The MoD's pounds 2bn bombshell

Public-sector finance: the Government is under fire over plans to sell off 60,000 service homes.

The announcement of the terms for the sale of the Ministry of Defence's housing stock has met strong criticism. Housing professionals and the Opposition claim the Government will obtain large capital receipts for use as pre-election tax handouts but will commit future administrations to higher ongoing revenue overheads for the lease-back of many of the homes.

There are about 60,000 MoD married quarters on 800 sites within the sale, some in areas of high-value housing, including Westminster, but many in less sought-after areas, such as next to RAF bases in East Anglia. The largest concentration of service homes is in and around London. The portfolio, valued at pounds 2bn, is too large to be bought by any single organisation.

NatWest Markets is handling the disposal, but it is rumoured that the draft proposal was drawn up by David Hart, the controversial personal adviser to the Defence Secretary, Michael Portillo. Mr Hart advised the Government on handling the miners' strike, and is himself a property developer.

The sale is believed to have attracted interest from a range of organisations. Some of the largest housing associations, including Home, Housing 21, the Peabody Trust and Merseyside Improved Homes, investment bankers Kleinwort Benson, BZW, Merrill Lynch and Goldman Sachs, property companies Johnson Fry, John Laing and Heron, and building societies Halifax and Nationwide have all been linked to consortia keen to buy parts of the portfolio.

Property companies have an added incentive to buy into the MoD stock with the announcement that the Government will not, after all, allow them to bid for grants to build social housing.

The sale of MoD homes is extremely attractive to the Treasury, and to the Cabinet, because it is set to raise pounds 2bn without the high profile of other privatisations. It can be seen as running parallel to the sale of the Housing Corporation's mortgage portfolio, which is expected to raise pounds 1bn.

It is the longer-term revenue implications that have attracted criticism. The lease-back arrangement will commit the MoD to increase its future revenue overheads, in return for immediate capital sums that will go directly to the Treasury. The outline prospectus says the stock will generate a guaranteed pounds 100m rental income per year from the MoD alone. The MoD is to gain a profit-share in the most lucrative disposals, but this is unlikely to match its revenue commitment.

An MoD section, the Defence Housing Executive, will continue to manage the properties, to meet the costs of management, insurance, maintenance and repair, and will pay the rent on behalf of service personnel. A guaranteed number of properties will be leased back by the MoD, even if not required by it, at an agreed market rent.

The MoD stresses that it is not committed to a sale. A spokesperson says: "It is still early days for the structure of any deal. We are looking to complete later this year - but if the right terms don't come forward, there won't be a deal." Earlier attempts at transferring the housing stock to a newly formed association were abandoned on the Treasury's insistence when it became clear that the sale price would be inadequate.

The Labour Party is not critical of the principle of this privatisation - indeed, before Christmas it complained that the sale was not going through quickly enough - merely of the manner of it. "Creating capital receipts in return for future revenue overheads is one of the problems with the way the Government is implementing the Private Finance Initiative," said a Labour source.

Some in the private sector have their own concerns. The Council of Mortgage Lenders believes that the houses are being offered cheap, and could lead to a flood of properties hitting the market at knockdown prices, further deflating the housing market. A trial scheme of 100 homes sold at an RAF estate near Cardiff had 700 buyers competing for properties that were going for pounds 20,000 less than similar houses in the area.

The government-funded Empty Homes Agency and the Public Accounts Committee have complained about the 13,000 MoD homes lying empty, which led to a manifesto commitment by the Tory party at the last election for some of these properties to be brought into the social housing sector. The agency is disappointed that the terms of the sale make this unlikely to be fulfilled.

Bob Lawrence, chief executive of the Empty Homes Agency, says: "From discussions with property professionals, housing associations, mortgage lenders and the Forces themselves we can say that no one is really happy with the privatisation, which is sad because if ministers had implemented their manifesto commitments they would now be enjoying credit."

Antony Fletcher, chairman of the agency and former deputy chairman of the Government's Empty Homes Task Force, adds: "If the sale goes to a private-sector body, the chances of those in serious housing need getting some of these houses will be poor. Even if they do, the impact on housing benefit will be immense. This was a golden opportunity to release housing stock that the Government already owned. It could have done tremendous good in stress areas."