Annual Report

History and Background

The present Ministry of Defence (MOD), the Department, was formed by the amalgamation in 1964 of the Ministry of Defence, the Admiralty, the War Office and the Air Ministry, and the inclusion in 1971 of the Ministry of Aviation Supply. In 1973, the operations of the Atomic Weapons Establishment (AWE) were transferred from the UK Atomic Energy Authority to the MOD.  

Principal Activity

The principal activity of the Department is to deliver security for the people of the United Kingdom and the Overseas Territories by defending them, including against terrorism; and to act as a force for good by strengthening international peace and stability.  

Further definition of the Departmental Objectives in terms of output is given in Schedule 5, Resources by Departmental Aims and Objectives.  

Departmental Boundary

At 31 March 2003 the Department consisted of the 11 (2001-02:11) Top Level Budget (TLB) Holders detailed in Note 27 to the financial statements, responsible for providing forces and support services required for a modern defence force. Within these TLBs there were 81 (2001-02: 84) reporting entities known as management groupings, including 31 (2001-02: 32) on-vote Defence Agencies listed in Note 31. Also included within the Departmental Boundary are Advisory Non-Departmental Public Bodies (NDPB) sponsored by the Department listed in Note 31. Defence Agencies with an accounts direction from HM Treasury also publish their own financial statements.  

The five (2001-02: four) Defence Executive Agencies established as Trading Funds and owned by the Department at 31 March 2003 fall outside the Departmental Boundary and are detailed in Note 9. The change during the year was a result of vesting of the Army Base Repair Organisation (ABRO) as a Trading Fund.  

The seven Executive NDPBs listed in Note 10 are sponsored by the Department and fall outside the Departmental Boundary. The accounts of these bodies are published separately.  

As part of Machinery of Government changes during the year, the Department took over the responsibility for the payment of war disablement and war widows' pensions from the Department of Work and Pensions. All expenditure incurred under the provision of these services falls under a separate Request for Resources (RfR3), and is disclosed separately under Other Operating Costs.  

QinetiQ Holdings Limited (hereafter referred to as 'QinetiQ') is a Self Financing Public Corporation which falls outside the Departmental Boundary. The Navy, Army and Air Force Institutes (NAAFI) is also outside the Departmental Boundary.  

The transactions and balances of the Armed Forces Pension Scheme (AFPS) are not consolidated within these financial statements. The report and accounts of the AFPS are prepared separately.

Future Developments

The Department sold 34% of its interest in QinetiQ to The Carlyle Group. In February 2003, QinetiQ acquired all the issued shares in QinetiQ Group plc, the company in which the Department had its original shareholding at 31 March 2002. QinetiQ is a company controlled by The Carlyle Group, but in which the Department has a significant equity interest. The sale followed the decision in September 2002 to select The Carlyle Group as the preferred bidder in the Department's selection of a strategic partner. The Department's intention is to sell the remaining stake in the company within 3 to 5 years, probably through a flotation on the stock market.  

The Carlyle Group's track record in assisting companies to grow and develop, and secure private sector capital, should ensure that the business achieves its anticipated future potential and thus increase its value. On the eventual sale of its remaining stake, the Department will retain a special share to ensure that the defence and security interests of the country are protected.  

Fixed Assets

Changes in fixed assets during the year are summarised in Notes 7, 8 and 9 to the financial statements.

The impact of the professional valuations carried out during the year is reflected in the accounts. Although the overall result of the professional valuations shows only a small net increase in values over the previous year's, there were some significant increases and decreases in values by individual assets. Further details on professional valuations are given in Note 8.  

Research and Development

Research and development expenditure is incurred mainly for the future benefit of the Department. Such expenditure is primarily incurred on the development of new fighting equipment and on the improvement of the efficiency and capability of existing fighting equipment.  

Amounts spent on research are not capitalised, and certain development expenditure is expensed, in accordance with SSAP13 'Accounting for Research and Development', and are included in Other Operating Costs detailed in Note 3.  

Development expenditure is included in Intangible Assets, where appropriate, and shown in Note 7.  

Net Expenditure

The Operating Cost Statement shows net expenditure of £41,793,591,000 which has been charged to the General Fund. Cash voted by Parliament and drawn down for the provision of Defence Capability (RfR 1), Conflict Prevention (RfR 2) and War Pensions and Allowances (RfR 3) amounting to £27,136,321,000 has been credited to the General Fund (Note 17).  

Operating and Financial Review

The Operating and Financial Review is included on pages 69 to 70.

Management

Ministers who had responsibility for the Department during the year were:

Secretary of State for Defence
The Right Honourable Geoffrey Hoon, MP

Minister of State for Defence Procurement
The Lord Bach of Lutterworth

Minister of State for the Armed Forces
The Right Honourable Adam Ingram JP, MP

Parliamentary Under Secretary of State for Defence and Minister for Veterans
Dr Lewis Moonie, MP  

Composition of Defence Management Board (DMB), during the year ended 31 March 2003:

Permanent Under Secretary of State
Sir Kevin Tebbit KCB CMG

Chief of the Defence Staff
Admiral Sir Michael Boyce GCB OBE ADC

Vice Chief of the Defence Staff
Air Chief Marshal Sir Anthony Bagnall KCB OBE ADC FRAeS RAF

Second Permanent Under Secretary of State
Mr Ian Andrews CBE TD

First Sea Lord and Chief of the Naval Staff
Admiral Sir Nigel Essenhigh GCB ADC (to 16 September 2002)
Admiral Sir Alan West KCB DSC ADC (from 17 September 2002)

Chief of the General Staff
General Sir Michael Walker GCB CMG CBE ADC Gen (to 2 February 2003)
General Sir Mike Jackson KCB CBE DSO ADC Gen (from 3 February 2003)

Chief of the Air Staff
Air Chief Marshal Sir Peter Squire GCB DFC AFC ADC FRAeS RAF

Chief of Defence Procurement
Sir Robert Walmsley KCB FEng FIEE

Chief of Defence Logistics
General Sir Sam Cowan KCB CBE ADC Gen (to 1 September 2002)
Air Chief Marshal Sir Malcolm Pledger KCB OBE AFC BSc FRAeS RAF (from 2 September 2002)

Chief Scientific Adviser
Professor Sir Keith O'Nions FRS

Non-Executive members
Charles Miller Smith, Chairman of Scottish Power (from 29 May 2002)
Philippa Foster Back, Director of the Institute of Business Ethics (from 10 July 2002)

Since the end of the financial year the following changes in appointment have arisen:

General Sir Michael Walker GCB CMG CBE ADC Gen appointed Chief of the Defence Staff on 2 May 2003 in succession to Admiral Sir Michael Boyce GCB OBE ADC.

Air Marshal Sir Jock Stirrup KCB AFC FRAeS FCIM RAF appointed Chief of the Air Staff on 1 August 2003 in succession to Air Chief Marshal Sir Peter Squire GCB DFC AFC ADC FRAeS RAF.

Sir Peter Spencer KCB FREng appointed Chief of Defence Procurement from 1 May 2003 in succession to Sir Robert Walmsley KCB FEng FIEE.

Ivor Caplin Esq MP, Member for Hove has been appointed on 13 June 2003 as Parliamentary Under Secretary of State for Defence and Minister for Veterans in succession to Dr Lewis Moonie, MP.

Remuneration of Ministers, and details of salary and pension entitlements of the members of the DMB, are shown in Notes 2.3 and 2.4.  

The Methodology of Senior Appointments

The Senior Civil Service was formed in April 1996 through an Order in Council. The recruitment principles, and their application, under which senior appointments, including those of the Permanent Under Secretary of State and Second Permanent Under Secretary of State, are made are specified in the 'Commissioners' Recruitment Code', responsibility for which lies with the Civil Service Commissioners.  

The Chief of Defence Procurement and the Chief Scientific Adviser are recruited on three year fixed-term appointments. The conditions covering the termination of their employment are set out in their contract documents.

The Chief of the Defence Staff, Vice Chief of the Defence Staff, Single-Service Chiefs of Staff and Chief of Defence Logistics are appointed on the recommendation of the Secretary of State for Defence to the Prime Minister. The final approval of the appointee lies with Her Majesty The Queen.  

Pension Liabilities

Pension liabilities for the majority of civilian personnel and Service personnel are provided by the Civil Service Pension Scheme (CSP) arrangements and the Armed Forces Pension Scheme (AFPS) respectively. The Department makes regular payments of Accruing Superannuation Liability Charge (ASLC) into the relevant pension schemes at rates determined by the Government Actuary.  

On 1 October 2002 the new CSP arrangements came into effect. Since that date all new entrants to the Department have had the option to join either the defined benefits (DB) scheme, known as 'Premium', or to join the defined contributions (DC) scheme which is known as 'Partnership'. The previous scheme, now known as 'Classic', was closed to new members when the new CSP arrangements came into effect. Member contributions to Premium are 3.5% and are considered to be a general contribution to the scheme. Members in Classic continue to contribute 1.5% in respect of the Widows Pension Scheme (WPS) benefits. The Department's contributions to Partnership vary depending on the age of the individual and the amount that they contribute.  

Both the Premium and Classic schemes are accounted for as Defined Contribution schemes in accordance with Treasury requirements. The pension liabilities are not included in the Department's Balance Sheet. The financial statements of these schemes are published separately.

Elements of Remuneration

Senior Civil Service and Ministers' emoluments are reviewed annually by the Review Body on Senior Salaries (SSRB). For civil servants outside the Senior Civil Service, emoluments are set on the basis of annual negotiations between the Department and the Trades Unions.  

Emoluments for Service personnel are paid in accordance with rank and conditions of service and are reviewed annually by the Armed Forces Pay Review Body (AFPRB) or the SSRB.  

Performance Schemes

The basic salary and annual increases of civilian members of the DMB, which could include a bonus payment, are performance related and are set by the Permanent Under Secretaries Remuneration Committee based in the Cabinet Office. The two Non-Executive Directors' remuneration, of which there is no performance-related element, is set by the Department within guidelines issued by the Cabinet Office.  

Senior officers at two-star rank and above participate in the Performance Management and Pay System (PMPS). The main elements of the PMPS are:

a. An objective-setting regime complementary to the Department's developing performance management system embodied in the Defence Balanced Scorecard.

b. A performance-related incremental pay system.  

Employees

The Department is committed to recruiting and retaining the best people for the job from all walks of life irrespective of race, gender or background.  

Payments to Suppliers

The Department's bills, with the exception of some payments to suppliers by units locally and outside Great Britain, are paid through the Defence Bills Agency (DBA). In 2002-03, the DBA met its target of paying 99.9% of all correctly submitted bills within eleven calendar days, ensuring that the Department is in compliance with its statutory obligation under the Late Payment of Commercial Debts (Interest) Act 1998. Commercial debt interest paid by units locally during the year amounted to £1,196 (2001-02: £134,522).  

Environmental Protection Policy

It is the Department's intention to comply with the Government's strategy for sustainable development and to take into consideration environmental and socio-economic factors in the development of policies, projects, acquisition programmes and training activities.  

A Sustainable Development Steering Group has been set up to oversee the development and implementation of a Departmental Sustainable Development Strategy. The Department is committed to compliance with the Environmental Protection Act 1990 and Environment Act 1995 and other relevant statutory provisions and any additional requirements arising from international treaties and protocols to which the UK is a signatory.  

Where the Department has been granted specific exemptions, disapplications or derogations from legislation, international treaties and protocols, Departmental Standards and arrangements will be introduced which are, as far as reasonably practical, at least as good as those required by the legislation. Any powers to disapply legislation on the grounds of national security will be invoked only when such action is absolutely essential for the maintenance of operational capability.

Departmental Report

The MOD's Departmental Report which is presented to Parliament each year comprises the 'Ministry of Defence Performance Report 2002-03' and 'The Government's Expenditure Plans 2003-04: Ministry of Defence'. The Departmental Report sets out the performance of the MOD against the objectives stated in Schedule 5 and also includes developments since the year-end, where appropriate. The Departmental Performance Report forms the first Section of the Annual Report and Accounts.  

Financial Instruments

The Department does not trade or enter into any speculative transactions in foreign currencies. Forward contract commitments entered into to cover future expenditure in foreign currencies are stated in Note 28.  

Provision of Information and Consultation with Employees

The MOD has a strong Whitley committee structure through which employees' representatives, in the form of recognised industrial and non industrial trades unions (TUs), are consulted on and informed of all matters likely to affect our civilian personnel. This structure is supported by formal policy and procedures for consulting and informing TUs. We also advocate the development of informal relationships with the TUs to discuss ideas together. Our policy makes clear that consulting the TUs is not a substitute for dealing with personnel direct, and vice versa. Managers and project leaders for example are encouraged to use all media available, including cascade briefings, newsletters and intranet websites/email. In respect of service personnel, the process operates through the chain of command, with no formal representation through the Trade Unions.  

Auditor

The financial statements for the Department are audited by the Comptroller and Auditor General under the Government Resources and Accounts Act 2000. The Certificate and Report of the Comptroller and Auditor General on the financial statements are set out on pages 75 to 87.

Kevin Tebbit

Accounting Officer
22 October 2003

Last Updated: 3 Dec 03