Operating and Financial Review

This is the first year that the Department is publishing the Departmental Performance Report (DPR) and the Departmental Resource Accounts as a single document. Presenting these two reports together as an "Annual Report and Accounts", in much the same way as in the commercial sector, increases the coherence of the Department's external reporting and is in line with Treasury best practice. The DPR deals mainly with the non-financial performance of the Department. It is structured along the lines of a Balanced Scorecard. The Defence Balanced Scorecard encapsulates the Defence Management Board's key objectives and priorities, including the Public Service Agreement targets, over the full range of the Department's business.  

Operational activity during the year was dominated by events in Iraq (Operation TELIC). This operation required a significant deployment of UK personnel to the Gulf and involved complex and difficult logistical support operations. During the year, the Department was also committed to operations in Afghanistan, Sierra Leone and Balkans and in the UK, under Operation FRESCO, mobilised a large number of personnel to assist in the fire cover required during the firefighters' strike. Further details of these operations are given in Section 1 of the Annual Report and Accounts.  

Financial Review

Last year the Department's Resource Accounts were qualified in respect of two supply system issues and an excess Vote in respect of RfR 1 net resource outturn. This year the Department planned and operated its financial controls so as to successfully remain within the Parliamentary controls. The NAO have removed one qualification in respect of one of the supply systems issues: that relating to MoD assets held by contractors. But it has not been possible to resolve the issue surrounding the qualification on stock consumption data. Significant progress continues to be made on this issue, and the Department is on track to resolve the issue in the current financial year.  

Net Resource Outturn

The total Net Resource Outturn was £2,475 million below the Estimate. Schedule 1 provides a summary explaining the reasons for the underspend, but, in the main, the underspend was largely due to lower than forecast non-cash costs. The main underspend arose in respect of Request for Resources (RfR) 1, Defence Capability. RfR 2 (Conflict Prevention) and RfR 3 (War Pensions and Allowances) outcomes were close to the Estimates.

The Net Resource Outturn was £8,495 million above last year. The significant increase in costs was caused by a number of items. The main item was the impact of the Quinquennial valuation (see Note 8 for further details) of the fixed assets carried out during the year. This resulted in an additional charge to the resource outturn of some £4,000 million, comprising impairments and additional depreciation costs. An additional cost of £1,124 million also had to be borne in respect of nuclear decommissioning costs allocated to the Department by BNFL as a result of their review of their strategy on solid Intermediate Level Waste retrieval. Conflict Prevention costs were also higher by £500 million due to the war in Iraq. The remaining increase is spread over several cost headings detailed in Note 3.

Net Cash Requirement

The net cash requirement (NCR) was £1,312 million below the Estimate. The underspend in cash resources is mainly attributable to a reduction in operating costs after offsetting non-cash transactions, movements in working capital and lower than expected capital expenditure.  

Financial Position

The net asset value at £81,438 million was £4,963 million below last year. The decrease is accounted for by a small decline in the value of fixed assets caused by a number of factors; mainly the impact of the Quinquennial valuation, disposals and reduction in investments. Working capital decreased by £1,052 million, mainly due to a reduction in stocks. Provision for liabilities and charges increased due to further provisions for nuclear decommissioning made in respect of BNFL, as referred to in Note 16.  

Cash Flow

The amount drawn down from the Consolidated Fund was £27,136 million. This amount was mainly utilised to finance operating activities (£21,165 million) and net capital expenditure on fixed assets (£5,647 million). Cash and bank balances decreased by £216 million, after making payments to the Consolidated Fund in respect of prior year's Supply and Consolidated Fund receipts.  

Future Developments

During the year, the Department selected The Carlyle Group as its strategic partner and sold them an interest of 34% in QinetiQ, a company involved in the supply of scientific and technical services. Defence remains a core business for QinetiQ , but it is now applying its expertise to solve commercial problems in diverse markets. The Carlyle Group will help the business to develop and grow, and secure private sector capital, with a view to achieving its anticipated future potential. It is the intention to sell the remaining stake in the company within 3 to 5 years, probably through a flotation on the stock market.  

The Department continues to explore prospects and opportunities for using Private Finance Initiatives and Public Private Partnering arrangements to deliver best value without compromising operational effectiveness.

Last Updated: 3 Dec 03