The Surveyors assessed the total alternative use land for its existing use, together with an estimated value of Royal Ordnance properties at iFZ0 million, depreciated figure for the buildings and other site but advised that the valuation must be regarded with works, making allowances for their age and condition. some caution. The report was discussed by the The valuation assumed that business would carry on Department, their advisers and the Treasury. The at each location and, on this basis, the Surveyors Treasury questioned whether there was any assessed the existing use value of Royal Ordnance possibility of some sites obtaining planning land and buildings as at 31 March 1984 at permission.

11 MINISTRYOFDEFENCEzF"RTHER EXAMNA'TIONOFTHESAL!IOFROYALORDNANCEPLC

2.7 Rothschild commented that it was clear from the the Green Belt, were already extensively developed, valuation that the absence of a real market for the and were often concluding that it would be preferable very specialised nature of Royal Ordnance properties to allow them to be redeveloped in order to preserve made it impossible to place a meaningful value on the the “real” Green Belt. They therefore advised that it properties on an existing use basis, whilst this same could be reasonably assumed that planning consent specialised use made valuation on an alternative use would ultimately be obtained for some significant basis equally misleading: as the estimated open re-development at Waltham Abbey and Enfield, market value of ?ZO million would, according to although it was impractical to form a realistic view as expert opinion, be completely offset by necessary to the acreage over which such permission would be decontamination costs estimated at s27 million. They obtained. Their valuation reflected all these stated that the report had confirmed their preliminary uncertainties. In their view there would be few, if view that the historic cost net book value of any, purchasers prepared to pay a substantial sum for properties should continue to be used in the accounts what was a long term speculation. They advised that of Royal Ordnance except where exceptional the alternative use valuation should be regarded with circumstances, such as disposal as part of any re- caution. Their assessment included the following organisation and rationalisation programme, could be valuations as at 31 December 1985: shown to apply in respect of individual properties, when estimated open market value, net of decontamination costs where relevant, should be used. The Department accepted this advice.

Post-incorporation valuation Waltham Abbey 8.5 3.0 Enfield 4.1 2.0 2.8 In preparation for the flotation in July 1986, the Patricroft 1.0 0.25 Department and the Company jointly instructed Weatherall, Green and Smith to update their existing (a) Not allowing for decontamination and clearance use valuation of the Company’s properties on the costs. same basis as the earlier exercise. Subsequently they gave instructions to update the alternative use 2.11 The Department recognised that they might valuation. The Surveyors reassessed the existing use obtain a higher immediate return for the Exchequer if value at El62 million and the alternative use value at they approached the sale of Royal Ordnance simply E24 million, both as at 31 December 1985. The as an exercise in the sale of assets to the highest alternative use valuation did not allow for bidders. However in view of the Government’s desire decontamination costs (paragraph 2.7) and was to dispose of Royal Ordnance as a whole, Rothschild subject to the same reservations as the earlier advised that the Company should be sold as a going valuation (paragraphs 2.4-2.6). concern, as a piecemeal disposal to several purchasers would carry with it the risk that the less 2.9 The Surveyors also commented upon the attractive parts of the Company would remain unsold potential future value of the Waltham Abbey and and involve considerable management, industial EnfieldNorth sites, acknowledging the work being relationsand commercial difficulties. Rothschild also undertaken by another Royal Ordnance consultant advised the Department that the sale of the Company surveyor - Fuller Peiser - on the possibility of on a going concern basis by auction would require obtaining permission for development of these sites. prospective buyers to form their own views on the Weatherall, Green and Smith did not make enquiries assets and liabilities in arriving at their cash offer. of the relevant planning authorities because to do so might in their judgement prejudice Fuller Peiser’s NAO’s consultants’ review of pre-sale work. However, they stated that from their general valuations knowledge they would expect difficulty in obtaining satisfactory consent for a major development, 2.12 The consultant surveyors commissioned by the primarily because the land lay within the Green Belt NAO (paragraph 1.11) were instructed to review the and the Lee Valley conservation area; and because of adequacy of the instructions given to Weather& the substantial work required to upgrade the access to Green and Smith, the extent and adequacy of the the site before development could be undertaken. information they used, their valuations and the reasonableness of their assumptions, and whether 2.10 They pointed out, however, that many their valuation certificates complied with Royal planning authorities were now looking closely at their Institution of Chartered Surveyors guidance policy towards sites which, although nominally within [Appendix 1 to Annex A). Their main findings on the

12 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC pre-sale valuations (together with comments on their of valuation for Waltham Abbey must have been findings by other parties consulted) were: a borderline decision; but that the valuations reported would have been significantly lower if (a) The in&u&ions given by the Department the depreciated replacement cost basis had not and Royal Ordnance for the 31 March 1984 and been adopted at 31 December 1985 [Annex A 31 December 1985 valuations were clear, correct paragraphs 2(b) and 2.14-2.22). and adequate for the purpose of their incorporation in the flotation prospectus (Annex (d) The depreciated replacement cost A paragraphs l(a) and 1.2-1.12). calculations for existing use valuation of all sites as at 31 December 1985 were acceptable [Annex (b) Weatherall, Green and Smith had adequate A paragraphs 2(c) and 2.23). factual information available to them. They had informal meetings with local planning officers in (e) The NAO’s consultants regarded connection with their March 1984 valuation, but Weatherall, Green and Smith’s view of the they made no further enquiries to establish the development prospect at the Enfield site as at attitude of local planning authorities towards the 31 December 1985 as marginally pessimistic, but development of the two sites when updating the considered that they took a realistic view of the alternative use valuation of the Waltham Abbey difficulties in the way of development and in particular of the heavy costs likely to be and Enfield sites as at 31 December 1985. Instead they relied, with the approval of the incurred in gaining access to the site. They Department and Royal Ordnance, upon the therefore accepted that the alternative use Fuller Peiser report commissioned by Royal valuation of the Enfield site, as at 31 December Ordnance to determine the prospects of 1985, was substantially accurate. The Patricroft development on these two sites. However, the alternative use valuation was also substantially NAO’s consultants’ own discussions with accurate [Annex A paragraphs z(d) and 2.25). officers of the two local planning authorities (fJ Weatherall, Green and Smith had, in the indicated that Fuller Peiser had held no NAO’s consultants’ view, similarly taken a mcm discussions with them at that stage. The NAO’s pessimistic view of development prospects at consultants recognised that discussions between Waltham Abbey than was justified by the Fuller Peiser and local authorities were thought wording of Fuller Peiser’s report and their unwise in late 1985 and early 1986 when the alternative use valuation was also pessimistic. possible closure of the Waltham Abbey site and [Royal Ordnance stated that the Fuller Peiser the proposed future uses of that site and the report was not a valuation but rather an adjacent northern part of the Enfield site were a indication of potential uses for the site without very sensitive and highly confidential matter. detailed investigation of planning issues.) The Nevertheless their own discussion with officers NAO’s consultants felt that an alternative use of the two local authorities suggested that had valuation of the order of E6 million might have Fuller Peiser had such discussions, they might been justified at 31 December 1985 but that even have found an encouraging attitude on the part this would have been lower than the existing of the two authorities to partial development of use valuation of E8.5 million disclosed in the the two sites (Annex A paragraphs Z(a) and Information Memorandum. Therefore 2.2-2.9). (The Department observed that Weatherall, Green and Smith’s pessimism was Weatherall, Green and Smith had drawn both understandable and of no material attention in their alternative use valuation to the consequence [Annex A paragraphs 2(e) and possibility of a mom favourable attitude towards 2.26-2.27). redevelopment (paragraph 2.10). However, Royal Ordnance told the NAO that, in their view, the (g) The NAO’s consultants concluded that the initial reaction of Epping Forest District Council two valuation reports as at 31 December 1985, to the development of the Waltham Abbey site taken together, were satisfactory but they would was negative.) have normally expected a single document (Annex A paragraphs 2(f) and 2.31433). (c) Weathemll, Green and Smith made it clear to their clients that it would not be appropriate Royal Institution of Chartered Surveyors to adopt depreciated replacement cost as the Review basis of existing use valuation if it seemed likely that the business would not be continued at any 2.13 The review carried out for the NAO by the particular site for the foreseeable future. The Royal Institution of Chartered Surveyors covered the NAO’s consultants concluded that the decision instructions given by the Department and Royal to adopt the depreciated replacement cost basis Ordnance to Weatherall, Green and Smith to carry

13 MINISTRYOFDEFENCE:F"RTHER EXAMINATIONOFTHESALEOFROYALORDNANCEPLC out valuations of Royal Ordnance properties as at competition for the second batch of SA80 for 31 March 1984 and 31 December 1985; and the basis the British Army, with significant potential closure and methodology adopted by Weatherall, Green and expenditure. Smith in carrying out and reporting on the valuations. 2.18 The NAO consulted British Aerospace and two 2.14 The Institution’s opinions are reproduced in other bidders - Trafalgar House, who dropped out of full at Annex B. Their main conclusion was that the bidding in March 1987, and GKN whose bid was Weatherall, Green and Smith had carried out the unsuccessful. The companies told the NAO that they instructions they received and had provided had received all the information which they needed valuation certificates which were entirely acceptable, on Royal Ordnance and were given the opportunity to and in accordance with the requirements of the inspect all the Company’s sites. British Aerospace Institution, as set out in the Guidance Notes on the emphasised that they bought the Company as a going Valuation of Assets. concern and not as an exercise in asset-stripping. Their main concern before purchase was that Royal Information for prospective purchasers Ordnance would do its job on the sites it occupied and they were not interested in alternative use land 2.15 The Information Memorandum issued to values. However, where sites were surplus, they 17 prospective purchasers referred to the need for would consider proposals from developers and would rationalisation of the Royal Ordnance business as not discount the possibility of developing sites perceived by the Company, which could result in the themselves. creation of a stock of surplus properties. In particular it drew attention to the Company’s intention to close 2.19 Trafalgar House stated that in assessing site its Waltham Abbey site and the proposed planning values they were concerned with overall benefits net application for that and the northern part of the of any redundancy etc costs and the cost of adjacent Enfield site. It contained the existing use decontamination, which they thought was likely to be valuations as at 31 December 1985 but the underestimated. They were interested in developing Department, following discussion with Rothschild, Royal Ordnance as a commercial organisation but decided not to include the alternative use valuations they recognised that high rationalisation costs were because these showed a negative value overall involved. They said that they were contemplating a (paragraphs X7-2.8). maximum price of El.50 million at the time they decided to withdraw. 2.16 Six companies made proposals to acquire the Company. The indicative bids ranged from flO0 to 2.20 GKN stated that their objective was to acquire 150 million and were subject to receipt of further the Company as a going concern in order to expand information and specific caveats. The Department its existing Defence activities and not on a break-up afforded four of these companies controlled access to basis with a view to realising cash from site disposals. the Company’s books and records and sites. Their main conclusion in considering site values, after examining all relevant information and 2.17 They also provided all four companies with discussing with local authorities, was that there was furtherinformation on factorsaffecting the valueof probablylimited net gainto be madefrom disposals the Company’s properties, including the estimated because of decontamination, relocation, redundancy cost of decontaminating all sites as assessed and other costs likely to arise. They explained that internally. They were given details of the proposed following the 1988 press articles on site values, they planning application for Waltham Abbey and Enfield had reviewed their deliberations at the time they North and told by Royal Ordnance that in due course were bidding for the Company. They concluded that some form of planning consent was likely; and that there were no substantive grounds for revising their the revenue from their sale or development would judgement with regard to net property values or the depend significantly upon the terms finally agreed proposals and offer they made for the purchase of with the planning authority, the economic climate Royal Ordnance, which was based on solely then prevailing and the phasing of development in commercial considerations. In the case of prospects relation to the cost of decontamination and of for planning permission for W&ham Abbey and relocating those facilities which the Company needed Enfield North, GKN concluded that no real change to continue. The companies were also provided with had taken place since the sale; whilst site values additional financial information in the form of factory might have risen, so had the likely costs and the budgets and long term corporate plans for each prudent view of the planning prospects originally operating division. They were told of the likelihood of taken appeared to be justified by the apparent Enfield’s closure, if the Company failed to win the hardening of Green Belt restrictions.

14 MINISTRYOF DEFENCE:FURTHER EXAMINATION OF THE SALEOF ROYALORDNANCE PLC

NAO’s consultants’ assessment of site Ordnance of their likely decision on the values at date of sale planning applications. However on 26 March 1987 Lee Valley Regional Park Authority, which 2.21 The last valuation of sites prior to the sale was consulted by the planning authorities as a related to the position at 31 December 1985, 15 small part of the Waltham Abbey site lies within months before the sale. The NAO instructed their the Park and was designated by the Authority in consultants to establish and report upon changes in 1986 as an area of Nature Conservation value and market circumstances between 31 Importance, advised that it was not opposed to December 1985 and 2 April 1987, and the general the North Enfield application; also, whilst they effect of these changes upon the existing use and objected to the proposed scale of development at alternative use values of the sites at Enfield, Waltham Waltham Abbey, they would not object to a Abbey and Patricroft; and to prepare an alternative reduced scale of industrial development (Annex use valuation of those sites as at 2 April 1987 [Annex A paragraph 3.9). A paragraph 3.1). Their main findings [together with comments on these findings by other parties [d] The NAO’s consultants concluded that, consulted) were: whilst in April 1987 the planning situation in relation to Waltham Abbey and Enfield sites [a) On 10 March 1988 Royal Ordnance remained uncertain, the local planning announced that Waltham Abbey was being authorities had by then been made aware of the considered for closure and that the Company intended closure of Waltham Abbey, probably by was exploring the possibility of redeveloping 1989, and of Royal Ordnance’s intention to that site and the derelict northern 35 acres of the explore the development possibilities for this Enfield site. Shortly thereafter the local planning site and the northern part of the Enfield site, authorities attended a presentation given by the which had put the planning authorities on Company and Fuller Peiser on the possible notice that they had seriously to consider future future uses of both sites. The local authorities uses of the sites. The planning authorities were, understood that Royal Ordnance were however, awaiting the Local Plan Inspector’s considering potential values of these properties report and anticipated guidance from the for sale for redevelopment before formally Inspector on the continuation of the Green Belt deciding whether to vacate the sites, and the notation of the sites [Annex A paragraphs 3.10, authorities indicated their objection to the scale 3.23(a)). of redevelopment then proposed. Between November 1986 and February 1987 a Public (e) In general terms, residential, commercial Inquiry was held into the Roydon, Nazeing and and industrial property prices and land values Waltham Abbey Local Plan, which showed both increased appreciably between December 1985 Enfield and Waltham Abbey sites situated within and April 1987 as a result of general the Green Belt. Royal Ordnance objected to this improvements in the economy and continued classification of their sites and their evidence improvements in the road network in the was heard by the Department of the vicinity of Enfield and Waltham Abbey. This Environment Inspector in December 1986, improved road network, particularly the though the Inspector’s report was not issued completion of the M25 Motorway, resulted in until 5 August 1987, some four months after the the area becoming a more attractive location for sale to British Aerospace (Annex A paragraphs industrial and distribution users (Annex A 3.3-3.4). paragraphs 3.11-3.12). [b) In January 1987 Royal Ordnance submitted (f) The NAO’s consultants’ view was that had planning applications in respect of the Waltham Royal Ordnance instructed Weatherall, Green Abbey and Enfield North sites. The application and Smith to update their alternative use for Enfield North was for redevelopment for valuations of Enfield and Waltham Abbey, after 90 residential units and 107,500 square feet of the Company’s redevelopment plan became light industrial space and recreational uses, all public knowledge, and had Weatherall, Green served by a new access road. The Waltham and Smith than made enquiries of the local Abbey application was for a business park of planning authorities, they would have taken a 538,000 square feet and 975 residential units, more optimistic view regarding the prospect of recreational uses and a new access road [Annex obtaining planning permission for the partial A paragraphs 3.7-3.8). development of these sites (Annex A, paragraphs 3(a) and 3.13). (The Department (c] The local planning authorities had not, by pointed out that the Weatherall, Green 2 April 1987, given any indication to Royal and Smith alternative use valuation as at

15 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

31 December 1985 had already drawn attention valuations would have altered radically in relation to to the more favourable proposals for planning existing use valuations, it was proper to look to the permission - paragraph 2.10. Royal Ordnance’s pressure of competition to guard against any risk of view is that the initial reaction of the local under-valuation. and that accordingly it was for the authority to development of the Waltham Abbey bidders to make their own assessments in drawing up site was negative - paragraph 2.12 (b)). their offers. (g) The NAO’s consultants certified that, in 2.24 The NAO’s consultants also commented that it their opinion, the alternative use valuations of would be highly unusual for sites such as Waltham Enfield and Waltham Abbey as at 2 April 1987 Abbey and Enfield to be sold on the basis of a “once were approximately E4.5 to 6.5 million for for all” payment, at a time when planning Enfield and E9 to 13 million for Waltham Abbey investigations had hardly begun and without any real (Annex A paragraph 3.19). knowledge on the part of either vendor or purchaser (h) The NAO’s consultants considered that the of the amount of development which might be plannin g situation of the Patricrofl site did not permitted on the sites, or of the time it might take to change appreciably between December 1985 and obtain permission. They considered that, in the April 1987 but the alternative use valuation precise circumstances of the sale of Royal Ordnance would have increased to about ~0.5 million at to British Aerospace, a clawback provision in the sale 2 April 1987, mainly due to the general increase agreement would have been prudent and appropriate in land values [Annex A paragraphs 3(b) and and ought not to have had a major impact on British 3.15-3.18). Aerospace’s offer; alternatively, if it had been practicable to do so, it might have been advantageous (i) The NAO’s consultants did not consider to exclude the Enfield site and the Waltham Abbey that them would have been major changes in site from the sale (Annex A paragraphs l(c), 1.20- any of the existing use valuations based on 1.21, 2.29 and 2.30). depreciated replacement costs between December 1985 and April 1987. They observed, 2.25 The NAO noted that the privatisation of the however, that this basis of valuation would National Bus Company, which from 1986 onwards probably not have been appropriate in April involved the sales of parts of the Company as 1987 in the case of Waltham Abbey, because of separate going concerns, made use of clawback the impending closure of business on that site, provisions in appropriate cases. The Department of and in the case of the northern area of the Transport were concerned about the possibilities of Enfield site, which was surplus to the asset stripping and requested their advisers to explore Company’s requirement and was the subject of a alternative strategies for safeguarding property values planning application for alternative use (Annex A On disposal. In considering the range of options paragraphs 3[e) and 3.21-3.22, 3.23(e)). available, the Company proposed and subsequently negotiated the use of, mortgage charges to give legal 2.22 The NAO’s consultants stated that, having effect to the clawback provision on some vulnerable regard to the decision to sell Royal Ordnance property. These were designed to give the Company a privately rather than by flotation, the announcement share of any enhanced development value realised in of the closure of Waltham Abbey, the declaration that the ten years following the sale, typically 55 per cent the Enfield North site was surplus to requirements, if sold within the first four years and 65 per cent the submission of planning applications for the two thereafter. The Company placed a mortgage charge on sites, and the elapse of time since the last valuation 18 properties in 14 of the 62 sales involving both date, full consideration by all parties involved should third parties and management buyouts. To date have led to the updating of the valuation and further several million pounds have been received from advice being sought from Weatherall, Green and charges which have been removed. I intend to report Smith shortly before the sale to British Aerospace in further on the Sale of the National Bus Company. April 1987 [Annex A, paragraphs l(b), 1.16, l.zz(b]). 2.26 Rothschild told the NAO that there were no 2.23 The Department told the NAO that, since the detailed discussions, so far as they were aware, of any alternative use valuation as at 31 December 1985 had proposal to enable the Exchequer to retain, after the been so low, it was unlikely that a revaluation would sale, a financial interest in the Company or its assets; have had the effect of increasing it much if at all whilst land transactions in the commercial sector above the existing use valuation. The Department told sometimes include clawback provisions, both they the NAO that, particularly in the absence of any and the Department did not believe that such major reascm to suppose that alternative use provisions were at all c0mm0n in circumstances

16 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC similar to the sale of Royal Ordnance, where a rationalisation of the Company. By inhibiting the business was sold as a going concern. In their view, freedom of Royal Ordnance to develop their business, had such a proposal been attempted, it would have this would have conflicted with the fundamental been regarded by bidders as a significant negative objective of privatisation; and by giving the feature in their assessment of the Company and Department a financial interest in the future of would have been inconsistent with the competitive particular sites, could have led to the distortion of sale process. It would also have indicated that assets future competition for products in this area of were likely to be sold, which conflicted with the procurement. The Department suggested to the NAO Government’s aim of maintaining Royal Ordnance as that in considering whether clawback would have a going concern. Rothschild stated that, given that been appropriate in this case, more weight should be Royal Ordnance was a manufacturing business rather given to the judgement of Rothschild, in view of their than a collection of vacant sites, it would have been particular experience and expertise in the sale of difficult, if not impossible, to structure an effective Companies. continuing participation in the development of its properties. Any structure likely to be effective would 2.28 Royal Ordnance told the NAO that closure of the have depressed proceeds without promising a real En&Id factory had not been announced at the time of prospect of enhanced total value. The arrangement the sale of the Company; that it was a manufacturing would have been complex and highly uncertain, it site with sign&ant potential closure costs; and that the would have led to the sort of difficulties which a sale Waltham Abbey and Enfield sites ware carrying out by competitive tender is designed to avoid, and work at the time of the sale and were still doing so would not have been effective in the circumstances of during 1988. In their view, the Company would have Royal Ordnance. had great dif3iculty being sold as a going concern without these sites. Nevertheless in the NAO’s 2.27 The Department told the NAO that they consultants’ view the announced closure of Waltham endorsed Rothschild’s general view. In their view, Abbey, the declaration that the northern part of the clawback provisions would not have been appropriate Enfield site was permanently surplus to requirements, or desirable in the particular circumstances of this and the submission by Royal Ordnance of planning sale, both for the reasons given by Rothschild and applications had caused the local planning authorities because they would have meant continuing to begin serious consideration of the future planning Government involvement and interest in the uses of these sites.

17 MINISTRY OF DEFENCE: FIJFZ-HER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

Part 3: Post-Sale Developments

Report by Warburg Securities Government had already expressed on the Warburg’s assessment (paragraph 3.2). 3.1 In August 1988 S G Warburg Securities, a securities firm, produced a research report on the NAO’s consultants’ assessment of current British Aerospace Group, for distribution to certain of values their institutional clients. The report attributed a value of E450 million to the Royal Ordnance sites at 3.4 The NAO’s consultants assessed the alternative Waltham Abbey and Enfield and El2 million to the use valuations for the Enfield, Waltham Abbey and Patricroft site. Patricroft sites as at 31 March 1989 [Annex A, Part 4). No planning permission for development for 3.2 Subsequent allegations in the media of under- alternative uses had been granted in respect of the valuation led to Government statements in three sites, but the NAO’s consultants considered that Parliament. These explained that Warburg’s there was plainly some prospect that permissions assessments were not a valuation but speculation by a might be granted within a short period, although the merchant bank conducting an in-house analysis of the precise nature of the development which might be value of British Aerospace, and lacking in any expert permitted remained in doubt. They believed that, in knowledge of the situation. In particular the these circumstances, “hope value” attached to each of Government said that Warburg had looked at an the three sites. However they stated that, in their acreage of land and put against it a large valuation experience, prices paid in the market for potential per acre, assuming that all land was capable of development sitas for which no planning permission redevelopment; they had failed to take account of the existed were discounted by comparison with prices fact that the planning application, which had already paid for sites having the benefit of a valid permission; been submitted in respect of Waltham Abbey and the discount reflected the risks, uncertainties, cost Enfield North, envisaged substantial areas being made and delays in obtaining planning permission and the available for public amenity and other uses. Also possible need to contest an appeal at a public inquiry these sites were in the Metropolitan Green Belt, [Annex A paragraph 4.23 and Schedule C]. which immediately raised a presupposition against development; and planning applications had not been 3.5 They pointed out that, in the case of Enfield and approved and had since been refused. Waltham Abbey, purchasers would also expect to make discounts, in some cases substantial, for a 3.3 Following discussions with the NAO, S G number of other relevant matters. These included: the Warburg Securities provided a statement setting out time needed to prepare the sites for development, to the background and purpose of their report and the construct infrastructure works and install services basis on which values had been ascribed to properties (the costs of both of which could be abnormally high] (Annex C). They stated that there was no suggestion andto developthese very large areas of land; andthe in their report that the values ascribed to the abnormally high cost of demolishing existing properties represented professional valuations arrived buildings, clearing earth mounds and general at after examination of the sites and upon the basis of decontamination. In assessing the current particular assumptions; that for Waltham Abbey and decontamination cost the NAO requested their Enfield the report ascribed a value of El.2 million per consultants to base their calculation on estimates acre, based on their study of reports of prices paid prepared in March 1984 (El.3 million at Waltham over recent years for similar properties near to the Abbey but none at Enfield) by a consultant M25 Motorway ring, and allowing for redevelopment commissioned by the Department, but adjusted to possibilities, but paying no great weight to current prices. However, the NAO’s consultants decontamination costs; that their main concern was understood that another more recent examination of to obtain a reasonable estimate of the overall surplus decontamination requirements commissioned by over book value of British Aerospace properties as a Royal Ordnance indicated that the 1984 estimates feature relevant to the value of British Aerospace may have significantly underestimated the problem shares to sophisticated institutional investors; and (Annex A paragraphs 4.254.26). that the report was marked “For Private Circulation Only”. The Department told the NAO that this 3.6 The NAO’s consultants considered it likely that statement confirmed the views which the a developer would be required, as a condition of

18 MINISTRY OF DEFENCE: FIJRTBZR EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC planning permission, to carry out an abnormal rationalisation and restructuring. The Department also amount of landscaping over an extensive area and to commented that there might be considerable delays undertake other costly works. They quoted the before the obstacles to development were removed. example of a suggestion in the current local authority planning brief that the old feeder canal and canal basin running into the Enfield site might be restored Planning applications and consents as a focal point for the proposed tourist/heritage use of the central part of the site. They also considered it 3.10 The NAO’s consultants were also instructed to likely that there would be constraints on development report on the current position on planning at Enfield as a result of the “listing” of an extensive applications and consents in respect of all Royal area of buildings on the site, which might also have Ordnance sites; and on any plans drawn up by the to be restored and which may not be capable of relevant local authorities involving any of the sites. profitable use. Finally, and potentially most serious of Their report (Annex A, Part 5) confirmed that, apart all in relation to the value of the Enfield site, from those for Enfield North and Waltham Abbey negotiating satisfactory access to the site for (paragraph 2.21(b)], Royal Ordnance had made no development would be difficult and expensive. Prices planning applications at 31 March 1989 for paid in the open market for the purchase of land alternative use in respect of any of its sites. The essential to provide access (sometimes called “ransom applications in respect of Waltham Abbey and Enfield land”) could be as high as one-half of the increase in North were refused by the local planning authorities development value (Annex A paragraphs 4.27430). in June 1987. Royal Ordnance had lodged appeals against these decisions but had subsequently withdrawn them so they had no planning 3.7 After allowing for the current planning position and the factors outlined above, the NAO’s consultants applications for alternative use outstanding at assessed the following range of alternative use 31 March 1989. However, the local authorities for the valuations as at 31 March 1989 (Annex A, Schedule Waltham Abbey, Enfield and Patricroft sites were all A]: considering the future use of the sites (Annex A paragraphs 5.~5.12 and Schedule C).

Waltham Abbey El5 to 22.5 million Enfield El0 to 15 million l$sury guidance on disposal of surplus Patricroft about El million

3.11 In April 1988, the Treasury issued new guidelines to Departments on procedures relating to 3.8 The NAO’s consultants stressed that the current the disposal of surplus land. These state that, in order alternative use valuations at paragraph 3.7 above to secure the best price, land which has potential for represent the prices likely to be paid by purchasers in development should normally be sold with the the knowledge that they would have to bear benefit of planning permission. The Treasury significant costs for the matters mentioned in recognise that in a few cases there may be delay in paragraphs 3.5 and 3.6 and that there might be resolving uncertainties about the planning position considerable delays in obtaining planning permission and that it may then be appropriate to dispose of the and overcoming other obstacles before development land before those uncertainties have been resolved. could commence. They took the view that once such The guidelines state that in such cases it may well be costs had been incurred, planning permission appropriate to seek to secure from the purchaser any obtained, and other obstacles removed, the open increase in value attributable to the grant of planning market values of the Enfield, Waltham Abbey and permission after disposal terms have been agreed. Patricrofi sites would be considerably higher (Annex A paragraphs 4.384.39 and 4.534.54). 3.12 On the method of sale, the Treasury suggest 3.9 Land values have to be considered in the that sales by auction and tender should, context of plans for the business as a whole. provided they are effectively marketed, lead to Royal Ordnance pointed out that in addition to sufficient competition to ensure that a genuine market development costs, including such items as price of the land is reached; and that whether or not decontamination, commercial costs covering a reserve price should be set and the level of any redundancies, restructuring and relocation would reserve, will depend on the characteristics of the need to be incurred before values of individual sites property and the local market. The Treasury advise could be increased significantly. The Company Departments to consider this issue in conjunction provided El00 million in their 1987 Accounts for with their professional advisers.

19 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

3.13 The Treasury told the NAO that the new plans for the Enfield and W&ham Abbey sites. The guidelines were developed to assist departments to Company said that, following the closure of the dispose of surplus land and had not been written Enfield site in October 1988, and in anticipation of with privatisation in mind. They did not attempt to the closure of the Waltham Abbey site later in 1989, address the much more complex issues which arise an agreement had been entered into between British when concerned with the sale of a company with Aerospace and Trafalgar House for the future many assets and liabilities, including some land, as a development of these sites under a jointly owned going concern. company. Subject to local authority approvals and appropriate consultations, the joint company’s Future development of Enfield and Waltham Abbey sites strategy will provide a mixture of industrial, commercial. housine and leisure facilities that will 3.14 On 30 May 1989, British Aerospace announced enhance the area and benefit the local community MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

Part 4: Intellectual Property Rights

4.1 In view of the public and Parliamentary interest retained by the Department on incorporation of the in the subject, the NAO further examined the Company, would not be part of the sale. Although the Department’s financial arrangements for the transfer Information Memorandum did not indicate that the of certain Intellectual Property Rights to Royal remaining Intellectual Property Rights would form Ordnance. part of the assets offered for sale, the Department subsequently confirmed to prospective purchasers 4.2 Intellectual Property Rights COVBI‘patents, that they did. All Royal Ordnance’s Intellectual inventions, trade marks, copyrights and technical Property Rights transferred with the Company on its information. The Ordnance Factories and Military sale to British Aerospace. Services Act 1984 enabled the Secretary of State for Defence to make a Scheme tiansfeming the assets and 4.6 At the time of the sale the Department attributed liabilities of the Royal Ordnance Factories to the new no specific value to Intellectual Property Rights: nor holding company, Royal Ordnance plc, on 2 January was a value identified by British Aerospace in their 1985 in exchange for fully paid up shares. The purchase offer; nor did Royal Ordnance’s accounts Scheme specified that intangible assets, such as attribute a value to these Rights. It is not therefore Intellectual Property Rights, which were not reflected possible to establish how much was included in the in the Royal Ordnance Factories Trading Fund, would sale price for them. In the Government’s view no be transferred to the new holding company at nil specific valuation was necessary as the ultimate V&E. return to public funds was determined by the open market’s assessment of the value of the whole 4.3 The Scheme of transfer listed the Intellectual business, including all of its assets and liabilities. Property Rights transferred to Royal Ordnance except for a number of items, the ownership of which was 4.7 The NAO asked two of the prospective still under discussion at the date of the Scheme. A purchasers of Royal Ordnance - GKN and Trafalgar supplementary agreement between the Department House - whether they were fully aware of the range and the Company transferred the outstanding and potential value of Intellectual Property Rights Intellectual Property Rights for a nominal sum of El belonging to Royal Ordnance and whether their on 4 October 1986. The Department retained certain assessment of these values was reflected in their final rights to use or authorise others to use the Rights in bids. question without payment. 4.4 During the Parliamentary debate leading to the 4.8 GKN told the NAO that in their assessment the 1984 Act, the Government made it clear that no value of Intellectual Property Rights was significantly specific valuation would be placed on the Intellectual reduced by the requirement on Royal Ordnance to Property Rights transferred to Royal Ordnance plc, pay levies to the Department on an indefinite basis in which would need them to generate future trade, respect of export sales of a significant proportion of turnover and profits. Their view was that, as its product portfolio. They also told the NAO that ultimately the valuation of the Company at their final bid did reflect, inter alia, their assessment privatisation would depend on its earnings generated of the value of Intangible Assets belonging to Royal from its assets including the Intellectual Property Ordnance. Rights, the value of those Rights would be reflected in the price obtained from the Company. 4.9 Trafalgar House told the NAO that issues relating to Intellectual Property Rights were still being 4.5 Following the abandonment of flotation in 1986 debated when they pulled out of the bidding. They the Information Memorandum made available to had felt at that stage, however, that Royal Ordnance prospective purchasers of Royal Ordnance indicated were not fully protected on Intellectual Property that certain Intellectual Property Rights, ie those Rights.

21 MINISTRY OF DEFENCE: FURTHER EXAMIN ATION OF THE SALE OF ROYAL ORDNANCE PLC

Glossary of Abbreviations

C&AG Comptroller and Auditor General

The Committee The Public Accounts Committee

The Department The Ministry of Defence

Enfield North The northern part of the Royal Ordnance’s Enfield site

NAO The National Audit Office

NAO’s Consultant Surveyors Gerald Eve, Chartered Surveyors, and He&y and Baker, International Surveyors and Valuers

Warburg Securities S G Warburg, Akmyd, Rowe and Pitman, Mullens Securities Ltd

,~

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$.$y~;&~-~~~” .,._ “^_. ~.. .,.;:;.~._ .“I. I~ .~. -.(y~:.: .- ?Z MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC y Annex A

FURTHER NATIONAL AUDIT OFFICE STUDY

ON THE SALE OF ROYAL ORDNANCE PLC

REPORT

BY

GERALD EVE

AND

HEALEY & BAKER

19th April 1989

23 MINISTRY OF DRFRNCE: FURTHER RXAMINATION OF TIE. SALE OF ROYAL ORDNANCE PLC

Healey and Baker Gerald Eve International Surveyors and Valuers Chartered Surveyors 29 St George Street 7 Vere Street Hanover Square London WIM OJB London WIA 3BG

National Audit Office Buckingham Palace Road Victoria London SWIW 9SP 19th April 1989

Dear Sir Further NAO Study on the Sale of Royal Ordnance plc In accordance with the instructions contained in your letter of 21st March 1989 we have examined certain aspects of valuations made by Weatherall, Green and Smith, Chartered Surveyors, of properties occupied by Royal Ordnance plc. We have also carried out valuations of three of the properties on certain bases as at 31st March 1989. We now have pleasure in submitting our report.

2. We wish to place on record our appreciation of the very great assistance we have received from you and your colleagues. We also gratefully acknowledge the help we have received from Weatherall Green and Smith, who have made available to us many of their records, and from the officers of the various local planning authorities concerned.

3. Neither the whole nor any part of this report, nor the whole or any part of the Valuation Certificates or any reference thereto may be Included in any published document, circular or statemenr nor published in any way, without both firms’ approval of the form and context in which it may appear, such approval not to be unreasonably withheld. In relation to Schedule B, any such publication or reference to the Valuation Certificate will not be permitted unless it contains a sufficient contemporaneous reference to the incorporation of the special assumptions referred to therein and in the report.

4. This report is prepared for the use of the National Audit Office only and no responsibility is accepted to any other party.

Yours faithfully,

Healey and Baker Gerald Eve

24 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

CONTENTS

Page Abbreviations 26

List of Appendices and Schedules 27

Introduction 28

Our Conclusions 30

Part 1: Our review of the instructions given to Weatherall Green &Smith 33

Part 2: Our review of the valuations made by Weatherall Green &Smith 38 (a) Available information (b) Assumptions (c) The Valuations (d) The Valuation Certificates

Part 3: Changes in circumstances between 31st December 1985 and 2nd April 1987 43

Part 4: Alternative use valuations as at 31st March 1989 46

Part 5: The current planning position 53

25 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

ABBREVIATIONS

AVSC - Assets Valuation Standards Committee BAe - British Aerospace DRC - Depreciated Replacement Cost FP - Fuller Peiser, Chartered Surveyors GN - Guidance Note MOD - Ministry of Defence NAO - National Audit Office RIGS - Royal Institution of Chartered Surveyors RO - Royal Ordnance plc WGS - Weatherall Green & Smith, Chartered Surveyors

GLOSSARY (see Appendix 2)

Clawback RIGS AVSC Guidance Notes Existing Use Alternative Use Stock Exchange Yellow Book Lee Valley Regional Park Authority Planning Gain

26 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

APPENDICES AND SCHEDULES

Appendix 1: Our letter of instructions Appendix 2: Glossary of terms Appendix 3: Copy of Epping Forest District Council’s decision notice refusing planning permission in respect of Waltham Abbey site. Appendix 4: Copy of London Borough of Enfield’s decision notice refusing planning permission in respect of Waltham Abbey site. Appendix 5: Copy of Epping Forest District Council’s decision notice refusing planning permission in respect of Enfield site. Appendix 6: Copy of London Borough of Enfield’s decision notice refusing planning permission in respect of Enfield site.

Schedule A: Valuation Certificate - Open Market Values Schedule B: Valuation Certificate - Potential Values Schedule C: History of Planning and other Relevant Circumstances, Enfield, Waltham Abbey and Patricroft - 1985 to 1989 Schedule D: Summary of Information Provided by Local Planning Authorities as at 31st March 1989.

Note

Appendices 3 to 6 and Schedule D of the Report have not been reproduced.

27 MINISTRY OF DEFENCE: FURTHER ExAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

INTRODUCTION

1. This report records the results of an examination made jointly by our two firms at the request of the National Audit Office (NAO) into certain aspects of valuations made as at 31st March 1984 and 31st December 1985 of sites occupied by Royal Ordnance plc (RO) by Messrs Weatherall Green and Smith (WGS), Chartered Surveyors.

2. Our instructions are contained in a letter from NAO dated 21st March 1989:- (i) Review the instructions given by the Ministry of Defence (MOD) and RO plc to Messrs Weatherall Green and Smith (WGS) to carry out valuations of RO plc sites as at 31st March 1984 and 31st December 1985, and the bases on which these valuations were carried out. If, in your view, the instructions given to WGS were incorrect or inadequate, you are required to advise the NAO of your opinion of the correct basis of instructions or of the bases of valuation, as the case may be, and whether there would have been consequential material differences in the valuation figures. (ii) Review the extent and adequacy of factual information available to WGS in respect of RO plc sites at Enfield, Waltham Abbey and Patricroft, both as a result of their own surveys and investigations, and as provided to them by outside sources. You are required to take account of the planning circumstances as they were known at the time of the valuation of these three sites as at 31st December 1985, consulting, if necessary, the local planning authorities concerned. (iii) Review the reasonableness of assumptions made by WGS in determining the values of RO plc sites at Enfield, Waltham Abbey and Patricroft as at 31st December 1985;

(iv) Review the Existing Use and Alternative Use valuations made by WGS of RO plc sites at Enfield, Waltham Abbey and Patricroft as at 31st December 1985. You are required to comment in general terms upon the methods employed by, and figures reported by WGS in their Existing Use valuations. You are also required, in the case of Alternative Use valuations, to provide your own opinion of the approximate values of the three sites on an Alternative Use basis, if these differ significantly from WGS’s valuations;

(4 Review the valuation certificate as at 31st December 1985 provided by WGS to the MOD and RO plc; in particular, whether the certificate adequately covered all matters which should have been reported and whether the valuations conformed with the Guidance Notes issued by the Assets Valuation Standards Committee of the Royal Institution of Chartered Surveyors and the Stock Exchange “Yellow Book”;

(vi) Establish and report in general terms upon changes in values and market circumstances between 31st December 1985 and 2nd April 1987 (the date of the sale of RO plc) and the general effect of those changes upon the Existing Use and Alternative Use values of the RO plc sites at Enfield, Waltham Abbey and Patricroft between those dates. (vii) Preparea report on the Alternative Use valuation of RO plc sites at Enfield, Waltham Abbey and Patricrofl as at 31st March 1989. You are required to prepare this report on the basis sat out in the attached Appendix A. (viii) Prepare a report on the current position on planning applications and consents in respect of RO plc sites listed in the attached Appendix B; and on any plans drawn up by the relevant Local Authorities involving any of the RO plc sites listed in Appendix 8.

3. A full copy of that letter, including Appendices A and B, is included in this report as Appendix 1. We were subsequently asked to supplement the instruction at para 2(vi) above by preparing Alternative Use Valuations of the sites at Enfield, Waltham Abbey and Patricroff as at 2nd April 1987 on the basis of para l(a)(i) of Appendix A to our letter of instructions of 21st March 1989. We were asked to report by 17th April 1989, subsequently extended to 19th April 1989.

4. Information and facilities provided to us. In order to comply with your requirements this report has been prepared in 19 working days. Inevitably we have had difficulty, in the time available, in obtaining all the information, advice and assistance we might have wished. We have been particularly constrained in obtaining factual information about the three sites themselves, and the buildings on them, since it did not

28 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

prove possible to obtain permission for us to make inspections of any of the sites until two working days before our report was originally due, nor until that time did we have any direct communication with RO or BAe. Earlier, however, we inspected the environs of the sites, viewed the sites as best we could from neighbouring public roads and studied photographs of the buildings and aerial photographs of the sites. We have also had the benefit of informal discussions with officers of Enfield Borough, Epping Forest District and Salford City Councils and of Lee Valley Regional Park Authority, and we are very grateful for the help they have given us.

5. At your request we have relied upon factual information provided to us by WGS and we gratefully acknowledge the help we have received from that firm, who made available to us many of their records. WGS themselves relied upon a report prepared in January 1986 by Fuller Peiser (FP), Chartered Surveyors, who were (and are) advising RO on planning matters in relation to the Waltham Abbey and Enfield sites.

6. Background. The history of the incorporation of the Royal Ordnance Factories in January 1985, and the subsequent sale of RO to BAe in April 1987, is summarised in two reports presented to the House of Commons by the Comptroller and Auditor General on 22nd April 1985 (Ministry of Defence: Incorporation of the Royal Ordnance Factories - HC 343 1984-85) and 17th November 1987 (Ministry of Defence: Sale of Royal Ordnance plc - HC 162 1987-88).

7. WGS were first instructed to prepare valuations as at 31st March 1984 of the sixteen sites to be vested in RO, for the purposes of an Offer for Sale of RO on the Stock Exchange (as was the intention in 1984). They duly reported on 25th February 1985, but were subsequently instructed to update their valuations as at 31st December 1985.

8. In July 1986 the Secretary of State for Defence announced that it was no longer the intention to offer RO shares for sale on the Stock Exchange. Instead, bids were to be invited for a private sale of RO, preferably as a whole, but excluding the Leeds factory which was to be sold to Vickers. Although the sale to BAe took place in April 1987, WGS were not asked to comment after their December 1985 valuations. MIMSTRY OF DEFENCE: FUR-R EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

CONCLUSIONS

1. We have reviewed the instructions given to WGS and set out our findings in Part 1 of this report. Our conclusions are:- (a) The initial instructions given to WGS were clear, correct and adequate for the specific purpose for which the valuations were requested, i.e. for incorporation in the prospectus in connection with a public offer for the sale of shares in RO. 64 Having regard to the decision to sell the company privately rather than by an offer for sale on the Stock Exchange, the announcement of the closure of the Waltham Abbey site, the declaration that the North Enfield site was surplus to requirements, the submission by RO of planning applications for the Waltham Abbey and North Enfield sites, and the elapse of time since the valuation date, full consideration by all the parties involved should have led to the updating of the valuations and further advice being sought from WGS, shortly before the sale to BAe in April 1987. (Note - throughout this report we refer to the 35 acres at the northern end of the Enfield site as the “North Enfield” site). (c) That in all the circumstances it would have been prudent for MOD to have insisted upon a clawback provision in the contract for the sale of RO to BAe. Alternatively, if it had been practicable to do so, it might have been advantageous to exclude the Enfield and Waltham Abbey sites from the sale to BAe.

2. We have reviewed the valuations made by WGS and set out our findings in Part 2 of this report. Our conclusions are:- (a) WGS had adequate factual information available to them. In relation to planning (with the knowledge and approval of RO) they relied upon the report of Fuller Peiser, who for reasons of confidentiality had neither formal nor informal discussions with officers of the planning authorities. (b) The decision to adopt the DRC basis of valuation at Waltham Abbey must have been a borderline decision, given that active consideration was being given to the closure of that site. However the valuation reported would have been significantly lower if the DRC basis had not been adopted. (cl We believe that the DRC calculations were acceptable. (d) We believe that the Alternative Use valuations of the Enfield and Patricroft sites were substantially accurate. (e) We believe that the Alternative Use valuation of the Waltham Abbey site was low, but that was of no material consequence since the Existing Use value reported by WGS was so much higher. (0 We believe that the two valuation certificates, taken together, were satisfactory, but we would normally have expected a single document. 3. We have in general terms establishedthe changesin values and market circumstancesbetween 31st December 1985 and 2nd April 1987 and we report in Part 3 of this report on the general effect of those changes upon the values of the Enfield, Waltham Abbey and Patricroft sites. Our conclusions are:- (a) In the case of the Enfield and Waltham Abbey sites the planning situation at April 1987 remained uncertain. However, the announcement of the impending closure of the Waltham Abbey site and the declaration that the North Enfield site was permanently surplus to requirements, and the submission by Royal Ordnance of planning applications had caused the local planning authorities to begin serious consideration of the future planning uses of those sites, and it was possible to take a more optimistic view of the prospects of development than was taken by WGS as at December 1985. (b) There was little change in the planning situation affecting the Patricroft site. (c) There had been appreciable increases in land values between the material dates, affecting all three sites although the increases were less marked at Patricroft. (d) As a consequence of these changes we believe Alternative Use valuations es at April 1987 would have been appreciably higher in all three cases than those reported by WGS as at December 1985. We think that the Alternative Use values of the three sites, as at 2nd April 1987, were of the order of:-

30 MINISTRYOFDEFENCEzFURTHEREXAMNATIO,NOFTHESALEOFROYALORDNANCEPLC

f Enfield 4,500,OOO to- 6,500,OOO Waltham Abbey 9,000,000 to 13,000,000 Patricroft About 500,000

(4 There would not have been major changes in the DRC valuations, but that basis of valuation would probably not have been appropriate in April 1987 in the case of Waltham Abbey because of the impending closure of the business on that site, nor in the case of North Enfield because that site had been declared surplus to requirements. Possibly it may not have been appropriate in the case of the remainder of the Enfield site, if it seemed likely that the business on that site might not be continued for the foreseeable future.

4. We have prepared a report on the Alternative Use valuations of the Enfield, Waltham Abbey and Patricroft sites as at 31st March 1989 as Part 4 of this report. Subject to the explanations given in Part 4, our valuations may be summarised as follows:-

f Enfield 1 o,ooo,ooo to 15,000,000 Waltham Abbey 15,000,000 to 22,500,OOO Patricroft About 1,000,000

5. Part 4 of this report also includes our report on the potential values of the three sites, based on the special assumption that planning permissions had been granted as at 31st March 1989 for various forms of development described more fully in Part 4. Subject to the explanations given in Part 4, our valuations may be summarised as follows:- Brief Description of Development Value Prospect of obtaining planning f permission within five years

Enfield 1. As approved planning brief - About 34 acres residential About 7 acres business uses Plus leisure, tourist, shopping uses etc. 16,500,000 Excellent 2. As 1 but in generally denser and more valuable form 18,000,000 Very good

Waltham Abbey 1. As draft planning brief - About 13% acres business/industrial About 22 acres residential 20,000,000 Very good 2. As 1 plus:- Additional 6% acres business/industrial Additional 8 acres residential 32,500,OOO Good 3. As 2 plus:- Additional 20 acres residential 45,000,000 Fair

Patricroft 1. Redevelopment of the whole site for industrial purposes 1,400,000 Excellent

6. We have prepared a report on the current planning position in respect of 15 RO sites, and set out our findings in Part 5 of this report and Schedule D.

31 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

7. Summary. Our main conclusions are:- (a) The instructions given to WGS were clear, correct and adequate for the specific purpose for which the valuations were originally requested, but important changes in circumstances had occurred by the date of the sale of RO to BAe in April 1987, and further advice should have been sought from WGS at that time. (t-4 In general terms, we think that the valuations reported by WGS were at acceptable levels, save only that we think that their Alternative Use valuation of the Waltham Abbey site was low. However, the level of that valuation was of no material consequence since the Existing Use value reported by WGS was so much higher. (c) In all the circumstances, it would have been prudent for MOD to have insisted on a clawback provision in the contract for the sale of RO to BAe. Alternatively, if it had been practicable to do so, it might have been advantageous to exclude the Enfield and Waltham Abbey sites from the sale to BAe. (d) As a consequence of the changes in values and market circumstances between 31st December 1985 and 2nd April 1987 we believe Alternative Use valuations as at April 1987 would have been appreciably higher in all three cases than those reported by WGS as at December 1985. We think that the Alternative Use values of the three sites, as at 2nd April 1987, were of the order of:- f Enfield 4.500.000 to 6.500.000 Waltham Abbey 9,000,000 to 13,000,000 Patricroft About 500,000 (4 We think that the Alternative Use values of the three sites, as at 31st March 1989, were of the order of:- f Enfield 10.000.000 to 15.000.000 Waltham Abbey 15.000.000 to 22.500.000 Patricroft About 1,000,000 MWSTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

Part 1: Our review of the instructions given to Weatherall Green 81 Smith

1.1 Our instructions require us to:- “Review the instructions given by the Ministry of Defence (MOD) and RO plc to Messrs Weatherall Green & Smith (WGS) to carry out valuations of RO plc sites as at 31st March 1984 and 31 December 1985, and the bases on which these valuations were carried out. If, in your view, the instructions given to WGS were incorrect or inadequate, you are required to advise the NAO of your opinion of the correct basis of instructions or of the bases of valuation, as the case may be, and whether there would have been consequential material differences in the valuation figures.”

1.2 After some informal discussions, WGS were formally instructed by the Ministry of Defence (MOD) on 10th July 1984 to prepare valuations of sixteen Royal Ordnance sites, with the buildings on them, which were: I .to be vested in RO plc which it is intended in due course to float on the Stock Exchange by means of an Offer for Sale. Your valuation report will be used in preparation for the Offer for Sale and will be referred to (updated if necessary) in the prospectus itself n

1.3 WGS were asked to prepare their report as at 31st March 1984 in accordance with the Guidance Notes on the Valuation of Assets issued by the Assets Valuation Standards Committee (AVSC) of the Royal Institution of Chartered Surveyors (RICS) on the following bases: “(a) Existing Use Valuation either (i) on an open market value basis, wherever possible; or (ii) where open market value is not appropriate - for example, for buildings of a specialist nature - on a depreciated replacement cost basis; and (b) Alternative Use Valuation - ie representing net realiseable value on a disposal.”

and to complete: I, .a Stock Exchange Yellow Book valuation report as at 31st March 1984 specifying the values attributed to the land, buildings and houses at each of the locations.. .distinguishing between the amounts arrived at by reference to each of the bases referred to above.”

1.4 WGS tell us that they submitted a draft report for consideration by MOD in September 1984 but did not issue their final report, which was in substantially similar terms to the draft, until 25th February 1985, at the request of MOD.

1.5 On 24th March 1986 WGS were formally instructed by RO to update their previous valuations “for the purposes of the Flotation Prospectus”. Their instructions were to proceed as detailed in a letter written by WGS to RO on 2nd January 1986, the relevant paragraphs of which were:- “We understand that your instructions will be to advise as to the existing use values for balance sheet purposes as at 31st December 1985 of 16 freehold properties and leasehold interests in outlying properties used in connection with the factories at Chorley, Summerfield, Westcott and Leeds, as detailed in our previous Valuation Certificate dated 25 February 1985. Our surveys in connection with that previous valuation were carried out during the Summer of 1984 and we would not envisage the need for reinspections except in the following circumstances: 1) Where there has been significant expenditure on adaptations or additions, since our previous survey. 2) Where there is to be any change in the basis of valuation from depreciated replacement cost to open market value. 3) Where you specifically instruct us to reinspect. In this connection we would mention that our Certificate will make it clear where our valuation is based upon the 1984 survey. From our meeting it is clear that reinspections should be made of the factories at Bridgwater and Glascoed and may be necessary for Chorley, Bishopton, Enfield and Featherstone. A complete list can be agreed when the schedule of recent works is to hand.”

33 MJNISTRY OF DEFENCE: FLIRTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC and:- “You will note that our existing use valuations in March 1984 were all assessed by reference to depreciated replacement costs. Depreciated replacement cost valuations are expressed as being subject to the adequate potential profitability of the businesses carried on therein having regard to the total value of the assets employed. It is for the Directors to satisfy themselves as to whether such valuations are appropriate in the light of the performance of a particular business. We would, however, stress that it would not be appropriate to adopt DRC valuations if it seems likely that the business will not be continued at any particular site for the foreseeable future. No doubt you will advise us of any such instances so that we may adopt the appropriate basis of valuation.” and:- “Our report will be produced in a format to suit publication. It will certainly be no more detailed than our previous Certificate and indeed will probably be substantially the same but without any reference to alternative use values, except where this is necessary by virtue of (the paragraph above).”

1.6 It will be noted that these instructions appear to relate only to Existing Use valuations (except in relation to sites at which it seemed likely that the business would not continue). However, WGS have provided us with a copy of a letter dated 12th March 1986 written by Mr C V Balmer of MOD to Dr M F Green of RO plc which includes the following paragraph:- “In general, we are content with the proposals set out in the Weatherall Green & Smith letter of 2 January but there are some additional points which we would like to see put to WGS and which were touched on at our meeting last Thursday: a. We are after a straightforward report which gives a current valuation. It would be helpful if any comments or explanations of changes since the earlier valuation were relegated to Annexes; b. WGS should look to comment wherever they can on any likely prospects for disposals or enhancements of value and any encouraging view they can give on the prospects of planning permission would be especially welcome. We are looking to WGS to update their alternative use values particularly in relation to sites where value may have been affected by changes in the planning environment.

C. We will wish to use information selected from their report in the prospectus. In this context, it would be helpful if their report could be as free from qualification as possible. Any qualifications felt absolutely necessary should be quantified. d. Obviously they must agree with the revised timetable.”

1.7 The points raised in that letter were not referred to in the formal letter of instructions to WGS of 24th March 1986, but it is the recollection of WGS that they agreed orally to comply with the MOD request.The change in instructions (and specifically para 2(b) of the letter quoted above, which contains the request to update the earlier Alternative Use valuations) does not appear to have been documented.

1.8 Before preparing their reports (dated 17th July 1986) on their 31st December 1985 valuations, WGS had at their own request been given (in March 1986) a copy of a report dated January 1986 by RO’s planning consultants, Fuller Peiser (FP), Chartered Surveyors. WGS were therefore aware that:- “The (RO) management has identified a possible rationalisation of the current operations which could result in the vacating of the North Enfield and Waltham Abbey Sites.” (FP report, p.3.)

1.9 WGS tell us that although they knew in March 1986 that RO were considering the vacation of the Waltham Abbey and North Enfield sites, their understanding, at the time of their report of 17th July 1986, was that no final decision had been taken. They had discussed the basis of their valuations with RO and were satisfied that a DRC approach was justified as at the date of valuation having regard to the then uncertainty about the future of the two sites.

1.10 WGS subsequently reported both Existing Use and Alternative Use valuations to RO on 17th July 1986. In their report on their Alternative Use valuations they recorded that RO were exploring, with the assistance of FP: -

34 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

“the possibility of obtaining permission for development of these sites for a mixture of high-tech, retail, residential, leisure and industrial development together with public open space and amenity landscaping.”

1.11. Later in that report, after mentioning some of the difficulties standing in the way of a major development of the North Enfield and Waltham Abbey sites, WGS concluded:- “However, one must recognise the undoubted potential for obtaining consent for an extremely valuable redevelopment which the Company may well achieve some years hence at which time they would be likely to obtain a value markedly higher than our present figure of the alternative use value.”

WGS did not quantify that potential value in their report, possibly because they were not specifically asked to do so, and possibly because they were aware that FP had already referred to specific figures in their report.

1.12 It appears to us that the instructions given to WGS, in relation to the valuations as at 31st March 1984 and the later valuations as at 31st December 1985, were clear, correct and adequate for the specific purpose for which the valuations were requested, ie for incorporation in the prospectus in connection with a public offer for the sale of shares in RO plc.

1.13 The valuations were, however, not used for that purpose. In July 1986 the Secretary of State for Defence announced his intention to invite bids for a private sale of RO, preferably as a whole, but that as an exception the Government and the RO Board had accepted an offer by Vickers plc to purchase from RO their Leeds tank factory. The Existing Use valuation as at 31st December 1985 (but not the Alternative Use valuation) was appended to the “Information Memorandum” prepared by N M Rothschild & Son in October 1986 in connection with the invitation of offers for a private sale of RO, and reference to the amount of the Existing Use valuation was made in section 19 of that Memorandum headed “Net Assets”. No mention was made in the Memorandum of the Alternative Use valuation, although it was said that “the Board is actively exploring the potential for disposal of surplus land”.

1.14 We can understand why RO and their advisors did not think it necessary to disclose the contents, or indeed the existence, of the WGS Alternative Use valuation report to prospective purchasers of RO, since the Alternative Use valuations were, in the case of every site, and in aggregate, lower than the Existing Use valuations. By contrast it might have been advisable to refer to the potential value, but we think the fact that the Waltham Abbey and Enfield sites had considerable potential value, if planning permission for significant development could be obtained, would have been apparent to prospective purchasers. However, they might not have appreciated the formidable difficulties in the way of making the sites available for development, which were mentioned in the FP and WGS (Alternative Use) reports.

1.15 In September 1986 N M Rothschild & Son sent WGS an extract from a draft of the Memorandum and asked whether the reference to the WGS valuation report was acceptable. WGS were also asked whether they had any objection to the Memorandum including a reference only to “the section of your report relating to depreciated replacement cost”. WGS suggested certain minor amendments to wording but did not ask for any reference to be made to their Alternative Use valuations or to their statement of potential value. We think that they should have suggested such a reference.

1.16 In any event, we believe that full consideration, at that time, by all the parties involved, should have led to the realisation that there had been changes in circumstances which merited further advice being sought from WGS.

1.17 At no time after the Secretary of State’s announcement of July 1986 were WGS asked whether they wished to suggest any alterations to their valuation or report having regard either to the different purpose for which the valuations were then to be used, or to the proposed vacation and development of the Waltham Abbey and North Enfield sites. Nor were they asked to update their valuations a second time, although the sale to BAe was not formally completed until 22nd April 1987, nearly sixteen months after the date of the later WGS valuations as at 31st December 1985, and in their report WGS had stressed that property values might change substantially even over a relatively short period.

35 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

1.18 Prior to the sale to BAe in April 1987, RO had already announced its decision to close the Waltham Abbey site and had submitted planning applications for that and the North Enfield site, which had been unused for many years and had been declared permanently surplus to requirements. RO subsequently e announced its decision to close the Enfield factory. (See HC 162 1987-88 para 12).

1.19 In those circumstances we think MOD and RO should have asked WGS:- (a) to update both their Existing Use and Alternative Use valuations shortly before April 1987 (the date of sale to BAe), (b) to consider whether the proposed alteration in the basis of sale of RO affected the advice previously given by WGS in relation to the proposed Stock Exchange flotation,

(4 to consider whether the announced closure of the Waltham Abbey site and the proposed development of that site and the North Enfield site affected the situation, and (d) in the event that it was thought by RO that other sites (such as the Enfield site) might be considered for closure in the foreseeable future, to consider whether that affected their advice (see para 2.16 below), and (e) to consider and advise whether steps should be taken to protect the vendor in the event that after the sale the purchaser of RO succeeded in obtaining planning permission for redevelopment, thus enhancing the values of the sites.

1.20 In relation to fe) above, we take the view that in the circumstances existing in April 1987 it would have been prudent for MOD to have insisted upon a clawback” provision in the contract for the sale of RO plc to BAe. In reaching that conclusion we have had regard to:- (a) the very considerable difference between the potential value of the Waltham Abbey and Enfield sites (if planning permissions could be secured for significant development, and access and other difficulties could be overcome) and WGS’s Existing Use and Alternative Use valuations (the latter having to take account of the very considerable uncertainties about development at the time of valuation), (b) the announcement that RO intended to close the Waltham Abbey site, and the declaration that the North Enfield site was permanently surplus to requirements, (c) ;hnadfact that RO had submitted planning applications for the Waltham Abbey and North Enfield sites,

(d) the possibility (which we have not been able to clarify) that the closure of the Enfield factory may have been under consideration in April 1987, even though the announcement of its closure was not made until later.

1.21 It is of course possible that the insertion of a clawback provision into the ROlBAecontract might have adversely affected the price paid by BAe. However, we think that such a provision ought not to have had a major impact on BAe’s offer. As an alternative, it might have been practicable to exclude the Enfield and Waltham Abbey sites from the sale to BAe.

1.22 Conclusions. Our conclusions are:- (a) The initial instructions given to WGS were clear, correct and adequate for the specific purpose for which the valuations were requested, i.e. for incorporation in the prospectus in connection with a public offer for the sale of shares in RO. (b) Having regard to the decision to sell the company privately rather than by an offer for sale on the Stock Exchange, the announcement of the closure of the Waltham Abbey site, the declaration that the North Enfield site was surplus to requirements, the submission by RO of planning applications for the Waltham Abbey and North Enfield sites, and the elapse of time since the valuation date, full consideration by all the parties involved should have led to the updating of the valuations and further advice being sought from WGS, shortly before the sale to BAe in April 1987.

l See Glossary

36 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

(4 That in all the circumstances it would have been prudent for MOD to have insisted upon a clawback provision in the contract for the sale of RO to BAe. Alternatively, if it had been practicable to do so, it might have been advantageous to exclude the Enfield and Waltham Abbey sites from the sale to BAe.

~..

.bI : ~.. :. MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

Part 2 Our review of the valuations made by Weatherall Green & Smith

2.1 Our instructions require us to:- “(a) Review the extent and adequacy of factual information available to WGS in respect of RO plc sites at Enfield, Waltham Abbey and Patricroft, both as a result of their own surveys and investigations, and as provided to them by outside sources. You are required to take account of the planning circumstances as they were known at the time of the valuation of these three sites as at 31 December 1985, consulting, if necessary, the local planning authorities concerned.

(b) Review the reasonableness of assumptions made by WGS in determining the values of RO plc sites at Enfield, Waltham Abbey and Patricrofl as at 31st December 1985.

(cl Review the existing use and alternative use valuations made by WGS of RO plc sites at Enfield, Waltham Abbey and Patricroft as at 31 December 1985. You are required to comment in general terms upon the methods employed by, and the figures reported by WGS in their existing use valuations. You are also required, in the case of alternative use valuations, to provide your own opinion of the approximate values of the three sites on an alternative use basis, if these differ significantly from WGS’ valuations. (d) Review the valuation certificate as at 31 December 1985 provided by WGS to the MOD and RO plc; in particular, whether the certificate adequately covered all matters which should have been reported and whether the valuations conformed with the Guidance Notes issued by the Assets Valuation Standards Committee of the Royal Institution of Chartered Surveyors and the Stock Exchange “Yellow Book”.”

2.2 Information available to Weatherall Green and Smith. It must be borne in mind that the valuations made by WGS as at 31st December 1985 were in effect a review and updating of their earlier valuations as at 31st March 1984. Most of their surveys, inspections, and research were carried out at the time of the 1984 valuations and, in accordance with their instructions, reinspections were only made in the case of a minority of sites, chiefly where alterations had taken place. Many of the costs used in the 1984 valuations were increased for use in the 1985 valuations by use of appropriate indices. We understand that WGS advised RO of the procedures they proposed and that RO were content. indeed, we think those procedures were implicit in the instructions given, and were in conformity with the RIGS AVSC Guidance Notes* on the review of valuations.

2.3 Physical Circumstances. We think WGS took all reasonable steps available to them to define the physical nature of the three properties with which we are concerned. They inspected all three at the time of their March 1984 valuations and reinspected the Enfield and Waltham Abbey sites for the purposes of their December 1985 valuations. They were provided with site and building drawings by RO (most of which they subsequently returned) and checked both site boundaries and buildings against the plans. Their report records that internal inspection of some buildings was not permitted, for security reasons. We accept their conclusion (as stated in their report) that this constraint was not “material in the context of the overall valuation.” As a consequence some buildings were measured on site,and others were measured from plans. Measurements were taken on the basis of gross external areas which was, in our view, and in view of the security restrictions, an entirely reasonable and acceptable basis of measurement. WGS were permitted to take external photographs of buildings and they made a note of the principal features of the main buildings.

2.4 Tenure. For their 1984 valuations, WGS were provided by Coward Chance, solicitors to RO, with detailadmaries (two of which we have seen) of the tenure of the three properties, which was supplemented by information supplied by staff of RO. That information was not updated by Coward Chance for the 1985 valuations but we understand that WGS were given further information by staff of RO.

2.5 We understand from WGS that they were not able to establish the identity of the owners of all the land not in RO’s ownership which would have been required to obtain access to the Enfield site from the North-South road. They were however aware that more than one ownership was involved. l See Glossary

38 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

2.6 Planning - Enfield and Waltham Abbey. WGS had informal meetings with officers of the planning departments of Enfield Borough and Epping Forest District Councils and with officers of the Lee Valley Regional Park Authority in August 1984 in connection with their March 1984 valuations. We are satisfied that at that time they obtained all the information they needed for their purposes and that they made appropriate enquiries.

2.7 For the purposes of their December 1985 valuations WGS made no further planning enquiries. They were aware that RO had commissioned Fuller Peiser (FP), Chartered Surveyors, to make a report on planning and associated matters bearing upon the prospects of development of the North Enfield and Waltham Abbey sites. WGS took the view (after discussions, we understand, with RO staff) that they should not duplicate FP’s work and they therefore had regard to FP’s report of January 1986.

2.8 It is apparent from their report that FP were in possession of the relevant approved and draft Structure, Borough and Local Plans and we understand that they inspected the statutory register of planning decisions. They correctly record the formal planning circumstances at the time. However, we understand from officers of the two local planning authorities that FP did not meet them in order to prepare their report and that neither formal nor informal discussions had taken place at that stage. Indeed, FP record, at para 9.0 of their report, that:- ,, .the current planning framework within which any application will be considered has been investigated. We have not however discussed the Site with any of the various bodies which would determine the eventual permissions.” and at para 7.0 they recommend the following “short term action”:- “2. General consultations to determine initial attitude of planning authorities to overall site development. Specific representations in connection with Epping Forest’s draft Local Plan and County’s Structure Plan review.” “4. Consultations with Lee Valley Regional Park Authority.”

2.9 We can well believe that informal discussions between FP and the local authorities were thought unwise in late 1985/early 1986 at a time when the possible closure of the Waltham Abbey site was still only in contemplation and was obviously a very sensitive and highly confidential matter. Nevertheless, from our own discussions with officers of the two local planning authorities, we think that had FP had such discussions they might have found an encouraging attitude on the part of the two authorities to the partial development of the two sites, and they might have found support, at officer level at least, for their own view that the merits of the Green Belt notation covering the two sites had never been tested.

2.10 We also think that WGS took, as at December 1985, a more pessimistic view of the prospects of development than we consider was justified by the wording of the FP report and in particular para 9.0 of that report. In their own report WGS say, in relation to Waltham Abbey and North Enfield:- “We have not made our own enquiries of the Planning Authority because to do so might prejudice the work being carried out on the Company’s behalf. However, from our general knowledge we would expect it to be difficult to obtain a satisfactory consent for a major development primarily because the land is within the Green Belt and the Lee Valley.”

2.11 In the schedule to their report they say of the Enfield site:- “The land is within the Metropolitan Green Belt and redevelopment would be resisted. Our valuation assumes primarily agricultural or recreational use but with hope value of obtaining limited industrial and warehouse consents over a period.” and they made a similar comment about the Waltham Abbey site.

2.12 Planning - Patricroft. WGS discussed the planning circumstances of the site with an officer of the local planning authority and we are satisfied that they made appropriate enquiries and obtained all the information they needed for their purposes. In the schedule to their report they remark:- “Valuation assumes sale for redevelopment for industrial or warehouse use.”

39 MmIsTFx OF DEFENCE: FuFmER ExAMlN.4TION OF THE SALE OF ROYAL ORDNANCE PLC

2.13 In our opinion WGS were correct in assuming that the local planning authority would have approved redevelopment of the site to provide employment generating uses such as industry and warehousing and we also believe they were correct in assuming (as they did) that an element of residential development would also have been permitted if it had been thought viable. Retail development was unlikely to have been permitted as the local authority was concerned about the impact of new retail developments in the area.

2.14 Assumptions made by Weatherall Green and Smith. Apart from the assumptions which they made about the prospects of development, reviewed above, the other significant assumptions made by WGS related to: - (a) whether any of the properties should be categorised as being surplus to the trading requirements of RO, in which case the recommended basis of Valuation was Open Market Value (see para 4.21) and (b) in the case of properties not surplus to trading requirements, whether those properties should be valued on the basis of Open Market Value for Existing Use”, or on the depreciated replacement cost (DRC)* basis.

2.15 On the first point, the advice in the RIGS AVSC Guidance Notes (Background Paper BP2) is that:- “Where land and buildings are declared by the Directors to be surplus to trading requirements, they will be assessed to open market value which takes into account any possible alternative use.”

2.16 WGS had made clear to RO, in accepting instructions for the 1985 valuation, that:- ,, .it would not be appropriate to adopt DRC valuations if it seems likely that the business will not be continued at any particular site for the foreseeable future. No doubt you will advise us of any such instances so that we may adopt the appropriate basis of valuation.”

2.17 Our understanding is that this point was discussed by WGS with RO staff but that it was decided that since the closure of the Waltham Abbey site was at the date of valuation only under consideration, and that no firm decisions had been taken, it was inappropriate to use the Open Market Value basis. We think that must have been a borderline decision, given the investigations which RO had commissioned from FP and the decision to announce the intention to close so soon afterwards.

2.18 It must be remembered, however, that the valuation reported by WGS would have been significantly lower if the Open Market Value basis had been adopted.

2.19 On the second point (whether the properties should have been valued on the basis of Open Market Value for Existing Use or on the DRC basis) WGS say in their report I .the properties are occupied by the Royal Ordnance or Agency Companies for the purposes of the business and must be recognised as coming within the category of property which is rarely, if ever, sold for a continuation of the existing use except by way of the sale of the business as a whole due to the specialised design, use and arrangement of the buildings and location of the sites. We have, therefore, prepared our existing use valuations by reference to depreciated replacement cost.”

2.20 The advice in RIGS AVSC Guidance Note GN’l about the use of the DRC basis of valuation is (at para 2.2.1):- “There are some kinds of property for which evidence of comparative transactions does not exist and in these cases their value for existing use can only be arrived at on the basis of ‘depreciated replacement cost’.”

Examples of the type of property to which this basis will apply are given in Background Paper BP3:- I .properties located in particular geographical areas for special reasons or of such a size, design or arrangement as would make it impossible for the valuer to arrive at a conclusion as to value from the evidence of open market transactions.” * See Glossary

40 MINISTRY OF DEFENCE: PUFXHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

If it was correctly assumed that the business would continue (see para 2.16 above), we take the view that in the light of this advice WGS were able to justify the use of the DRC basis.

2.21 If WGS had been asked to make fresh valuations shortly before April 1987 it is apparent that the DRC basis would not have been appropriate at that time for the Waltham Abbey and North Enfield sites and possibly not for the remainder of the Enfield site (the closure of which was announced shortly after the sale to BAe) and the appropriate basis of valuation would have been Open Market Value. If asked for fresh valuations it would have been correct for WGS to enquire of RO whether the businesses on each of the sites were expected to continue for the foreseeable future.

2.22 As at December 1985 the closure of the Patricroft site had not (so far as we are aware) been discussed publicly and we think that property was also justifiably valued on a DRC basis for existing use.

2.23 The Valuations made by Weatherall Green and Smith. We have reviewed WGS’s calculations and we have discussed their figures with them at some length. So far as their DRC valuations are concerned we understand their justification for their calculations and we are content that in general terms their reported valuations are acceptable.

2.24 In relation to their Alternative Use* valuations, we need to comment in more detail in relation to the individual sites.

2.25 Enfield. We think that WGS’s view of the prospects of development of the Enfield site was marginally pessimistic.owever, we think that they took a realistic view of the difficulties in the way of development and in particular of the heavy costs likely to be incurred in gaining access to the site, including the purchase of “ransom land” owned by third parties. We are thus content that WGS’s Alternative Use valuation of f2,000,000 as at 31st December 1985 was substantially correct. Their DRC valuation was f4,125,000.

2.26 Waltham Abbey. It follows from our belief (see para 2.10 above) that WGS took, as at December 1985, a more pessimistic view of the prospects of development than might have been justified, that we think that their Alternative Use valuation of f3,000,000 was also pessimistic. However, it must be remembered that their Existing Use valuation (on a DRC basis) was f8.500.000 and we do not think that even an optimistic Alternative Use valuation would have exceeded that figure. In those circumstances we think that WGS’s pessimism (although understandable) was, in the context of the purpose of the valuation (as instructed) of no material consequence to the outcome of the valuation as a whole, since it was the Existing Use valuation of f8,500,000 which was disclosed to the purchasers and they had no knowledge of WGS’s Alternative Use valuation.

2.27 In the light of our enquiries we think that an Alternative Use valuation of the order of f6.000.000 might have been justified as at 31st December 1985.

2.28 Patricroft. We are content that WGS’s Alternative Use valuation of f250,OOO as at 31st December 1985 was substantially correct. Their DRC valuation was f1,000,000.

2.29 Alternative Use valuations generally. We feel diffidence in making any criticism of WGS’s figures, firstly because we do so only from a position of hindsight, secondly because our own investigations have ! revealed very plainly the difficulties in making highly subjective judgements about the chances of overcoming the real obstacles in the way of development, and thirdly because we regard the basis of valuation as, in all the circumstances, somewhat theoretical. It would be highly unusual for sites such as Enfield and Waltham Abbey to be sold on the basis of a “once for all” payment, at a time when planning investigations had barely begun, and without any real knowledge on the part of either vendor or purchaser of the amount of development which might be permitted on the sites, or of the time it might take to obtain permissions, or of how some of the obstacles to development might be overcome (Patricroft, because of its smaller size and much lower level of value, might not fall into this category).

* See Glossary

41 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

2.30 In practice it would be far more likely that such sites would be sold to a developer on a joint venture basis, or on a conditional contract basis, or that the vendor would have granted options, thus allowing the eventual purchase price to be based on the scale of development achieved. In the precise circumstances of the sale to BAe we believe that a clawback provision would have been appropriate.

2.31 The Valuation Certificate. In our view the two valuation certificates dated 17th July 1986, taken together, conform substantially with the Guidance Notes on the Valuation of Assets issued by the Assets Valuation Standards Committee of the Royal Institution of Chartered Surveyors and with the Stock Exchange “Yellow Book” - “Admission of Securities to Listing”.*

2.32 The point should be made, however, that WGS’s Existing Use valuation certificate, looked at as a separate document, makes no mention of the Alternative Use valuations, nor that in some cases these valuations are significantly below the amounts of the Existing Use valuations.

2.33 We believe that the two certificates, taken together, adequately cover all the matters which should have been reported and we particularly draw attention to the following:- (a) The Existing Use valuation report explains the reason for the adoption of the DRC basis of valuation, and expresses those valuations as being subject to the adequate potential profitability of the businesses carried on, (W The Existing Use valuation report records that the valuations result from a review of the March 1984 valuations, and that site reinspections had been carried out only in the case of seven sites (including Enfield and Waltham Abbey but not Patricroft) at which there had been significant changes. (4 The Alternative Use valuation report sets out plainly the difficulties and risks affecting the development of the Waltham Abbey and North Enfield sites but concludes:- “However, one must recognise the undoubted potential for obtaining consent for an extremely valuable redevelopment which the Company may well achieve some years hence at which time they would be likely to obtain a value markedly higher than our present figure of the Alternative Use value.”

2.34 Conclusions. Our conclusions are:- (a) WGS had adequate factual information available to them. In relation to planning, (with the knowledge and approval of RO) they relied upon the report of Fuller Peiser, who for reasons of confidentiality had had neither formal nor informal discussions with officers of the planning authorities. (b) The decision to adopt the DRC basis of valuation at Waltham Abbey must have been a borderline decision, given that active consideration was being given to the closure of that site. However the valuation reported would have been significantly lower if the DRC basis had not been adopted. (c) We believe that the DRC calculations were acceptable. (4 We believe that the Alternative Use valuations of the Enfield and Patricroft sites were substantially accurate. (4 We believe that the Alternative Use valuation of the Waltham Abbey site was low, but that was of no material consequence since the Existing Use value reported by WGS was so much higher. (R We believe that the two valuation certificates, taken together, were satisfactory, but we would normally have expected a single document.

*See Glossary

42 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

Part 3: Changes in circumstances between 31st December 1985 and 2nd April 1987

3.1 We are instructed to:-

“Establish and report in general terms upon changes in values and market circumstances between 31st December 1985 and 2nd April 1987 (the date of the sale of RO plc) and the general effect of those changes upon the existing use and alternative use values of the RO plc sites at Enfield, Waltham Abbey and Patricrofl between those dates.” and to prepare Alternative Use valuations of the sites at Enfield, Waltham Abbey and Patricroft as at 2nd April 1987 on the basis of para l(a)(i) of Appendix A to our letter of instructions of 21st March 1989.

3.2 Enfield and Waltham Abbey - Planning Changes. The planning history of both the Enfield and Waltham Abbey sites, together with other relevant matters, are shown on Schedule C attached. Between the two material dates some consideration was being given to their future use, but in April 1987 there remained considerable uncertainty over the planning situation with a number of significant decisions unresolved.

3.3 On 10th March 1986 a statement was issued by RO that Waltham Abbey was being considered for closure, and shortly thereafter the local planning authorities attended a presentation given by RO and FP on possible future uses of the Waltham Abbey and North Enfield sites. The understanding of the local planning authorities at this time was that RO were considering the potential values of the sites for sale for redevelopment before formally deciding whether to vacate the sites. The local planning authorities indicated their objection to the scale of development then proposed by RO.

3.4 The Metropolitan Green Belt remained as the land allocation on all the statutory plans for both sites throughout this period. However, between November 1986 and February 1987 a Public Inquiry was held into the Roydon, Nazeing and Waltham Abbey Local Plan which had been placed on deposit in March 1986. The plan which covered both sites showed them situated within the Green Belt. RO had objected to this notation and their evidence was heard in December 1986. (The Inspector’s Report was not issued until 5th August 1987.)

3.5 A small part of the Waltham Abbey site (comprising the Osier Marshes and part of the access road from the north of the site leading to Highbridge Street) lies within the boundary of the Lee Valley Regional Park Authority* and the Waltham Abbey and Enfield sites are bounded to the north, south and west by the Lee Valley Park.

3.6 In 1986 the Authority adopted the Lee Valley Park Plan which defined the Osier Marshes as an area of Nature Conservation Importance within an informal recreation area. The Plan proposed a park path along the Cattlegate Flood Relief Channel between the two sites, the precise lo&ion of which would be determined by detailed studies. It is however shown diagramatically in the Plan to the east of the Enfield site, crossing the Channel and continuing southwards on the west side of the Waltham Abbey site.

3.7 Planning applications were submitted by RO in respect of both North Enfield and Waltham Abbey sites on 30th January 1987. The applications were accompanied by a “Supporting Statement” which noted that RO:- “has concluded that all its facilities for explosive, propellant and rocket motor research and development should be concentrated at Westcott in Buckinghamshire. It is therefore proposed that the activities currently undertaken at Waltham Abbey will be transferred elsewhere and the site closed during 1989.”

The statement added in relation to the North Enfield site that “this area has not been significantly used for a number of years and the Company has decided that it can now be declared permanently surplus to its requirements.” * See Glossary

43 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

3.8 The application for the North Enfield site was for redevelopment for 90 residential units, 107,500 sq feet of light industrial space and recreational uses, all served by a new access road. The Waltham Abbey application was for a business park of 538,000 sq feet and 975 residential units, recreational uses and a new access road linking Highbridge Street on the north with Road on the east.

3.9 The local planning authorities had not, by 2nd April 1987, given any indication to the applicants of their likely decision. However, Lee Valley Regional Park Authority, which was consulted by the planning authorities, had responded. On 26th March 1987 the Authority advised that it did not oppose the North Enfield application. That decision may have been influenced by the fact that the proposed new access road was to be routed through (land in the Authority’s ownership) which would have had beneficial financial implications for the Authority. The Authority objected to the scale of development proposed at Waltham Abbey but stated that it would not object to a reduced scale of industrial development.

3.10 In conclusion, as at 2nd April 1987, the planning situation in relation to the Waltham Abbey and Enfield sites, remained uncertain. Nevertheless, between December 1985 and April 1987 the local planning authorities had been made aware that the Waltham Abbey site was to close, probably in 1989, and that North Enfield was surplus to requirements and planning applications in respect of these sites had been submitted, which put them on notice that they had seriously to consider future redevelopment of the sites. They were however awaiting the Local Plan Inspector’s report, and anticipated guidance from the Inspector on the continuation of the Green Belt notation for the sites.

3.11 Enfield and Waltham Abbey - Changes in Values. In general terms residential, commercial and industrial property prices and land values increased appreciably between December 1985 and April 1987, as a result of general improvements in the economy and continued improvements to the road network in the vicinity of Enfield and Waltham Abbey. By April 1987 the M25 motorway had been completed, and in particular the important westward link to the Ml and M4 corridor had recently been opened. Considerable further progress had also been made towards the construction of the north-south link road, which was in April 1987 partially open.

3.12 This improved road network resulted in the area becoming a more attractive location for industrial and distribution users, and between the material dates a number of significant developments were constructed and let or sold.

3.13 Enfield and Waltham Abbey - Effect of Changes in Planning and Values on 1985 Valuations. It is our belief that had RO instructed WGS to update their valuations shortly before April 1987, and had they then made enquiries of Officers of the local planning authorities, they would have taken a more optimistic view of the prospects of obtaining planning permission for the development of significant parts of the two sites than they actually took at the time of their 1985 valuations. Once it became public knowledge that Waltham Abbey was to close and that North Enfield was surplus to requirements, we think that further planning enquiries would have shown a firmer approach on the part of the local planning authorities to the partial development of the two sites, and a desire to create employment opportunities to replace those lost by the closure of the RO business.

3.14 The combination of the appreciable increases in values since 1985 and of a more optimistic view of the prospects of obtaining planning permission for significant development, in April 1987, would have resulted in Alternative Use valuations made in April 1987 being significantly greater than those reported by WGS as at December 1985.

3.15 Patricrofl - Planning Changes. We do not think that the planning situation of the Patricroft site changed appreciably between December 1985 and April 1987 (see Schedule C). There were no changes to either draft or approved Structure or Local Plans which affected the premises, and no planning applications or decisions made of any relevance to redevelopment.

3.16 In 1986 Salford City Council had commissioned a Retailing Study from Messrs Hillier Parker May and Rowden. This was completed in June 1987. It has little significance except to reinforce the view taken by WGS that retailing would not have been an acceptable use on the site to the local planning authority in December 1985.

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3.17 Patricroft - Changes in Values. We take the view that there was an appreciable increase in industrial land values between December 1985 and April 1987, although less than that experienced in the EnfieldNValtham Ab’dey area.

3.18 Patricroft - Effect of Changes in Planning and Values on the 1985 Valuations. We think that as a result of the limited changes in planning circumstances, and the increase in land values since 1985, an Alternative Use valuation of the Patricrofl site in April 1987 would have been appreciably higher than the valuation reported by WGS as at December 1985.

3.19 We hereby certify that in our opinion the values of the freehold interests in the three sites as at 2nd April 1987, for sale in the open market with vacant possession of those parts of the sites then in the occupation of RO, and with the benefit of the tenancy referred to in para 4.12, are approximately as follows: - f Enfield 4,500,OOOto 6.500.000 Waltham Abbey 9,000,000t0 13,000,000 Patricroft About 500,000

3.20 Our valuations are made on the basis of such of the considerations and assumptions set out in paras 4.21 to 4.39 as were then applicable. It will be appreciated that we had not inspected the sites at April 1987.

3.21 DRC Valuations. We do not think that there would have been major changes in any of the DRC valuations between December 1985 and April 1987, although building costs had risen and the land element would also have appreciated in value.

3.22 However the important point is that the DRC basis of valuation would probably not have been appropriate in April 1987 in the case of Waltham Abbey because of the impending closure of the business on that site, nor in the case of North Enfield because that site had been declared surplus to requirements. Possibly it may not have been appropriate in the case of the remainder of the Enfield site if it seemed likely that the business on that site might not be continued for the foreseeable future.

3.23 Conclusions. Our conclusions are:- (a) In the case of the Enfield and Waltham Abbey sites the planning situation at April 1987 remained uncertain. However, the announcement of the impending closure of the Waltham Abbey site and the declaration that the North Enfield site was permanently surplus to requirements, and the submission by Royal Ordnance of planning applications had caused the local planning authorities to begin serious consideration of the future planning uses of those sites, and it was possible to take a more optimistic view of the prospects of development than was taken by WGS as at December 1985. (b) There was little change in the planning situation affecting the Patricroft site. (4 There had been appreciable increases in land values between the material dates, affecting all three sites although the increases were less marked at Patricroft. (4 As a consequence of these changes we believe the Alternative Use valuations as at April 1987 would have been appreciably higher in all three cases than those reported by WGS as at December 1985. We think that the Alternative Use values of the three sites, as at 2nd April 1987, were of the order of: - f Enfield 4,500,OOOto 6,500,OOO Waltham Abbey 9,000,000 to 13,000,000 Patricroft About 500,000 (e) There would not have been major changes in the DRC valuations, but that basis of valuation would probably not have been appropriate in April 1987 in the case of Waltham Abbey because of the impending closure of the business on that site, nor in the case of North Enfield because that site had been declared surplus to requirements. Possibly it may not have been appropriate in the case of the remainder of the Enfield site, if it seemed likely that the business on that site might not be continued for the foreseeable future.

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Part 4. Alternative Use valuations as at 31st March 1989

4.1 We are asked to provide Alternative Use valuations of the RO sites at Waltham Abbey, Enfield and Patricroft as at 31st March 1989 in accordance with para 2(vii) and Appendix A of your letter of 21st March 1989 (See Appendix 1 to this report). We understand the purpose of the valuations is to assist you in preparing the forthcoming report of the Comptroller and Auditor General to Parliament, and it is important that you should consult with us if you wish to use our valuations for any other purpose.

4.2 Information and facilities provided to us. To conform with your programme we have had only 19 working days to prepare this valuation. Inevitably we have had difficulty, in the time available, in obtaining all the information, advice and assistance we might have wished. We have been particularly constrained in obtaining factual information about the sites themselves, and the buildings on them, since it did not prove possible to obtain permission for us to make inspections of any of the sites until two working days before our report was originally due, nor until that time did we have any direct communication with RO or BAe. Earlier, however, we inspected the environs of the sites, viewed the sites as best we could from neighbouring public roads and studied photographs of the buildings and aerial photographs of the sites. We have also had the benefit of informal discussions with officers of the local planning authorities and of Lee Valley Regional Park Authority.

4.3 At your request we have relied upon factual information provided to us by WGS and we gratefully acknowledge the help we have received from that firm, who made available to us many of their records. WGS themselves relied upon a report prepared in January 1986 by Fuller Peiser (FP), Chartered Surveyors, who were (and are) advising RO on planning matters in relation to the Waltham Abbey and Enfield sites. We wrote to FP with certain questions about their January 1986 report. We have as yet received no reply as FP have indicated that they are unable to answer our questions until they receive their clients’ instructions.

4.4 The Enfield Site - Situation. The Enfield and Waltham Abbey sites are virtually contiguous, separated only by the Cattlegate Flood Relief Channel (a subsidiary water course of the River Lee) and lie just south of the M25 motorway, between junctions 25 and 26. Waltham Abbey Town Centre lies about half a mile to the north of the Waltham Abbey site, and Enfield Town is about three miles to the south-west of the Enfield site.

4.5 The Enfield site is at present reached from Ordnance Road, a principally residential road leading to Hertford Road (AIOIO) about one mile to the west. Ordnance Road can also be reached from the new “North-South road” (Mollison Avenue), an industrial relief road, which is currently open from Ordnance Road southwards to Road (Al IO) and which will shortly be completed in a northwards direction from Ordnance Road, joining Hertford Road at , a short distance south of the M25, and about one mile by road from junction 25. The new road will not only provide easy access to the M25 but will also avoid the level crossing on Ordnance Road at Station (Liverpool Street to Hertford BR) about half a mile west of the site.

4.6 The Enfield site is an island, bounded on the west by the River Lee and on the east by the Cattlegate Flood Relief Channel. Close to the entrance to the site, Ordnance Road turns sharply to cross the lock on the Canal, at which point it is only about 7 metres wide and has no footpaths. The actual entrance to the site is across a second bridge over the River Lee itself. We understand this bridge to be owned by RO and to have a weight restriction which prevents its use by laden heavy lorries.To the east of the site there is a subsidiary entrance across a bridge over the Cattlegate Flood Relief Channel leading to a private road (within RO ownership) which leads to Sewardstone Road (A112) about half a mile to the east.

4.7 Description. The Enfield site has an area of about 100 acres and is low-lying and flat. It is said to have a high water table. Most of the buildings lie on the western part of the site, and the eastern part of the site is traversed by twin high voltage power lines of the National Grid. There are a large number of buildings on the site, previously totalling about 576,000 sq feet gross external area although one substantial building has recently been demolished. In addition there are derelict buildings on the northern part of the site of which about 35 acres is now fenced off and left unused, partly as a blast zone in connection with the Waltham Abbey site. The buildings still occupied vary in size, quality and condition. Most are of considerable age, whilst others are modern. There are also a variety of different ranges and butts on the site.

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4.8 Tenure. In 1984 WGS were advised by RO’s solicitors that RO owned the freehold interest in the Enfield site. They were not advised of any tenancies. There are a number of houses within the site and we assume that these are occupied on short term or service tenancies not subject to control and that possession could be obtained without difficulty if necessary. We have not been told of any changes in tenure since 1984 but we understand that since 1987 RO may have acquired a small strip of land on the east bank of the Lee Navigation Canal possibly including part of Government Row.

4.9 The Waltham Abbey Site - Situation. The site has three principal entrances, two on the west side of L Sewardstone Road (A112) and one to the south side of Highbridge Street, Waltham Abbey, at the northern extremity of a narrow strip of the site which runs northwards from the main site by means of a bridge under the M25. The main site is bounded on its northern side by the M25, on its western side by the Rammey Marsh and the Cattlegate Flood Relief Channels, on its southern side by agricultural land and on its eastern side by Sewardstone Road (Al 12).

4.10 Description. The Waltham Abbey site has an area of about 286 acres. The northern part of the site rises from the Cobbins Brook at the foot of the M25 embankment to a low ridge which runs roughly east-west across the site about two or three hundred yards south of the motorway. To the south of the ridge the land falls again to the south and west and the southern part of the site is nearly level. A narrow tree-banked water course known as Black Ditch traverses the site in an east-west direction about 500 yards south of the motorway. The land south of Black Ditch nearest to the Cattlegate Flood Relief Channel is very low-lying.

4.11 The buildings on the site total about 454,000 sq ft gross external area. There is a concentration of larger buildings in the strip of land immediately adjoining the northern boundary, and smaller buildings mostly of postwar construction are scattered over a wide area in the central part of the site, interspersed with woods and landscaped areas. Many of the buildings were built for explosive production and storage and are surrounded by protective high earth mounds. About 40 acres at the south-west corner of the site is an area of Osier Marshes, overgrown with marsh plants and reeds, and said to be of scientific interest. A further 37 acres in the south-east corner is agricultural land let on an agricultural tenancy.

4.12 Tenure. In 1984 WGS were advised by RD’s solicitors that RO owned the freehold interest in the Waltham Abbey site and that there was an agricultural tenancy of about 37 acres in the south-eastern part of the site which was producing about f1,600 p.a. We have been given no information about changes in tenure subsequent to 1984, nor have we seen the detailed summary of tenure provided to WGS in 1984 by Coward Chance.

4.13 The Patricroft Site - Situation. Patricroft lies about 8 miles to the west of Manchester City Centre and about 4 miles to the west of Salford. The site lies in a predominantly industrial area to the north of Patricroft Station which is on the main Liverpool to Manchester line and immediately south of the M602 which is an eastwards extension of the M62 which links Liverpool with Leeds and Hull.

4.14 The site is accessible principally from the south from Green Lane which passes through a largely late Victorian residential area and past the Bridgewater Hospital.

4.15 Green Lane, which runs roughly in a north/south direction splits the site into two principal areas, the smaller being to the west and bounded by the Bridgewater canal. The greater part of the site, which includes the principal buildings on the east side, extends in an irregular shape towards the motorway to the north east.

4.16 Description. The site area is approximately 25 acres. It has been developed over a period of 150 years with a large number of buildings which appear to have originally comprised a Locomotive Manufacturing Works and a Laundry.

4.17 The site to the west of Green Lane is level. The site to the east rises in a north-easterly direction to a point about 15 feet above Green Lane before falling away in the direction of the M602.

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4.18 The total area of the buildings is approximately 568,000 square feet and they are in the main old, poorly laid out, and lacking modern facilities, though some have been improved.

4.19 Tenure. In 1984 WGS were advised by RO’s solicitors that RO owned the freehold interest in the whole of the Patricroft site save for a small area which was held on lease for a term of IO years from 1st May 1977 at an initial rent of f1,500 p.a. That rent had been reviewed in May 1982 but the amount of the reviewed rent was not known. Part of the property was subject to a rent charge of f36.75 p.a. WGS were not advised of any tenancies. We have not been advised of any changes in tenure since 1984, except that we were told locally that the leasehold interest has been surrendered.

4.20 Planning. In preparing our valuations we have had regard to the planning circumstances set out in Part 5 of this report.

4.21 General Valuation Considerations. Our valuations have been prepared in accordance with the Guidance Notes on the Valuations of Assets issued by the Assets Valuation Standards Committee of the Royal Institution of Chartered Surveyors and are upon the basis of Open Market Value as defined in Guidance Note GN22:-

“Open Market Value means the best price at which an interest in the property might reasonably be expected to be sold at the date of the valuation assuming:-

(a) a willing seller;

(b) a reasonable period in which to negotiate the sale taking into account the nature of the property and the state of the market;

(c) that values will remain static during that period;

(d) that the property will be freely exposed to the open market; and

(e) that no account will be taken of any additional bid by a purchaser with a special interest.”

4.22 Where land and buildings are declared to be surplus to the trading requirements of the occupying company, they should normally be assessed to Open Market Value which takes into account not only the existing use of the property but also the value for any possible alternative use to the extent to which this is reflected in the price obtainable on the open market.

4.23 No planning permissions for development for alternative uses have yet been granted in respect of any of the three sites, but there is plainly some prospect that permissions may be granted within a short period (although the precise nature of the development which might be permitted remains in doubt). In these circumstances we believe that “hope value” attaches to each of the three sites. “Hope value” may legitimately be included in Open Market Value to the extent to which it is reflected in the price obtainable in the open market as defined above. Nevertheless, it is our experience that prices paid in the market for potential development sites, for which no planning permission exists, are discounted by comparison with prices paid for sites having the benefit of a valid permission.

4.24 Apart from the discount which prospective purchasers could be expected to make for the risks, costs and delays involved in obtaining planning permission and the possible need to contest an appeal at a public inquiry, we think that, in the case of the Enfield and Waltham Abbey sites, purchasers would also expect to make discounts, in some cases very substantial discounts, for a number of other relevant matters.

4.25 Firstly, a purchaser would certainly have regard to the time it would inevitably take to prepare the sites for development, construct infrastructure works and install services, and finally to develop these very large areas of land, and would adjust his offer accordingly. It appears likely also that the costs of the infrastructure and servicing works may be abnormally high.

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4.26 Secondly, allowance must be made for the abnormally high costs of demolishing the existing buildings, clearing earth mounds, and general decontamination. We have, at your request, relied upon estimates of clearance and decontamination costs prepared by Mr J V Gray as at March 1984, which we have adjusted to current prices. We have assumed that there are no deleterious materials present, in land or buildings, other than those covered in Mr Gray’s report. However we understand that since that date, detailed examination of the sites and their decontamination requirements have been commissioned by RO, and we are given to understand that the 1984 estimates may significantly have underestimated the problems. We have not had sight of any recent reports or surveys and in the event that these reveal decontamination costs materially in excess of those you have asked us to rely upon, we would wish to reconsider the amounts of our valuations.

4.27 Thirdly, it seems likely that a purchaser/developer would be required, by conditions imposed in a planning permission, to carry out an abnormal amount of landscaping work over an extensive area, and might also be expected (possibly as “planning gain “*) to carry out other costly works. For example, there is a suggestion in the current planning brief that the old feeder canal and canal basin, running into the Enfield site from the north, might be restored as a focal point for the proposed tourist/heritage use of the central part of the site.

4.28 Fourthly, it seems likely, on the Enfield site, that there would be constraints on development as the result of the “listing” of an extensive area of buildings on the site (which might also have to be restored). These buildings may or may not be capable of profitable use, and a purchaser would certainly make an allowance for risks on that account.

4.29 Fifthly, and potentially most serious of all in relation to the present value of the Enfield site, that site is probably incapable of being developed in any worthwhile way without the acquisition of land, or rights over land, in order to form a new access road from the west. We understand that RO have, since the sale to BAe, bought one small piece of land likely to be required for access. It appears to us, however, that further rights will need to be negotiated with at least two separate landowners, and it may be that very substantial prices will have to be paid. In relation to the Waltham Abbey site, rights may have to be negotiated to widen the existing bridge over the old River Lee at the northern extremity of the narrow strip running northwards from the main site, if major development is to be undertaken.

4.30 Prices paid in the open market for the purchase of land (sometimes called “ransom land”) essential to provide access to landlocked development land are commonly assessed in accordance with the principle first discussed by the Lands Tribunal in the case of Stokes v Cambridge Corporation (1961) 13 P &CR 77 ie that the owner of access land would negotiate a price based upon a share in the development value of the landlocked site “unlocked” by the acquisition of the access land. In the Stokes case one-third of the development value was said to be a fair proportion but it is usually thought that the size of the share should depend on the availability of other access points, if any, and the cost of alternative means of access. In extreme cases, where no other means of access existed, a share as high as one-half of the development value has been thought appropriate. In the case of the Enfield site we are doubtful whether there is at present any alternative means of access open to a developer.

4.31 We have not inspected all the buildings internally (for the reasons stated in para 4.2 above) nor are we aware of any reports obtained upon the structural condition of the buildings. Lack of such information is of little consequence in relation to the bulk of the buildings, since our valuations have regard to the development potential of the sites, but at Enfield there are certain listed buildings which may be retained. We are aware that those buildings are of considerable age, and in the circumstances we have assumed that they are in fair general condition (having regard to their age) and wind and water tight. We are not aware whether there are any obligations or liabilities under the Defective Premises Act 1972 and have made no separate allowance on that account.

4.32 We have made no allowance for any liability for taxation which may arise on disposal, nor have we made any adjustment for the costs of sale.

* See Glossary

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4.33 We do not know whether there are any minerals lying below any of the three sites. However, in making our valuations we have not had regard to any value which any such minerals may have.

4.34 We have no knowledge of sub-soil conditions nor do we know whether those conditions have been tested. We have therefore made no allowance for any abnormal foundation costs, flood protection works, or the like.

4.35 Many of the buildings on the sites are of great age. In the absence of any indications to the contrary, we have assumed that there is no intention that further buildings should be listed as of architectural or . historic interest. If further buildings are so listed, the amounts of our valuations might be adversely affected.

4.36 Our Valuations. We are asked to make Alternative Use valuations of the three sites as at 31st March 1989, at which date none of the sites had the benefit of any planning permission for redevelopment, and many of the difficulties referred to in paras 4.23 to 4.30 had yet to be overcome. In practice in such circumstances, very few sites are sold on an unconditional basis. In the interests of obtaining the best price it is more usual for vendors to obtain planning permission in outline before disposal, or alternatively, to grant an option or to enter into a contract for sale conditional upon the purchaser obtaining planning permission, or subject to a “clawback” provision.

4.37 Because sales in the circumstances prevailing as at 31st March 1989 would be so unusual and there is therefore little market evidence, and because we think that there is so much difficulty in quantifying the costs and risks which would be borne by the purchaser, we think it right to state our valuations in the form of bands of values, to indicate that it is exceedingly difficult to be certain about precise values at the present time.

4.38 However on the basis of the considerations and assumptions set out in paras 4.21 to 4.35 above, we hereby certify that in our opinion the values of the freehold interests in the three sites as at 31st March 1989, for sale in the open market with vacant possession of those parts of the sites in the present occupation of RO, and with the benefit of the tenancy referred to in para 4.12, are as shown on Schedule A attached. Our valuation of the Enfield site is made on the assumption that operations on the Waltham Abbey site have been, or will shortly be, discontinued, and that there will therefore be no further requirement for a blast zone at the northern end of the Enfield site.

4.39 We stress that these valuations represent the prices likely to be paid by purchasers in the knowledge that they would have to bear significant costs for the matters mentioned in paras 4.23 to 4.30 above, and that there might be considerable delays in obtaining planning permissions and overcoming other obstacles before development could commence. It follows, therefore, that once such costs had been incurred, planning permissions obtained, and other obstacles removed, the open market values would be considerably higher.

4.40 Potential Values. Our valuations reported in Schedule A are thus significantly reduced from those that would be appropriate if the sites had the benefit of valid planning permissions. We are asked in Appendix A to your letter of instructions dated Zlst March 1989 to prepare further valuations on the same basis as those reported in Schedule A but ,I .with the added special assumption that at that date outline planning permission had been granted for development of the whole or part of the site. You are to assume one or more planning permissions as you think appropriate for such forms of development as you consider to be realistic, relevant and valid in the particular circumstances, and to provide your views on the likelihood of each such planning permission being obtained within a period of five years from the valuation date.”

We comment on each of the sites below.

4.41 Enfield. The planning brief prepared by the two local authorities has reached an advanced stage and we think our primary assumption (which we call Scheme 1) must be that planning permission had been granted in accordance with that brief as at 31st March 1989. A summary of the contents of the brief is contained in Part 5 of this report. We think that there are excellent prospects that planning permission for this development could be obtained within five years from 31st March 1989.

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4.42 Having regard to the contents of the brief we find it difficult to suggest any variation to the form of development in precise terms. In practice we think that the most sensible alternative assumption, likely to be made by a prospective purchaser, is that planning permission might be obtained along the lines of the brief but in a generally denser and more valuable form. We call this Scheme 2 and have assumed that it is ten per cent more valuable than Scheme 1. We think that there are very good prospects that planning permission for such a form of development could be obtained within five years from 31st March 1989.

4.43 Because the form of development proposed in the brief already utilises the greater part of the site . and there are severe constraints upon any extensive increase in the developable area we do not think it realistic to make any further assumptions about permissions which might be obtained within five years of 31st March 1989.

4.44 Waltham Abbey. This is an extremely large and varied site, and it is possible to envisage a variety of forms of development. In order to give an indication of the bracket of possible values appropriate depending upon the nature of planning permission we have considered three schemes and valued each on the basis that outline planning permission had been granted as at 31st March 1989.

4.45 Scheme 1. We have seen an advance copy of a draft development brief about to be published for consultation purposes by Epping Forest District Council. Scheme 1 assumes outline planning permission in accordance with the provisions and requirements of that brief. The brief envisages development contained principally to the north of Black Ditch with slightly over 22 acres of land for residential use and 13% acres of industrial and business uses. To the south of Black Ditch the only development proposed is on part of the site adjoining Sewardstone Road where a use appropriate to the green belt, e.g. school or hospital is suggested. A new road linking Sewardstone Road and Highbridge Street is to be constructed, the whole of the site is to be cleared and decontaminated, and extensive landscaping is proposed.

4.46 We think there are very good prospects that planning permission for the development described above could be obtained within five years from 31st March 1989.

4.47 Scheme 2. This scheme assumes the planning permission assumed in Scheme 1 and in addition assumes that planning permission has been granted for development north of Black Ditch for a further 14% acres for residential and industrial purposes.

4.48 We think that there are good prospects of obtaining planning permission for Scheme 2 within five years from 31st March 1989.

4.49 Scheme 3. This scheme assumes both the planning permissions assumed in Scheme 2 and in addition assumes that planning permission has been granted to include residential development of about 20 acres south of Black Ditch, lying between Cattlegate Flood Relief Channel and the land proposed by Epping Forest District Council to be used for a purpose appropriate to the green belt.

4.50 We think that the prospects of obtaining planning permission for development in accordance with Scheme 3 within five years from 31st March 1989, are fair.

4.51 We would add that within the context of known planning policies we think it unlikely that planning permission would be forthcoming for a form of development significantly more valuable than that described as Scheme 3 above within a period of five years from 31st March 1989.

4.52 Patricroft. In the case of this site we think that there is effectively only one main assumption which can be made about the nature of planning permissions which might be obtained within five years, ie that permission could be obtained for the redevelopment of the site for industrial purposes. It is possible that there might be some variations on this (eg for warehousing or residential purposes) but they would not significantly increase the resultant values. We think that there must be excellent prospects of obtaining such a planning permission within five years from 31st March 1989.

4.53 Valuations. We hereby certify that in our opinion the values of the freehold interests in the three sites, as at 31st March 1989, for sale in the open market with the added special assumptions set out above, are as shown on Schedule B attached.

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4.54 We stress that in making these valuations, the only additional special assumptions we have made are that planning permissions have been granted for the development described. We have e assumed that any of the difficulties described in paras 4.23 to 4.30 above have been overcome, nor that any costs have been incurred, nor that any agreements have been reached with adjoining landowners. The comments we make in para 4.39 in relation to our current valuations in Schedule A are equally applicable to the potential valuations shown in Schedule B (except our comments in respect of the costs, risks and delays in obtaining planning permissions) and thus it follows that once such costs had been incurred and other obstacles removed, the open market values would be considerably higher. .

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Part 5. The Current Planning Position

5.1 We are instructed to:- “Prepare a report on the current position on planning applications and consents in respect of RO plc sites listed in the attached Appendix B; and on any plans drawn up by the relevant Local Authorities involving any of the RO plc sites listed in Appendix B.”

5.2 Schedule D attached summarises the current planning situation for each of the RO sites as at 31st March 1989. The schedule contains information on existing planning permissions and refusals, the statutory planning framework, and any other planning guidance relevant to each of the sites.

5.3 In respect of the sites of Waltham Abbey, Enfield and Patricroft where we have had the benefit of informal discussions with officers of the relevant planning authorities, we set out below more detailed remarks relating to current planning circumstances.

5.4 Waltham Abbey. In August 1987 an Inspector appointed by the Secretary of State for the Environment to hold a local Inquiry into objections made to the draft Roydon, Nazeing and Waltham Abbey Local Plan, reported on the objections heard at the Inquiry, including those made on behalf of RO in respect of the Waltham Abbey site. He recommended that a Planning Brief be prepared to ensure “a planned approach to the future of this site.” The Green Belt boundary should be “lasting and defensible based on existing physical features and to be enhanced with suitable landscape improvements.” The Inspector noted that “as a starting point for the consideration of a suitable Green Belt boundary I would recommend the line of trees which extends from west to east across the site broadly following the line of Black Ditch Road.”

5.5 The Inspector’s report further recommends “an area to the north of the site and adjoining the M25 Motorway for a future Industrial/Commercial Park of sufficient size to accommodate the replacement of the scattered units at present existing m

5.6 These and other recommendations were incorporated in the Local Plan in May 1988.

5.7 Epping Forest District Council have now prepared a Planning Brief which has been approved for consultation purposes and is to be issued formally in September 1989. Its proposals are described briefly in para. 4.45 above, and set out as Scheme 1 in Schedule B attached.

5.8 The policies of the Lee Valley Regional Park Authority are as set out in para 3.6 above.

5.9 In June 1987 notices of refusal of the planning applications made in January 1987 by RO were issued by Enfield LB and Epping Forest DC, copies of which are attached as Appendices 3 and 4. We understand that appeals against the refusals which were lodged by RO, have been withdrawn.

5.10 Enfield. In relation to the Enfield site, the Local Plan Inspector recommended “a more detailed study toestablish the boundary (i.e. of the Green Belt), but the southernmost part, suitably planted, as a permanent feature, should be retained within the Green Belt.” A Planning Brief has been prepared jointly by London Borough of Enfield and Epping Forest District Council which was recently approved. The Brief, which would constitute a material consideration for any proposed development of the site, proposes a mix of residential, industrial and leisure uses with substantial areas of landscaping. Access to the site is to be gained by an extension to Ordnance Road by way of a new bridge over the River Lee Navigation and River Lee.

5.11 The policies of the Lee Valley Regional Park Authority are as set out in para 3.6 above.

5.12 In June 1987 notices of refusal of the planning applications made in January 1987 by RO were issued by Enfield LB and Epping Forest DC, copies of which are attached as Appendices 5 and 6. We understand that appeals against the refusals which were lodged by RO, have been withdrawn.

5.13 Patricroft. The decision to close the Patricroft site became public knowledge in October 1988. This led to the setting up of a working party with a membership drawn from RO, Salford City Council and Salford University, which is currently studying the future use of the site. We understand that the use of the site as a Technology Park is one of the options under consideration.

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5.14 The Eccles Local Plan 1982 is currently under review by Salford City Council, but no draft documents are yet available. A consultation paper is expected in late 1989.

54 MINISTRY OF DEFENCE: F”RTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

Appendix 1 of Annex A

National Audit Office Buckingham Palace Road Victoria London SWIW 9SP

M Beaman Esq Gerald Eve Chartered Surveyors Reference: RT 3139 7 Vere Street Date 21 March 1989 London WIM OJB

P Orchard-Lisle Esq Healey and Baker 28/29 St George Street London WIA 3BG

Dear Sirs FURTHER NAO STUDY ON THE SALE OF ROYAL ORDNANCE PLC LETTER OF INSTRUCTIONS

1. The background to the further National Audit Office (NAO) Study on the sale of Royal Ordnance (RO) plc is contained in paragraph 1 of our draft Invitation to Tender letter which you received on 7 December 1988. You are instructed to jointly undertake the work described in paragraph 2 below.

2. (i) Review the instructions given by the Ministry of Defence (MOD) and RO plc to Messrs Weatherall Green and Smith (WGS) to carry out valuations of RO plc sites as at 31 March 1984 and 31 December 1985, and the bases on which these valuations were carried out. If, in your view, the instructions given to WGS were incorrect or inadequate, you are required to advise the NAO of your opinion of the correct basis of instructions or of the bases of valuation, as the case may be, and whether there would have been consequential material differences in the valuation figures. (ii) Review the extent and adequacy of factual information available to WGS in respect of RO plc sites at Enfield, Waltham Abbey and Patricroft, both as a result of their own surveys and investigations, and as provided to them by outside sources. You are required to take account of the planning circumstances as they were known at the time of the valuation of these three sites as at 31 December 1985, consulting, if necessary, the local planning authorities concerned. (iii) Review the reasonableness of assumptions made by WGS in determining the values of RO plc sites at Enfield, Waltham Abbey and Patricroft as at 31 December 1985; (iv) Review the existing use and alternative use valuations made by WGS of RO plc sites at Enfield, Waltham Abbey and Patricrofl as at 31 December 1985. You are required to comment in general terms upon the methods employed by, and figures reported by WGS in their existing use valuations. You are also required, in the case of alternative use valuations, to provide your own opinion of the approximate values of the three sites on an alternative use basis, if these differ significantly from WGS’ valuations; (v) Review the valuation certificate as at 31 December 1985 provided by WGS to the MOD and RO plc; in particular, whether the certificate adequately covered all matters which should have been reported and whether the valuations conformed with the Guidance Notes issued by the Assets Valuation Standards Committee of the Royal Institution of Chartered Surveyors and the Stock Exchange “Yellow Book”;

55 MINISTRY OF DEFENCE: FLIRTHER EXAMlNAmON OF THE SALE OF ROYAL ORDNANCE PLC

(vi) Establish and report in general terms upon changes in values and market circumstances between 31 December 1985 and 2 April 1987 (the date of the sale of RO plc) and the general effect of those changes upon the existing use and alternative use values of the RO plc sites at Enfield, Waltham Abbey and Patricroft between those dates. (vii) Prepare a report on the alternative use valuation of RO plc sites at Enfield, Waltham Abbey and Patricrofl as at 31 March 1989. You are required to prepare this report on the basis set out in the attached Appendix A. (viii) Prepare a report on the current position on planning applications and consents in respect of RO plc sites listed in the attached Appendix B; and on any plans drawn up by the relevant Local Authorities involving any of the RO plc sites listed in Appendix B.

3. You are required to provide, by 17 April 1989, a report upon the results of the work described in para 2 above. If necessary information from third parties is outstanding at 17 April 1989, you are to prepare your report by the due date on the basis of the information available to you, and to complete your report as soon as possible thereafter.

4. Access to the three sites at Enfield, Waltham Abbey and Patricrofi is being arranged. If access is not made available you are to prepare your report on the basis of information obtained without the benefit of inspecting the sites concerned. If access is granted after 10 April 1989, you are to consult with this Office on the timing and content of your report.

5. WGS have undertaken to provide all relevant information required to undertake the work described in paragraph 2 above. You are asked to contact Mr Richard Baldwin at WGS to make the necessary arrangements. (Telephone 01-405-6944).

Yours faithfully

DEPUTY DIRECTOR OF RECRUITMENT

56 MINISTRY OF DEFENCE: FUR-R EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

Appendix A to Appendix 1 of Annex A

Royal Ordnance plc Sites: Enfield, Waltham Abbey and Patricroft - Bases of Current Alternative Use Valuation of Land

1. The valuation report referred to in paragraph 2(vii) of the Letter of Instructions should be prepared in accordance with the Guidance Notes on the Valuation of Assets issued by the Assets Valuation Standards Committee of the Royal Institution of Chartered Surveyors on the following bases: (a) Alternative use valuations representing: (i) The Open Market Value [in accordance with the definition in Guidance Note No. GN22) of the whole site as at 31 March 1989, taking into account site clearance and decontamination’ expenses and all other identifiable costs and factors which would in your opinion be reflected in bids made by purchasers in the open market, and (ii] The Open Market Value as at 31 March 1989 [on the same basis as in (i) above) but with the added special assumption that at that date outline planning permission had been granted for development of the whole or part of the site. You are to assume one or more planning permissions as you think appropriate for such forms of development as you consider to be realistic, relevant and valid in the particular circumstances, and to provide your views on the likelihood of each such planning permission being obtained within a period of five years horn the valuation date.

1 As part oftbe valuation of RO Plc sites as at 31 December 1985, which was carried out by WeatheralL Green and Smith during tbe period March to July 1986, the MOD commissioned a specialist to determine the decontamination cost for each site. These figures, which till be made available to you by WCS, should be used as the basis of calculattng the current decontamination cost for each of the sites concerned.

57 MINISTRY OF DEFENCE: FURTHER IxAMrPmTION OF THE SALE OF ROYAL ORDNANCE PLC

Appendix B to Appendix 1 of Annex A

Royal Ordnance Manufacturing Locations

Powfoot -I Birtley

Bishopton

Blackburn

Chorley Nottingham

Radway Green Bridgwater

Featherstone Westcott

Summerfield Waltham Abbey

Glascoed 1Enfield

58 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

Appendix 2 of Annex A

GLOSSARY OF TERMS

Clawback “Clawback” is a contractual provision under which a purchaser of land (usually land with development potential) is obliged to pay further consideration on the occasion of some specified event (such as the grant of planning permission) within a specified period of time after the sale. It is not an uncommon arrangement in circumstances similar to those prevailing at the time of the sale of RO, when the vendor of land has reason to believe that there would be a significant increase in value if the purchaser succeeded in obtaining planning permission for development (or for a more valuable form of development than envisaged at the date of sale) and that the potential value is not adequately reflected in the market value of the land at the date of sale.

The amount of further consideration payable on “clawback” is usually related to the enhancement in the value of the land created by the specified event (eg the grant of planning permission) although allowance is normally made for costs incurred by the purchaser in obtaining the enhancement in value, and the amount of the enhancement is sometimes calculated by reference to values prevailing at the date of sale rather than values at the date of the specified event.

RIGS AVSC Guidance Notes In 1974 the Royal Institution of Chartered Surveyors set up its Assets Valuation Standards Committee to assist and advise members in regard to the valuation of company assets. In 1976 the AVSC issued a set of Guidance Notes on the Valuation of Assets together with various Background Papers for use by members dealing with the valuation of company assets.

These have been regularly updated and revised, most recently in January 1989 when a new Guidance Note (GN28 - Additional Valuations made on Special Assumptions) and a new Background Paper (BP13 - A Purchaser with a Special Interest), were issued, together with amendments to existing Guidance Notes.

The AVSC is charged with the duty of scrutinising all published valuations and references which have given or could give rise to concern. In such an event the AVSC seeks to discuss with the member concerned the reasons underlying any departure from the Guidance Notes.

Open Market Value for Existing Use (Existing Use value). This basis of valuation takes into account the RIGS definition of open market value but with the added assumption that the property will continue as owner-occupied in its existing use or for some similar use, and thus ignores any possible alternative use of the property, any element of hope value, any value attributable to goodwill and any possible increase in value due to special investment or financial transactions such as sale and lease back, which would leave the owner with a different interest from the one which is to be valued.

Open Market Value for Existing Use would, however, include the possibilities of extensions or further buildings on undeveloped land or redevelopment of existing buildings, providing such construction can be undertaken without major interruption to the continuing business.

Existing Use for Asset Valuations does not carry the same meaning as in planning law, nor does it necessarily mean the particular trade currently being undertaken on the property. Many buildings are general purpose structures suitable for a wide variety of different trades. For example similar industrial buildings will probably have the same values irrespective of the different trades being carried on or goods produced.

59 MINISTRY OF DF,FmCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

Open Market Value for Alternative Use (Alternative Use value) Land and buildings may possess a value different from their Existing Use value when the prospective use of the property for some other purpose is reflected. Normal accounting concepts assume an ongoing business and where properties are occupied for the purpose of the business an Alternative Use value, which could only be realised on liquidation or a closure or removal of the business to other premises, is not suitable for inclusion in their accounts.

Such Alternative Use value may, however, have relevance to an overall appraisal of the company’s situation. Where it differs materially (either above or below) from Existing Use value it should be reported by the valuer, whether the Existing Use value is on an open market basis or by reference to depreciated replacement costs.

Where land and buildings are declared to be surplus to trading requirements, they should be assessed to open market value which takes into account any possible alternative use.

Depreciated Replacement Costs (DRC). There are some kinds of property for which evidence of comparative transactions does not exist, and the RIGS AVSC Guidance Notes state that in these cases the value for Existing Use can only be arrived at on the basis of “Depreciated Replacement Cost”. Examples of the type of properties to which this basis applies include:- (a) oil refineries and chemical works where usually the buildings are no more than structures or cladding for highly specialised plant, (b) power stations and dock installations where the buildings and site engineering works are related directly to the business of the owner and it is highly unlikely that they would have a value to anyone other than the company acquiring the undertaking, and (cl properties located in particular geographical areas for special reasons or of such a size, design or arrangement as would make it impossible for the valuer to arrive at a conclusion as to value from the evidence of open market transactions.

Any depreciated replacement cost basis of valuation requires an estimate of the open market value of the land in its existing use and an estimate of the new replacment cost of the buildings and other site works, from which deductions are then made to allow for the age, condition, functional obsolescence and other factors which result in the existing property being worth less than a new replacement. It is a method of using current replacement costs to arrive at the value to the business in occupation of property as existing at the valuation date.

Every valuation prepared on the depreciated replacement cost basis should be qualified by the valuer as being subject to the adequate potential profitability of the business compared with the value of the total assets employed. It is for the directors to decide if the business is sufficiently profitable to be able to carry the property in the balance sheet at the full depreciated replacement cost or whether some lower figure should be adopted.

Stock Exchange Yellow Book The Council of the Stock Exchange first published its requirements applicable to applicants applying for listing, in 1969. Those requirements entitled “Admission of Securities to Listing” were in 1984 reissued in a yellow covered manual which has thus become known as the “Yellow Book”. The manual describes the manner in which any proposed marketing of securities is to be conducted and the continuing obligations of issuers.

Lee Valley Regional Park Authority The Lee Valley Regional Park Authority was established by the Lee Valley Regional Park Act 1966 with an overall remit to provide and promote leisure and recreational facilities within the Park, covering about 10,000 acres along the 23 mile course of the River Lee. The Authority have a duty to prepare a plan for the area and are to be consulted by planning authorities when development is proposed that may affect the Park. The Authority have an owning interest in about 30% of the Park.

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Planning Gain “Planning gain” is a term which has come to be applied wherever, in connection with a grant of planning permission, a local planning authority seeks to impose on a developer an obligation to carry out works not included in the development for which permission has been sought or to make some payment or confer some extraneous right or benefit in return for permitting development to take place. As such, it is distinct from any alterations or modifications which the planning authority may properly seek to secure to the development that is the subject of the planning application - such as changes intended to reduce the scale or intensity of the proposed development, or to improve its layout or its impact on the local environment. In the case of “planning gain” the obligation sometimes arises from the terms in which development is permitted, eg from a condition of the planning permission, and sometimes from an agreement made in association with it. In some cases the developer may offer some such works or payment in applying for planning permission or in the course of subsequent negotiations.

61 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

Schedule A of Annex A

ROYAL ORDNANCE PLC SITES AT ENFIELD, WALTHAM ABBEY AND PATRICROFT OPEN MARKET VALUES AS AT 31st MARCH 1989

‘ROPERTY DESCRIPTION AND TENURE APPROXIMATE OPEN MARKE- VALUE AT 31 st MARCH 1989 f

?SAF Enfield Former small arms factory 10.000.000 to 15,000,000 Jrdnance Road standing on a site of about 100 Enfield Lock acres. Buildings on the site Middlesex (mostly of considerable age) previously totalled about 576,000 sq feet gross but some buildings have recently been demolished and others are in a derelict condition. The property is now unoccupied except for maintenance and security staff. The property includes seven houses most of which appear to be vacant. Freehold.

ROF Waltham Abbey Research establishment on a site 15,000,000 to 22,500,OOO Sewardstone Road of about 286 acres. Buildings on waltham Abbey the site total about 454,000 sq Essex feet gross. Some very old buildings but the majority are of immediate post war construction. The property is still occupied but the business is expected to close within 12 months. Freehold, subject to an agricultural tenancy of about 37 acres.

ROF Patricroft An old factory complex on a site 1 ,ooo,ooo Green Lane of about 25 acres. The buildings Patricroft on the site are mainly of Eccles considerable age and total about Manchester 570,000 sq feet gross. The property is still occupied but the business is expected to close soon. Freehold.

This schedule is to be read in conjunction with our report dated 19th April 1989

Healey & Baker Gerald Eve International Surveyors and Valuers Chartered Surveyors

62 MINISTRYOFDEFENCE:F"RTHERE XAMWAnON OF THE SALE OF ROYAL ORDNANCE PLC

Schedule B of Annex A

ROYAL ORDNANCE PLC SITES AT ENFIELD, WALTHAM ABBEY AND PATRICROFT OPEN MARKET VALUES AS AT 31st MARCH 1989 ASSUMING EXISTENCE OF OUTLINE PLANNING PERMISSION

SCHEME NO. BRIEF DESCRIPTION OPEN MARKET PROSPECTS OF VALUE AT OBTAINING PLANNING 3’lst MARCH PERMISSION BY 1969 31st MARCH 1994

1 About 34 acres of residential development, 7 acres of business uses, with the f16.500.000 Excellent remainder of the Site to be used for local shopping, recreational and leisure uses plus open space and landscaped areas. A number of attractive old buildings are to be retained and it is proposed that the former main machine shop, a listed building, should be converted for a tourist/heritage us.?, and an old canal re-excavated, such works to be carried out by the purchaser. A new vehicular access to the site is to be constructed by the purchaser, by an extension of Ordnance Road incorporating a new bridge over the River Lee and the Lee Navigation, which would require dredging works and a new lock.

2 As Scheme 1 but in a generally denser and more valuable form. f18.000.000 Very good

WALTHAM ABBEY

1 About 13% acres of business/industrial development adjoining M25 f20.000.000 Motorway. About 22 acres of residential development north of Black Ditch. New local distributor road to be constructed by purchaser between Sewardstone Road and Highbridge Street. South eastern part of Site between new road and agricultural land to be used for a purpose appropriate to Greer Belt. Remainder of site to become a country park. Whole site to be decontaminated, and prepared for development by purchaser.

2 Broadly in accordance with Scheme 1, but assuming an additional 6% acres f32.500.000 of business/industrial development, and an additional 8 acres of residential development north of Black Ditch.

3 As Scheme 2, but assuming residential development of an additional 20 acres f45.000.000 Fair south of Black Ditch and east of the Cattlegate Flood Relief Channel.

. PATRICROFT

1 Redevelopment of whole site for industrial purposes. f1.400.000 Excellent

This schedule is to be read in conjunction with our report dated 19th April 1989.

Healey and Baker Gerald Eve International Survevors and Valuers Chartered Surveyors

63 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

Schedule C of Annex A

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64 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

65 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

66 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

Annex B

The Royal Institution of Chartered Surveyors 12 Great George Street Parliament Square London SWlP 3AD Telephone: 01-222 7000 Telex: 915443 RI’3 G Facsimile: 01-22 294 30 DX: Victoria 2348 Our ReE Your Ref: 8 May 1989

National Audit Office Study on the Sale of Royal Ordnance plc

The National Audit Office asked the opinions of the Institution on the instructions given to Weatherall Green & Smith and on the basis and methodology adopted by them for the valuations of Royal Ordnance plc properties prior to its sale.

It is the view of the Institution that Weatherall Green & Smith have carried out the instructions they received and have provided Valuation Certificates which are entirely acceptable, and in accordance with the requirements of the Institution, as set in the Guidance Notes on the Valuation of Assets.

A letter from the Procurement Executive MOD, dated 10 July 1984, called for a report on the basis of (a) Existing Use Valuation and (b) Alternative Use Valuation. It is the Institution’s view that the instructions given were clear.

In their Certificate of 25 February 1985, Weatherall Green & Smith provided valuations which were stated to be for balance sheet purposes and in addition alternative use values were also given.

In a letter dated 2 January, 1986, Weatherall Green & Smith confirmed their instructions in respect of a further Valuation Certificate for balance sheet purposes and specifically stated that their Certificate would be produced without reference to alternative values except where the business was not likely to be continued on the respective site in the foreseeable future.

A letter was then sent by the Royal Ordnance, dated 7 March 1986, which confirmed that an update of the March 1964 Valuation was required, adopting the approach as detailed in the Weatherall Green & Smith letter of 2 January 1966. A formal contract was issued by Royal Ordnance on 24 March 1966.

The Institution has been supplied with a Valuation Certificate dated 17 July 1986, provided by Weatherall Green & Smith, which advises upon the value for balance sheet purposes. With the exception of one property, DRC valuations have been made on the basis of existing use. The position as to the basis of valuation is made entirely clear in the Certificate.

It has also been supplied with a Valuation Certificate dated 17 July 1986 provided by Weatherall Green & Smith, which reviews their previous comments on the open market alternative use values of sixteen freehold factories which are listed in the Certificate. Again, the basis of valuation and various limitations and reservations are specifically stated, and the position is made entirely clear in the Certificate.

67 MINISTRY OF DEFENCE: FURTHER EXAMINATION OF THE SALE OF ROYAL ORDNANCE PLC

The second Certificate refers to joint instructions of 7 March 1986, being presumably from Royal Ordnance plc and the Ministry of Defence. The Institution has not seen any such instructing document from the Ministry of Defence.

The wording and format of the Certificates appear to be in themselves entirely acceptable. Moreover, they would appear to comply with the instructions which were contained in the letters with which we have been supplied. If there were further and alternative instructions given which were contrary to the information and methods of valuation provided in the report, then we have no knowledge of this.

The Certificates would appear to be clear and precise as to the properties valued and the basis of valuation adopted at the appropriate times.

The Certificates which have been supplied contain no figures or other information as to values as these have been deleted and no comment whatsoever is made as to the quantum or correctness of the valuations. The Institution cannot comment upon the use subsequently made by the clients of the valuation certificates.

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Annex C

S G Warburg Group plc

British Aerospace plc - Research Report dated 11 August 1988 Statement to the National Audit Office by Alan Greene, M.B.A.

1. I am a securities analyst working for S G Warburg, Akroyd, Rowe & Pitman, Mullens Securities Ltd. (“S G Warburg Securities”] and was the author of the Research Report on British Aerospace plc (“British Aerospace”) published by S G Warburg Securities on 11 August 1988 (“the Report on British Aerospace”). I had a good general knowledge of British Aerospace through having worked in its Corporate Audit Department prior to joining S G Warburg Securities.

2. The Report on British Aerospace was prepared for circulation to institutional clients of S G Warburg Securities and was despatched to them on 11 August 1988, the date of the Extraordinary General Meeting of British Aerospace approving its acquisition of Rover plc (“Rover”). The document was marked “For private circulation only”.

3. I had started work on the preparation of the Report on British Aerospace on or shortly after 18 July 1988, when the planned closure by Rover of its Cowley (South) factory was announced. It will be recalled that a few days earlier revised terms for the acquisition of Rover by British Aerospace had been announced. It was known that the Board of British Aerospace was committed to a policy of greater efficiency by reducing costs, improving productivity and matching production and other resourcas to market demand. The existence of substantial surplus properties in the British Aerospace Group was already known, as was the strategy of the Board of British Aerospace to operate from fewer sites with moves to the North to cheaper, available labour. I decided, after consulting one of my colleagues, to undertake research to see whether an estimate of the value of surplus properties would be possible.

4. The basic source documents for the list of sites and activities which appeared in the Report on British Aerospace were the following: (9 The original 1981 Offer for Sale document: (ii] The 1987 Report by British Aerospace to its Employees; (iii) The latest published Reports and Accounts of British Aerospace, Rover and Royal Ordnance; (iv) The Comptroller and Auditor General’s Report on the sale of Royal Ordnance (HC 162).

I studied also Press reports and articles and other published material available in our library. Having prepared a list from all this source material I checked details with Public Relations representatives at British Aerospace, Royal Ordnance, Rover and Land Rover, who supplied me with site areas in cases where I lacked this information.

, 5. In the course of my research I reviewed published material in order to obtain a more full picture of what was planned or might reasonably be expected as regards industrial properties of the enlarged British Aerospace Group becoming surplus to requirements. I considered which of the surplus properties were likely to have values materially in excess of their book values and concentrated on these. I examined Ordnance Survey maps in public lending libraries to get a more clear picture of site features and locations not known to me.

6. The values ascribed by ma to particular properties ware based on available public information on reported property transactions in relevant areas or other areas considered reasonably comparable with adjustments thought by me to be appropriate, e.g. adjusting values disclosed by transactions in 1986-1987 to reflect

69 increasing property values up to August 1988. It should be appreciated that my concern was to obtain a reasonable estimate of the overall surplus over book value of British Aerospace properties as a feature relevant to the value of British Aerospace shares to sophisticated institutional investors. The Report on British Aerospace was not intended to represent, and would not have been regarded by our clients as representing, in respect of any particular property, a professional valuation on which an interested purchaser could place reliance.

7. In relation to the surplus or potentially surplus properties of Royal Ordnance shown on page 7 of the Report on British Aerospace I estimated a total value of f517 million, the major item being 380 acres of indust&l property at Enfield and Waltham Abbey located inside the M25 ring. To these 380 acres I allocated an average value of about El.2 million per acre, rounding down the figure of E456 million thus achieved. In settling upon ~1.2 million per acre I had studied reports of prices paid over the last year or two for light industrial property within and without the M25 ring and found that to the west, for which nmre information was available, around El million per acre had been paid for light industrial sites in 1986-87. With property values and industrial rents having increased largely (40-50 per cent) since mid-1986, but recognising that land within the northern sweep of the M25 should be discounted in value as compared with comparable land to the west of London, an average value of El.2 million per acre for the Enfield/Waltham Abbey sites seemed to me reasonable, allowing for redevelopment possibilities.

While in no way regarding them as evidence of value I had noted newspaper reports published almost a year earlier, at the time when the closure of the Enfield factory was announced, which put on it at that time values (based on the then assumed acreage of 110 acres rather than the figure of 100 acres supplied to me by Royal Ordnance) of 025 million or El.13 million per acre (the Independent, 14 August 1987) or sane fl million per acre (Jane’s Defence Weekly, 22 August 1987).

8. I considered, as regards Enfield/Waltham Abbey, the question of decontamination costs, but did not pay great weight to these. I had observed from the National Audit Office report on the sale of Royal Ordnance published on 20 November 1987, that in 1984 f1.3 million had been estimated to cover decontamination and clearance costs for the 280 acre Waltham Abbey site.

9. There was no suggestion in the Report on British Aerospace that the values ascribed to properties represented professional valuations arrived at after examination of the sites and upon the basis of particular assumptions. The clients to whom the Report was sent will not have expected any such thing and will have paid attention to the conclusions reached by the Report as to the overall surplus cwer book value projected and its relevance to the worth of British Aerospace shares.

13 December, 1988

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