Notes to the Accounts

Joint Ventures and Collaborative Projects

10.2 European Transonic Windtunnel GmbH (ETW):

The Department has a 31% interest in ETW, a non-profit making company, which is jointly owned by the governments of France, Germany, the Netherlands and the United Kingdom. ETW provides facilities for developments or research relating to air vehicles. Under a Memorandum of Understanding extended in January 2000, the Department is committed to making further payments of £260,000 up to 31 March 2004, all of which will be recovered from the Department of Trade and Industry. The contributions made to ETW are charged to operating costs when incurred.

The Department is also involved in collaborative projects with various foreign countries for the development and production of fighting equipment. Costs capitalised represent the Department's proportion of the total cost of a project.  

11. Stocks and Work in Progress

	31 March 2003	31 March 2002
	£000	£000
Work in progress	39,116	40,748
Raw materials and consumables	5,294,617	6,350,728
Assets declared for disposal	3,392	4,828
	5,337,125	6,396,304

12. Debtors

Notes:
i. Other debtors include loans for house purchase and other loans made to staff amounting to £97,554,131 (2001-02: £99,867,277). The number of staff with house purchase loans was 14,452 (2001-02: 14,766); and

ii. Prepayments include an amount of £343,500,000 paid into an Escrow account in respect of an
adjudication decision where an appeal is pending.

Note:
The cash at bank balance includes £175,900,000 (2001-02: £181,900,000) of sums advanced by foreign governments to the Department on various collaborative projects where the United Kingdom is the host nation. Advances made by foreign governments for the procurement of defence equipment on their behalf are also included in this amount. The corresponding liability for these advances is shown under Creditors due within one year.

14. Creditors: amounts falling due within one year

	31 March 2003	Restated (Note 26) 31 March 2002
	£000	£000
Trade creditors	608,803	427,277
Payments received on account	6,160	11,647
Other taxation and social security	164,041	158,851
Other creditors	400,635	425,114
Accruals and deferred income	3,736,625	3,091,302
Obligations under finance leases and PFI contracts	6,654	4,984
Payable to the Consolidated Fund	279,693	455,974
Amounts owed to other Government Departments	2,561	4,146
Amounts owed to undertakings in which the Department has a participating interest	177,303	81,490
Loans	1,375	1,424
	5,383,850	4,662,209

Note:
Amounts payable to the Consolidated Fund amounting to £279,692,811.63 (2001-02: £455,974,221.46) comprise:

	31 March 2003	Restated (Note 26) 31 March 2002
	£000	£000
CFERs received during the year	1,110	4,063
CFER – proceeds on part sale of shareholding in QinetiQ	39,427	–
CFER – proceeds of certain fixed assets	44,300	–
CFER – loan repayments by QinetiQ	49,900	–
Excess Operating Appropriation-in-Aid	–	42,810
Excess Non-Operating Appropriation-in-Aid	–	22,557
	134,737	69,430
Amount repayable by Consolidated Fund in respect of prior year	(39,665)	–
CFERs accrued at year end	–	5,888
Amount drawn but not spent at the year end (Note iii)	144,956	380,656
Net amount payable to Consolidated Fund	240,028	455,974
Amount shown within debtors due within one year	39,665	–
	279,693	455,974

i. Loans are from the National Loans Fund in respect of the Armed Forces Housing Loans. These are fully repayable between years 2012 and 2028, with the last instalment due on 20 February 2028. Interest on the loans is payable at rates ranging from 4.25% to 7% per annum.

ii. Included in other creditors are amounts advanced by foreign governments to the Department in respect of various collaborative projects where the United Kingdom is the host nation and for the procurement of defence equipment on their behalf of £175,900,000 (2001-02: £181,900,000).

iii. The amount comprises amount drawn down from the Consolidated Fund £27,136,321,000 less net cash requirement (Schedule 1) of £26,991,365,000.

15. Creditors: amounts falling due after more than one year

16. Provisions for Liabilities and Charges

Analysis of amount charged/(credited) to Operating Cost Statement

	2002-03	2001-02
	£000	£000
Charged/(credited) to:
Staff costs	232,485	111,708
Movements	–	(1,518)
Nuclear and Other Decommissioning provisions	1,635,223	137,811
Other costs	171,782	278,737
Net interest (receivable)/payable	247,703	232,636
	2,287,193	759,374
Made up of:
Increase	2,345,459	550,262
Release	(305,969)	(23,524)
	2,039,490	526,738
Unwinding of discount	247,703	232,636
Net increase in provisions	2,287,193	759,374

General

16.1 HM Treasury issued instructions to reduce the rate used for discounting the value of provisions from 6% to 3.5% to be effective from 1 April 2003. This has not affected the value of the provisions at the Balance Sheet date but this will have the effect of increasing the provisions at 1 April 2003 by £2,300 million and the operating costs in 2003-04 by the same amount.  

16.2 The increase in the year in nuclear provisions of £1,755 million includes an amount of £1,124 million in respect of the MOD allocation of costs associated with BNFL, where a review of the company's strategy for solid Intermediate Level Waste (ILW) retrieval and change in methodology of certain other costs resulted in a significant increase in the estimates of nuclear decommissioning costs. The increase also includes an increase of £505 million in AWE estimates arising from the first quinquennial review as required by the Government White Paper 'Review of Radioactive Waste Management Policy: Final Conclusion' (Cm 2919).  

16.3 Nuclear decommissioning provisions relate principally to the cost of facility decommissioning and the treatment and storage of nuclear waste arising at British Nuclear Fuel plc (BNFL), United Kingdom Atomic Energy Authority (UKAEA) and MOD sites and for the Departmental share of planning and constructing a national repository for the eventual disposal of that waste. Liabilities have arisen since the late 1940's and will continue well into the future as a result of ongoing production and operations associated with the manufacture and reprocessing of Special Nuclear Materials (SNM). The majority of the liability is historic and relates to facilities used for the production of SNM by BNFL and its predecessor the UKAEA. The Atomic Weapons Establishment is the other main source of MOD's liabilities.  

The liabilities include the costs associated with decommissioning and care and maintenance of redundant facilities (the conditioning, retrieval and storage of contaminated materials), research and development and the procurement of capital facilities to handle the various waste streams.  

Calculation of the provision to cover the liabilities is based on schedules of information received by the MOD from major decommissioning contractors. These schedules are based on technical assessments of the processes and methods likely to be used in the future to carry out the work. Estimates are based on the latest technical knowledge and commercial information available, taking into account current legislation, regulations and Government policy. The amount and timing of each obligation are therefore sensitive to these factors. These sensitivities and their likely effect on the calculation and amount of the liabilities are reviewed on an annual basis.  

The latest estimate of the undiscounted cost of dealing with the MOD's nuclear liabilities is £21,947,363,000 (2001-02: £16,622,092,000).  

The estimate of £5,529,752,000 (2001-02: £3,887,957,000) at 31 March 2003 represents the liabilities discounted at 6% and expressed in 2002-03 money values.  

The estimated timescale over which the costs will need to be incurred is as follows:

	2002-03	2001-02
	£bn	£bn
Up to 3 years	1.3	0.8
From 4 – 10 years	1.9	1.4
Beyond 10 years	2.3	1.7
Total	5.5	3.9

The bulk of the earlier anticipated costs relate to pre and post 1971 liabilities allocated to the Department. The significance of pre and post 1971 refers to the formation date of BNFL. Specific liabilities refer to the BNFL Sellafield, Springfields, Capenhurst, Calder Hall and Chapelcross sites.  

Later provisions have been made to cover the costs associated with the research, development and construction of the NIREX Deep Waste Repository (DWR). The provisions have been based on advice provided by NIREX.  

However, the policy for the disposal of intermediate and high level waste has yet to be clarified following the previous government's rejection, in May 1997, of planning consent for the proposed DWR. Pending the current government's consideration of a House of Lords Sub Committee report on means of disposing radioactive waste, the UK holders of such waste are working on the assumption that a repository will not be available earlier than 2040. This will necessitate the continued provision of interim storage.  

Other Decommissioning and Restoration

16.4 Other decommissioning and restoration provisions relate primarily to contaminated sites where the Department has a constructive or a legal obligation to restore the sites for normal use and for the decommissioning of certain fighting equipment and GWMB.  

Early Retirement Commitments

16.5 Where the Department implements an early retirement scheme, provision is made for future liability payable to civilian early retirees. This includes provisions arising from the '80:20 Scheme' under which 20% of the cost was borne by the Department and 80% was borne by the Civil Superannuation Vote. This scheme was terminated in 1997 and the full cost of the obligations are now payable by CSP.  

Other

16.6 Other provisions include costs arising from the disposal of fixed assets; redundancy and relocation costs associated with reorganisation and restructuring; and amounts payable under guarantees, litigation and contractual arrangements. Provisions include those concerning an adjudication decision where an appeal is pending.  

17. Reconciliation of Net Operating Costs to changes in General Fund

	2002-03	Restated (Note 26) 2001-02
	£000	£000
Net Operating Cost for the year (Schedule 2)	(41,793,591)	(33,475,629)
Paid and payable to the Consolidated Fund	(317,780)	(516,136)
Parliamentary funding from the Consolidated Fund (Schedule 4)	27,136,321	26,568,984
Transfer to General Fund of realised element of:
– Revaluation reserve (Note 18)	830,832	638,774
– Donated asset reserve (Note 18)	6,537	24,069
Non-cash charges:
– cost of capital charge (Schedule 2)	5,074,726	5,124,775
– auditors' remuneration (Note 3)	3,405	4,170
Surplus arising on restructuring of DERA	–	297,066
Net increase/(decrease) in General Fund	(9,059,550)	(1,333,927)
General Fund at 1 April	74,504,706	75,991,550
	65,445,156	74,657,623
Restatement of opening General Fund at 31 March 2002 (Note 26)	–	(152,917)
General Fund at 31 March	65,445,156	74,504,706

18. Reserves

	Revaluation Reserve	Donated Asset Reserve
	£000	£000
At 1 April 2002	10,549,019	1,347,597
Arising on revaluation during the year (net)	4,611,795	501,342
Additions during the year	–	20,480
Transfers and reclassifications	(148,348)	(169)
Transferred (to)/from Operating Cost Statement	–	(51,386)
Transferred (to)/from General Fund	(830,832)	(6,537)
At 31 March 2003	14,181,634	1,811,327

Note:
During the year Land and Buildings were valued by professional valuers and the new net book values were posted directly to fixed asset registers. However, as a result of adopting this treatment, the historical data in respect of the revaluation reserve for these assets could only be maintained at a disproportionate cost. The accounting treatment for future years is under review. This does not have any impact on the values at which Land and Buildings are stated in the Balance Sheet.

19. Capital Commitments

Capital Commitments for which no provision has been made in these financial statements, were as follows:

	31 March 2003	31 March 2002
	£000	£000
Contracted but not provided for	17,824,501	17,532,005

20. Financial Commitments

Commitments under operating leases:

	Land and Buildings		Other
	31 March 2003	31 March 2002	31 March 2003	31 March 2002
	£000	£000	£000	£000
The Department was committed to making the following payments during the next year in respect of operating leases expiring:
Within one year	6,284	8,205	12,844	9,268
Between two and five years	11,644	12,052	14,483	26,394
After five years	144,678	142,425	109,828	96,272
	162,606	162,682	137,155	131,934

21. Private Finance Initiative (PFI) Commitments

21.1 The payments made during the year in respect of on and off balance sheet PFI transactions were
£542,048,000 (2001-02: £538,023,000).

21.2 The payments which the Department is committed to make during the year 2003-04 are analysed below by time-bands specifying the period in which the individual commitment expires:

	31 March 2003	31 March 2002
	£000	£000
In the 1st year	–	1,600
In the 2nd to 5th years	225,325	–
In the 6th to 10th years	126,969	336,807
In the 11th to 15th years	3,820	–
In the 16th to 20th years	15,830	75,383
In the 21st to 25th years	127,451	18,835
In the 26th to 30th years	75,531	85,914
In the 41st to 45th years	6,250	6,250

The following information is provided for those schemes assessed as off balance sheet:

Project Description	Capital Value* £000	Contract Start/End Dates
Training, Administration and Financial Management Information System (TAFMIS): Provision of training administration and financial management information systems to the Army Training and Recruiting Agency (ATRA)	41,000	Aug 1996	Aug 2007
Material Handling Equipment (MHE): Pathfinder project providing 1,400 items of equipment on a Tri-Service basis.	8,000	Sep 1997	Jun 2002
Hazardous Stores Information System (HSIS): Provision of an information management service for hazardous stores safety datasheets with 2,000 users	1,000	Feb 1997	Dec 2007
Defence Fixed Telecommunications System (DFTS): Integration of 50 fixed telecommunications networks used by the Armed Forces and MOD, including the delivery of voice, data, LAN interconnect and other WAN services	70,000	Jul 1997	Jul 2007
Electronic Messaging Service: Interoperability of messaging services for the Army	33,000	Jul 1997	Apr 2007
Medium Support Helicopter Aircrew Training Facility (MSHATF): Provision of 6 flight simulator training facilities, covering three different types of helicopter, at RAF Benson	114,000	Oct 1997	Oct 2037
Hawk Synthetic Training Facility: Provision of replacement simulator training facilities at RAF Valley	19,000	Dec 1997	Dec 2015
Joint Services Command and Staff College (JSCSC): Design and delivery of a new tri-Service Command and Staff Training College infrastructure and supporting services, including single residential accommodation and married quarters (of which £63.9 million relates to on-balance sheet)	92,769	Jun 1998	Aug 2028
Attack Helicopter Training Service: Provision of full mission simulator, 3 field deployable simulators, ground crew, maintenance and armament training	165,000	Jul 1998	Sep 2027
Family Quarters Yeovilton: Provision of married quarters accommodation for 88 Service families at RNAS Yeovilton	8,200	Jul 1998	Jul 2028
RAF Lyneham Sewage Treatment: Refurbishment of existing sewage treatment facilities, serving a population of 7,000, to meet regulatory standards at RAF Lyneham	3,809	Aug 1998	Aug 2023
Tidworth Water and Sewerage: Pathfinder project providing water, sewerage and surface water drainage, serving a population of 12,000 military and dependants at Tidworth.	6,000	Sep 1998	Aug 2018
RAF Mail: Provision of informal messaging services for the RAF	12,000	Nov 1998	Nov 2008
Fire Fighting Training Units: Provision of fire fighting training for the Naval Recruiting and Training Agency (NRTA)	22,500	Apr 1999	Apr 2019
Light Aircraft Flying Training: Provision of flying training and support services for Air Experience Flying (AEF) and University Air Squadron (UAS) Flying Training	20,000	Apr 1999	Mar 2009
Tornado GR4 Synthetic Training Service: Provision of aircraft training service at RAF Marham and RAF Lossiemouth	61,700	Jun 1999	Jun 2031
Army Foundation College: Provision of teaching and training facilities for the further vocational education and military training of high-quality school leavers	73,408	Feb 2000	Dec 2029
RAF Cosford/RAF Shawbury Family Quarters: Provision of married quarters accommodation for 145 Service families at RAF Cosford and RAF Shawbury	15,083	Jun 2000	Jun 2025
Central Scotland Family Quarters: Provision of married quarters accommodation for 164 Service Families in Central Scotland	24,713	Jan 2001	Jan 2021
Tri-Service Material Handling Equipment: Provision of Tri-Service materials handling capability	35,000	Jun 2000	Jun 2010
Commercial Satellite Communication Service (INMARSAT): Provision of world-wide commercial satellite communication system for Royal Navy Ships to run for five years	2,600	Mar 2001	Mar 2006
Defence Electronic Commerce Services (DECS)	–	Jul 2000	Jul 2010
E3D Sentry Aircrew Training Service: E3D Sentry simulators instructors and maintainers at RAF Waddington	6,929	Jul 2000	Dec 2030
Lynx MK 7 and 9 Aircrew Training Service: Provision for simulator training facility for Lynx MK 7 and 9 helicopter aircrew	15,436	Jul 2000	Mar 2013
Tri-Service White Fleet: Provision, management and maintenance of support vehicles in the UK	40,000	Jan 2001	Jan 2011
Family quarters at Wattisham: Provision of married quarters accommodation for 250 Service families	34,200	May 2001	Jan 2028
Family quarters at Bristol/Bath/Portsmouth: Provision for married quarters accommodation for 317 Service families	78,010	Nov 2001	Apr 2028
Defence Housing Executive Information Systems (DOMIS): Provision for a management information system for the Defence Housing Executive	11,600	Oct 2001	Sept 2010
Marine Support to Range and Aircrew Training: Provision of management, manning, operation and maintenance of Air Support Craft and Range Safety Craft	11,000	Dec 2001	Dec 2012
Astute Class Training: Provision of a training environment for crewmen and maintainers to support Astute Class submarines for 30 years	41,000	Sep 2001	Sep 2031
Strategic Sealift (RoRo): Provision of strategic sealift services based on six RoRo ferries in support of Joint Rapid Reaction Force (JRRF) deployments	175,000	Jun 2002	Dec 2024
Field Electrical Power Supplies (FEPS): Provision of generator sets to support operational electrical requirements in the field	60,000	Jul 2002	Mar 2022
Material Handling Equipment: Provision of tri-service material handling equipment for Army, Navy and RAF storage depots	23,000	Aug 2002	Jul 2010
* The capital value is based on private sector partners’ capital investment, where known, or otherwise the capital value of the public sector comparator.

The following PFI projects, where service delivery has commenced, are treated as on balance sheet and their service payment commitments are included in the table shown above: Lossiemouth FQs; RAF Fylingdales; Defence Helicopter Flying School; Defence Animal Centre; Naval Communication; Provision of storage facilities; Main Building Redevelopment and a part of the Joint Services Command and Staff College.  

The following on balance sheet PFI projects have not yet entered service: Heavy Equipment Transporter.

Contracts for further PFI projects have been signed since the end of the financial year. The projects are as follows: Aquatrine Project A, Defence Sixth Form College and Pan Government Records Management and Archive Services (HAYES).  

No specific contingent liabilities have been identified in respect of the PFI contracts listed above.

22. Contingent Liabilities Disclosed Under FRS 12

Contingent liabilities estimated at some £1,318,000,000 (2001-02: £550,000,000) were identified.  
Indemnities issued to contractors and suppliers that were quantifiable as at 31 March 2003 amounted to £1,162,000,000.

23. Contingent Liabilities Not Required To Be Disclosed Under FRS 12 But Included For Parliamentary Reporting And Accountability

23.1 Quantifiable  

MOD has entered into the following quantifiable contingent liabilities by offering guarantees, indemnities or by giving letters of comfort. None of these is a contingent liability within the meaning of FRS12 since the likelihood of a transfer of economic benefit in settlement is too remote. 

	1 April 2002	Increase in year	Liabilities crystalised in year	Obligation expired in year	31 March 2003	Amount reported to Parliament by departmental minute
	£000	£000	£000	£000	£000	£000
UNRESTRICTED
Indemnities
Residual liability for the remediation of unidentified contamination in parts of the former Rosyth Naval Base which has been sold to Rosyth 2000 plc.	Up to £1,000k				Up to £1,000k	n/a
Termination liabilities arising out of MOD’s association with the Research Council under the Joint Grants Scheme.	£16,100k	£1,520k (1)	NIL	NIL	£17,620k	£17,520k
Liabilities arising from insurance risk of exhibits on loan to the Army, Navy and RAF Museums.	£1,452k	£47k (2)		£10 (2)	£1,489	Not known
RESTRICTED
Details on restricted liabilities not given because they are sensitive due to commercial confidentiality, national security, or where public knowledge of a guarantee could prompt claims from third parties.

Explanation of movements

1. Grants are replaced on an annual basis both ‘in place’ and ‘committed by letter’, hence liability fluctuates on an annual basis.

2. General reassessment of risk.

Reconciliation between disclosed amount and amount reported to Parliament

The last comprehensive valuations were as reported in the 2001-02 Treasury return.

23.2 Unquantifiable  

MOD has entered into the following unquantifiable contingent liabilities by offering guarantees, indemnities or by giving letters of comfort. None of these is a contingent liability within the meaning of FRS12 since the likelihood of a transfer of economic benefit in settlement is too remote.  

Unrestricted Indemnities

• Indemnity given in relation to the disposal of Gruinard Island in the event of claims arising from the outbreak of specific strains of anthrax on the Island.

• Indemnity to Devonport Royal Dockyards Ltd (DRDL) in respect of nuclear risks under the Nuclear Installations Act 1965.

• Indemnity to the Babcock Group in respect of nuclear risks under the Nuclear Installations Act 1965.

• Indemnities to Devonport Royal Dockyards Ltd (DRDL) and the Babcock Group in respect of non-nuclear risks resulting from claims for damage to property or death and personal injury to a third party.

• Product liability to British Aerospace in respect of work carried out by third party contractors on aircraft for which BAe are Design Authority and for which BAe, at MOD's request provide the third party contractor with design advice and verification.

Restricted Indemnities

• Details on restricted liabilities are not given because they are sensitive due to commercial confidentiality and national security.

• Explanation as to why unquantifiable: These liabilities are unquantifiable due to the nature of the liability and the uncertainties surrounding them.

24. Post Balance Sheet Events

Recovery of HMS Sussex

A US salvage company, Odyssey Marine Exploration, has found what is believed to be the wreck of HMS Sussex, which sank in the Western Mediterranean in 1694 carrying gold and silver coins valued at the time at £1 million. The wreck and its contents are legally the property of Her Majesty's Government.  

A licensing agreement was signed on 27 September 2002 between the Disposal Services Agency of the Ministry of Defence, on behalf of HM Government, and Odyssey. Under the agreement the net proceeds of sale of coins and other marketable artefacts will be shared between the two parties. HM Treasury will receive the net proceeds of the sale of the gold and silver coins, with the proceeds from the sale of any other artefacts being accounted for by the Ministry of Defence.  

The value of potential proceeds for the Ministry of Defence for this venture is not yet known nor indeed is estimable until the initial stages of exploration and recovery have been completed. At this stage therefore no income or asset has been recognised in the Ministry of Defence accounts. Expenses (including legal costs) incurred by the Ministry of Defence on this project will be borne by the Ministry's voted funds.

Last Updated: 3 Dec 03