Chapter Two > Outcome Three: Army Capabilities > Price to Government

Outcome Three: Army Capabilities

Price to Government

Table 2.16 Outcome Three - Army Capability for the Defence of Australia and its Interests
Budget
Estimate
Revised Additional Estimate(1) Projected Result(2) Actual Result(3) Variation(5) Variation
2003-04
$'000
2003-04
$'000
2003-04
$'000
2003-04
$'000
2003-04
$'000
2003-04
%
Operating Expenses
Employees - Military 2,474,189 2,439,569 2,660,053 2,495,214 -164,840 -6.2
Employees - Civilian 417,449 402,467 396,605 400,981 4,376 1.1
Sub-Total Employees 2,891,638 2,842,036 3,056,659 2,896,195 -160,464 -5.2
Suppliers expense 1,135,299 1,218,353 1,272,740 1,296,372 23,632 1.9
Inventory consumption 335,613 322,076 366,271 274,619 -91,653 -25.0
Sub-Total Suppliers 1,470,911 1,540,429 1,639,011 1,570,990 -68,021 -4.2
Grants 718 547 890 2,912 2,022 227.2
Depreciation and amortisation 608,881 577,038 659,580 576,366 -83,214 -12.6
Value of assets sold - - 130,121 80,915 -49,206 -37.8
Write-down of assets 85,890 72,114 74,496 224,535 150,039 201.4
Borrowing costs 15,979 13,603 17,716 15,354 -2,362 -13.3
Other expenses 919 -408 - 29,347 29,347 -
Total Operating Expenses from Ordinary Activities 5,074,937 5,045,358 5,578,473 5,396,614 -181,859 -3.3
Revenues
Sale of goods and services -66,168 -50,729 -86,739 -81,963 4,775 -5.5
Revenue from sale of assets - - -130,121 -95,983 34,139 -26.2
Assets now recognised -78,964 -50,997 -46,055 -104,560 -58,504 127.0
Other revenues(4) -84,785 -38,384 -36,031 -27,685 8,346 -23.2
Total Own Source Revenues -229,918 -140,110 -298,946 -310,190 -11,244 3.8
Price to Government for Outcome Three 4,845,019 4,905,248 5,279,527 5,086,424 -193,103 -3.7

Notes

  1. The Revised Additional Estimate figures have been adjusted since the Portfolio Additional Estimates Statements 2003-04 (p.38) to reflect an improved costing methodology.
  2. The Projected Result is consistent with the Portfolio Budget Statements 2004-05.
  3. The Actual Price to Government for Outcome Three, shown in this table ($5,086.424m), relates to Departmental expenses and revenues. The Actual Price to Government for Outcome Three does not include $0.127m of administered revenues. This amount relates to interest received from the foreign military sales account.
  4. The Actual Result amount for Other revenues includes interest and dividends, net foreign exchange gains/losses and resources received free of charge.
  5. The variation figures are the difference between the Actual Result and the Projected Result.

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Explanation of Significant Variations

The overall price of Outcome Three was $193.1m lower than the 2003-04 projected result, representing a decrease of 3.7 per cent. The reduction was largely technical in nature, relating to accounting variations and refinements to cost attribution rules, including the correction of anomalies contained in the projected result. The major variations were due to:

  • a net decrease in military employees expenses (-$164.8 m) due to:

    Salary and allowances

    • reduced salaries and allowance payments due to the lower (-177) than planned average funded strength (-$14.2m);
    • an overestimate of long service and annual leave to be paid in 2003-04 (-$6.9m);
    • an overstatement of the military employees salaries estimates in 2003-04 (-$6.9m);
    • a decreased take-up rate and overstatement of the estimate for the home purchase assistance scheme (-$5.2m);
    • a review of employee allowance entitlements recognising overpayment of Army military allowances (-$9.7m);
    • an overstatement of salary advances (-$4.6m);
    Superannuation

    • the decision not to proceed with the proposed transfer of the liability for the Defence Force Retirement and Death Benefit Scheme 3 per cent productivity benefit from the administered to departmental accounts (-$100.5m);
    • the reduced superannuation payment due to lower than planned average funded strength (-$2.8m);
    • the overstatement of military superannuation estimates in 2003-04 (-$3.0m);
    Leave liability

    • an overestimate of the impact of the workplace remuneration arrangement on leave liability and the implementation of a new methodology for calculating attrition rates on annual and long service leave provisions (-$1.0m);
    Housing

    • an increase in housing expenses including buy-out of old on-base housing annuities and increased take-up rate of members without dependants using rental assistance rather than living-in accommodation (+$4.8m);
    Compensation

    • an adjustment arising from an actuary review of compensation expense which projected higher longer term incapacity payments (+5 per cent), higher medical payments (+25 per cent) and a higher establishment cost for claims (+$83.1m);
    • a decrease in the number and value of claims for lump sum compensation for permanent impairment (-$4.0m);
    Health

    • increased health costs relating to medical and professional fees (+$8.3m);
    Fringe benefits tax

    • an underestimate of fringe benefits tax payable for rental allowance for members without dependants (+$13.1m);
    Reserves

    • increased activity by officers and instructors of cadets and a higher than projected use of Reserve days by non-Service Groups (+$2.0m);
    Cost attribution

    • the redirection of Land Command salaries to Outcome One incorrectly attributed to Outcome Three in the projected result (-$59.4m); and
    • progressive refinement of Defence's cost attribution rules to reflect changes in workforce distributions and expenditure patterns and other variations (-$57.9m).
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  • a net increase in civilian employee expenses (+$4.4m) due to: Salary and allowances

    • the recognition of Defence Integrated Distribution System redundancy costs in 2003-04, rather than 2004-05 as originally planned (+$6.8m);
    • lower full-time equivalent-average personnel than projected in 2003-04 (-$0.8m);
    • an overstatement of civilian employee salaries in 2003-04 (-$6.2m);
    Superannuation

    • payment to the University of New South Wales for Australian Defence Force Academy staff superannuation liabilities from supplier expenses rather than civilian employee expenses (-$8.9m);
    • an underestimate of the impact of the changing profile of members in the Commonwealth Superannuation Scheme and the Public Sector Superannuation Scheme (+$3.8m);
    Leave liability

    • increase in the future leave liability costs resulting from the new Defence Employees Certified Agreement (+$8.9m);
    • an increase in future leave liability costs resulting from Commonwealth Superannuation Scheme and the Public Sector Superannuation rate increases on leave liabilities (+$2.4m);
    • the recalculation of accrued leave balances arising from actuarial reviews and errors in certain aspects of the estimates (+$2.4m);
    Other

    • a variation in health costs reflecting more emphasis by Defence on the health and well being of its civilian workforce and other minor variations (+$0.4m);
    Cost attribution

    • progressive refinement of Defence's cost attribution rules to reflect changes in workforce distribution and expenditure patterns and other variations (-$4.4m);
  • a net increase in supplier expenses (+$23.6m) due to:
    • payment to the University of New South Wales for Australian Defence Force Academy staff superannuation liabilities (-$5.7m);
    • lower levels of expenses incurred on Defence's recruitment contract due to improvement in separation rates (-$5.1m);
    • the rephasing of some information systems and business improvement projects to 2004-05 to reflect changed schedules for these projects (-$3.4m);
    • changes in accounting treatment of revenue collected under garrison support contracts, which is no longer offset against expenses (+$1.2m);
    • the redirection to inventory purchases as Defence progressively reduces backlogs in this area (-$26.4m);
    • progressive refinement of Defence's cost attribution rules to reflect changes in workforce distribution and expenditure patterns and other variations (+$51.6m).
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  • a net decrease in inventory consumption (-$91.7m) due to:
    • the flow through of improvements in the pricing of explosive ordnance (-$17.1m);
    • an overstatement of inventory consumption estimate (-$36.5m); and
    • progressive refinement of Defence's cost attribution rules to reflect changes in workforce distribution and expenditure patterns and other variations (-$38.1m).
  • a net increase in grants of (+$2.0m) due to the reclassification of research agreements between the Defence Science and Technology Organisation and universities, the Point Nepean community grant, the Mornington Peninsula land grant and refinement to cost attribution rules (+$2.0m).
  • a net decrease in depreciation and amortisation expenses (-$83.2m) due to:
    • the non-requirement to proceed with the anticipated adjustment in specialist military equipment relating to the migration of assets from Defence's legacy financial system (DEFMIS) to ROMAN ($-113.3m);
    • the revaluation of buildings and infrastructure (+$26.8m);
    • the reclassification of some operating leases to finance leases (+$10.3m);
    • a review of the useful life on the repairable items on a number of platforms including the Leopard tanks (+$11.9m);
    • greater than anticipated adjustment in other property, plant and equipment required to correct an error in the migration of assets from Defence's legacy financial system (DEFMIS) to ROMAN (-$8.9m);
    • an understatement of the depreciation estimate (+$9.5m);
    • net movements from asset revaluations, assets under construction roll-out, assets first recognised and property sales delays (+$21.6m); and
    • progressive refinement of Defence's cost attribution rules to reflect changes in workforce distribution and expenditure patterns and other variations (-$41.1m).
  • a net decrease in value of assets sold (-$49.2m) due to:
    • the delay in the property sales program due to delays in contract negotiations, signings, planning consent and revisions to Government directions (-$54.4m);
    • the value of assets sold for which Defence owes an annuity to the Defence Housing Authority (+$20.0m);
    • an overestimation of the expected proceeds for other property, plant and equipment (-$17.6m); and
    • progressive refinement of Defence's cost attribution rules to reflect changes in workforce distribution and expenditure patterns and other variations (+$2.8m).
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  • a net increase in write-down of assets (+$150.0m) due to:
    • an adjustment to account for the change from $1,000 to $2,000 in the asset threshold for administrative assets and the removal of grouping of these assets (+$26.8m);
    • the transfer of assets, including George's Heights and Chowder Bay to the Sydney Harbour Foreshore Trust (+$39.7m);
    • a large scale review of Defence's inventory holdings by the Defence Materiel Organisation which led to inventory being recognised as obsolete (+$19.3m);
    • the reclassification of certain fixed assets in Standard Defence Supply System as inventory (+$14.0m);
    • the flow through of improvements in the pricing of explosive ordnance, including inventory consumed throughout the year and inventory still to be consumed (+$14.4m);
    • asset disposals including Black Hawk helicopters and night vision goggles (+$62.1m);
    • the write-down of specialist military equipment, including assets under construction through project-initiated reviews including LAND 75 - Battlefield Command System and JP 2070 - Lightweight Torpedoes (+$25.9m);
    • an increase in inventory disposals (+$5.5m); and
    • progressive refinement of Defence's cost attribution rules to reflect changes in workforce distribution and expenditure patterns and other variations (-$57.7m).
  • a net decrease in borrowing costs (-$2.4m) due to:
    • the reclassification of some operating leases into finance leases (+$1.3m); and
    • progressive refinement of Defence's cost attribution rules to reflect changes in workforce distribution and expenditure patterns and other variations (-$3.7m).
  • a net increase in other expenses (+$29.3m) due to:
    • an increase in the provision for Defence's share of the Commonwealth's common law liability for asbestos-related diseases (+$23.4m);
    • the resolution of past errors in accounting for the transfer of expense and revenue items between Defence and special public monies accounts. Items transferred after 30 June 2003 have been accounted for correctly (+$1.6m); and
    • corrections arising from the reconciliation of Defence Housing Authority annuity balances (+$4.3m).
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  • a net decrease in the sale of goods and services (+$4.8m) due to:
    • increased fuel sales to foreign governments (-$1.0m);
    • the sale of equipment to other Government agencies (-$2.2m); and
    • progressive refinement of Defence's cost attribution rules to reflect changes in workforce distribution and expenditure patterns and other variations (+$8.0m).
  • a net decrease in the revenue from the sale of assets (+$34.1m) due to:
    • the delay in the property sales program due to Government decisions, the need to refer works at Randwick, New South Wales, to the Public Works Committee, and variations in project scheduling for various reasons including the lead time required to consider local and State government priority sale proposals (+$46.2m);
    • an overestimation of the expected proceeds for other property, plant and equipment (+$17.6m);
    • the revenue received from the sale of housing for which Defence owes an annuity to Defence Housing Authority (-$20.0m); and
    • progressive refinement of Defence's cost attribution rules to reflect changes in workforce distribution and expenditure patterns and other variations (-$9.7m).
  • a net increase in assets now recognised (-$58.5m) due to:
    • assets identified following site audits and other remediation activities ($-29.6m);
    • Army historical assets being recognised for the first time by the Army History Unit (-$7.7m);
    • the reconciliation of the ROMAN fixed asset register to the Standard Defence Supply System - Defence's inventory management system - following the introduction of Standard Defence Supply System version 4 (-$28.4m);
    • the reclassification of certain fixed assets in Standard Defence Supply System as inventory (-$14.0m); and
    • progressive refinement of Defence's cost attribution rules to reflect changes in workforce distribution and expenditure patterns and other variations (+$21.2m).
  • a net decrease in other revenues (+$8.3m) due to:
    • Australian National Audit Office audit services received free of charge (-$0.5m);
    • the changes in accounting treatment of revenue collected by garrison support contractors which is no longer offset against expenses (-$1.2m);
    • the receipt of liquidated damages including for the armed reconnaissance helicopter project to fund a program of rectification works caused by delays in the projects (-$0.3m);
    • the net variations due to the timing difference between invoices for transactions in foreign currencies entering the system and being paid (-$2.6m); and
    • progressive refinement of Defence's cost attribution rules to reflect changes in workforce distribution and expenditure patterns and other variations (+$12.9m).

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Table 2.17 Price Summary of Outputs for Outcome Three - Army Capability for the Defence of Australia and its Interests
Budget
Estimate
Revised
Additional Estimate(1)
Projected Result(2) Actual Result(3) Variation(4) Variation
2003-04
$'000
2003-04
$'000
2003-04
$'000
2003-04
$'000
2003-04
$'000
2003-04
%
Output 3.1 - Capability for Special Forces Operations 445,118 410,589 335,210 422,750 87,540 26.1
Output 3.2 - Capability for Mechanised Operations 800,591 845,366 866,123 846,617 -19,506 -2.3
Output 3.3 - Capability for Light Infantry Operations 1,020,185 998,065 1,034,593 899,727 -134,866 -13.0
Output 3.4 - Capability for Army Aviation Operations 449,568 528,074 592,573 592,891 318 0.1
Output 3.5 - Capability for Ground-Based Air Defence 92,956 122,880 175,658 123,050 -52,608 -29.9
Output 3.6 - Capability for Combat Support Operations 407,921 421,886 495,509 410,686 -84,823 -17.1
Output 3.7 - Capability for Regional Surveillance 86,750 94,173 150,418 127,937 -22,482 -14.9
Output 3.8 - Capability for Operational Logistic Support to Land Forces 433,401 535,232 521,802 533,714 11,912 2.3
Output 3.9 - Capability for Motorised Infantry Operations 573,759 481,871 577,318 497,451 -79,867 -13.8
Output 3.10 - Capability for Protective Operations 534,769 467,112 530,322 631,602 101,279 19.1
Price to Government for Outcome Three 4,845,019 4,905,248 5,279,527 5,086,424 -193,103 -3.7

Notes

  1. The Revised Additional Estimate figures have been adjusted since the Portfolio Additional Estimates Statements 2003-04 (p.40) to reflect an improved costing methodology.
  2. The Projected Result is consistent with the Portfolio Budget Statements 2004-05.
  3. The Actual Price to Government for Outcome Three, shown in this table ($5,086.424m), relates to Departmental expenses and revenues. The Actual Price to Government for Outcome Three does not include $0.127m of administered revenues. This amount relates to interest received from the foreign military sales account.
  4. The variation figures are the difference between the Actual Result and the Projected Result.

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