Edward's mansion cost us ?1.8m

Almost £2 million of taxpayers' money was channelled into renovating Prince Edward's country mansion, despite Buckingham Palace's insistence that no public funds were used in the controversial project.

The Observer has learnt that the Ministry of Defence handed over £1.8m to the Crown Estate - the body that manages all royal property - for renovating Bagshot Park.

The 120-year-old former Army property is the home of Edward and the Countess of Wessex. The 88-acre property is also the headquarters of the Earl of Wessex's ailing television company, Ardent Productions. In 1997, Edward signed a secret 50-year lease with the Crown Estate and then agreed a refurbishment contract with builders C J Sims for £1.8m - the amount covered by the MoD funds.

The prince has since refused to pay a penny more, despite Sims demanding £600,000 for extra work it claims that Edward insisted upon. The company has since collapsed and blames Edward's 'dithering' over colour schemes and wallpaper for raising the cost. Other extras included a 'hotel-style' bathroom with matching sinks, gold-plated taps and towel rails.

MPs have expressed outrage at this use of public funds. Liberal Democrat frontbench spokesman Norman Baker said: 'It is astonishing the Ministry of Defence, which was unable to find £2m for Mozambique, paid nearly £2m to help renovate a home for one of the richest families in the world.'

Labour's Harry Cohen, a member of the defence select committee, said: 'It's shocking. There appears to be a sleight of hand here. Although the prince may not have received the MoD money directly, he still benefited.'

Baker has demanded details of the lease between the Crown Estate and the prince be made public and called for the public accounts committee to investigate the royal finances.

Last month The Observer disclosed that public funds were channelled into the project, despite the Palace's insistence this was not the case. Both the Government and the Crown Estate refused to give any other details.

Following further media inquiries the MoD admitted money had been paid but played down the amount. Even when two MPs tabled written questions, Defence Minister Dr Lewis Moonie avoided giving an answer.

Last Wednesday Moonie finally came clean over the MoD payment of £1.8m when Baker tabled a fresh parliamentary question.

It had long been a mystery how Edward could afford such an expensive restoration. He receives £96,000 a year from the queen for royal expenses, and his businesses are losing money.

The Crown Estate received the £1.8m from the MoD after September 1996 when it regained the lease from the Ministry. Under the terms of the lease the MoD, which had occupied the property since the end of the war, was required to return the building to a habitable state. The Crown Estate demanded £1.8m from the MoD and then struck a secret deal with Prince Edward, understood to be around £50,000 a year. But there still remain questions over how the prince paid the repair bills.

The Observer has established that he set up a shell company called Eclipse Nominees to run the contract. Monthly cheques for the work came from the prince's account at Coutts, but it is not known what the source of this cash was. If the Crown Estate passed the £1.8m to the prince in advance, it is possible Edward earned tens of thousands of pounds in interest, indirectly, from the MoD money.

A Buckingham Palace spokesman refused to give details saying: 'This is an entirely private matter between the prince and the Crown Estate. The repairs to Bagshot Park would have had to be carried out whoever had the lease.'

The Crown Estate also refused to give details.

antony.barnett@observer.co.uk