The heart of Britain's defence up for offer: Overseas buyers welcome

The Ministry of Defence building in Whitehall could be sold to a foreign bidder under plans for a lease-back arrangement to pay for a pounds 165m redevelopment of the building.

It is part of the Government's search for cuts in public expenditure, but senior ministers have warned the Treasury that any deeper cuts in the defence budget would hit the front-line capability, and risk breaking a clear commitment.

The statues of war heroes such as Montgomery and Slim are mute, but the sale raises questions about what they would have said if they had known the MoD building itself was to be sold to a potential foreign buyer. The building is being prepared for sale as part of the Government's private finance initiative scheme. A Japanese bank, Nomura International, was part of the consortium which recently agreed to pay pounds 1.6bn for the MoD married quarters.

Defence officials said last night that it was too soon to say who would be potential bidders for the 91,998 sq metres of office space in the prime central London spot, but foreign bidders were not being ruled out.

Although the ownership would change, the MoD would retain a very long lease on the building and under these terms, one leading property adviser said yesterday that the sale of the building could be in the region of pounds 175m.

For security reasons, the MoD will remain in control of the entire building.

Two other MoD buildings in central London - Northumberland House and Metropole House in Northumberland Avenue - will be closed and offered for sale as part of the deal.

The MoD would retain the old War Office and the defence secretary's grace- and-favour flat in the old Admiralty building near Admiralty Arch.

The move to sell the MoD building is part of the Government's private finance initiative. It could take place in 1998-99, which would mean that refurbishment work would not be completed until the next century.

Kenneth Clarke, the Chancellor, warned the Cabinet last week that deeper cuts in spending would be needed to find room for tax cuts in the forthcoming Budget before chairing a Cabinet expenditure committee (EDX) to try to cut up to pounds 5bn off public expenditure totals.

But ministers believe cuts of that order could be too much to expect in an election year. "It is going to be very tight in the sense that getting spending down is not easy and certain departments are fighting fiercely," said a source. Defence, roads, prisons and social security are in line for cuts.

Mr Clarke reviewed the options with senior ministers and officials, including the Inland Revenue and Customs and Excise last Friday at Dorneywood, in Buckinghamshire, the Chancellor's official country residence.