Financial Overview

Defence's Cash Position

Overview

Defence sources its cash primarily from appropriations, own source revenue, capital receipts and cash reserves. The allocations are subject to Government approval as part of the annual budget process. Once funds are appropriated for Defence purposes, if not fully used in the budget year, they are held as an appropriation receivable and remain available for use in future years, subject to Government approval.

Defence planned to progressively increase its cash reserves to $500m in 2002-03, in part in response to criticism by the Auditor-General of the low level of Defence's cash balances in 2000-01 and to ensure it had sufficient cash to meet its liabilities. The level of cash carried forward into 2002-03 was $335m higher than planned, due to the lateness of the 2001-02 Additional Estimates, some slippage in the capital program and an increase in Defence's payables.

Under the 'as needed' cash drawdown arrangements introduced earlier this year as part of the Government's Budget Estimates and Framework Review, Defence is now carrying a working cash balance of about $100m and draws down, on a daily basis, sufficient cash to meet payments falling due the next day. The balance of Defence's cash reserves is held as a cash receivable in the Official Public Account and is available to meet liabilities as they fall due, including employee liabilities.

Use of Cash in 2002-03

Defence had $21,921m in available cash in 2002-03, including $835m carried forward from 2001-02, against which it used $20,951m, leaving it with a cash balance, at 30 June 2003, of $970m. This was $164m higher than the $806m estimated in the Portfolio Budget Statements 2003-04 (page 29) [PDF]. Table 1.9 shows the actual movement of cash in 2002-03.

Table 1.9: Details of Cash Movement in 2002-03
Description	2002-03
Description	$m
Available cash
2001-02 available cash reserve	835
Appropriation Bill No 1 (inc capital use charge)	18,230
Appropriation Bill No. 2 - equity injection	995
Own source revenue (inc proceeds from asset sales and interest)	1,160
GST refund from Australian Taxation Office	670
Effect of exchange rate movements	31
Total	21,921
Cash used
Employee payments	5,867
Suppliers	4,722
GST expenses	742
Other operating expenses	31
Capital use charge payment	4,918
Purchase of land and buildings, specialist military equipment, property, plant and equipment and Inventory	4,186
Transfer of property sales receipts to Government	474
Transfer of residual 2001-02 interest receipts to Government	1
Repayment of finance lease loan	10
Total	20,951
Cash Balances as at 30 June 2003	970
Cash Balance comprises:
Cash at bank	100
Appropriation receivable	870
Total	970

Reasons for Increase in Cash Reserve at 30 June 2003

Defence used all of its 2002-03 appropriations, its own source revenue, and part of its cash reserves in 2002-03 (with the approval of the Government), leaving $970m in cash balances at 30 June 2003. Of this amount, $100m was held in Defence's bank accounts and $870m in the Official Public Account as an appropriation receivable. Table 1.10 summarises the variance between the planned cash reserves at the time of the 2003-04 Budget and the actual outcome.

Table 1.10: Planned vs Actual Cash Balances
	Planned	Actual	Variation
	$m	$m	$m
2002-03 Additional estimates forecast cash position	968	968	0
Use of cash reserves to meet logistics requirements (includes $50m in capital)	-150	-150	0
Cash holdings retained after moving to just-in-time draw downs	-100	-100	0
Return of cash reserves to receivables held in the Official Public Account	718	718	0
Use of cash for Bastille/Falconer and returned from Budget in 2003-04	-249	-113	136
Use of cash reserve for Bougainville and returned from Budget in 2003-04	-10	-15	-5
$200m Defence Capability Plan reprogramming	200	200	0
Retention of property sales proceeds to be used in 2003-04	46	104	58
Conversion of capital use charge receivable into an Appropriation Receivable due to the discontinuation of capital use charge	-	138	138
Other employee and suppliers costs	-	-163	-163
Appropriation receivable at 30 June 2003	706	870	164
Bank balance at 30 June 2003	100	100	0
Total Cash Reserves	806	970	164

The variations between the planned ($806m) and actual cash position at 30 June 2003 ($970m) are explained as follows:

Current Operations (+$136m)

The Government determined that the estimated net additional costs of the 2002-03 portion of Operations Bastille/Falconer in Iraq ($249m) would be funded from Defence's cash reserves, with reimbursement in 2003-04. In the event, an amount of $113m was spent in 2002-03 supporting these operations, leaving $136m in cash reserves for use in 2003-04 to cover remaining costs for Operations Bastille/Falconer and Operation Catalyst.

Bougainville - Operation Bel Isi (-$5m)

The Government agreed that additional costs for Operation Bel Isi would be funded from Defence's cash reserves in 2002-03 and reimbursed in 2003-04. Actual expenditure was $5m higher than estimated.

Increase in Retention of Property Sales Receipts (+$58m)

The Government agreed that Defence would retain additional property receipts in 2002-03 over and above the revised target of $474m, excluding Russell Offices. The estimate at the time of the 2003-04 Budget was $46m, but Defence achieved revenues of $104m in property sales receipts, which was $58m higher than planned.

Capital Use Charge Receivable (+$138m)

Following the cessation of the capital use charge, the Department of Finance and Administration agreed to discharge the capital use charge receivable of $138m remaining in Defence's accounts, contributing to the increase in the appropriation receivable at 30 June.

Higher Than Expected Personnel and Operating Costs (-$163m)

Defence was required to spend more than it had planned in 2002-03 due to a higher than expected level of payables, mainly in suppliers. This was due in part to additional purchases in the logistics budget (both suppliers and inventory purchases), and higher than expected costs in the military and civilian employees' budget, as well as a number of other costs primarily in relation to Defence Reform Program contracts and the housing and accommodation budget. The higher level of expenses was funded through the use of the capital use charge receivable ($138m) and higher than projected receipts including from the sale of specialist military equipment and commercial vehicles.

Status of the Appropriation Receivable

When the cash receivable is replenished for the reimbursement of Operations Bastille/Falconer ($113m) and Bougainville ($15m), the revised level of $998m will be $80m more than the minimum level of receivables approved by the Government, as follows:

Employee entitlements	$718m
Reprogramming of the Defence Capability Plan	$200m
Total	$918m

Explanation of Employee Liabilities Cash Receivable (+$718m)

In 2001-02, Defence was criticised by the Australian National Audit Office for having insufficient liquidity to meet its liabilities. In view of this and the ongoing build-up in its employee liabilities, Defence made a conscious effort in 2001-02 to increase the cash that it had put aside to meet liabilities. The circumstances in 2001-02, including the delayed Additional Estimates process, which provided additional funding late in the financial year, and some slippage in the capital program, provided the opportunity for Defence to set aside funds to address the employee liabilities problem. The Government agreed in the 2003-04 Budget that Defence should retain $718m, the maximum cash then expected to be available, to partially meet the cost in future years of existing employee liabilities.

Accrued employee liabilities have grown from $2,364m at 30 June 1999 (when accrual budgeting was introduced) to $3,661m at 30 June 2003, as shown in Table 1.11.

Table 1.11: Growth in Employee Liabilities
Employee Liability	30 June 1999	30 June 2000	30 June 2001	30 June 2002	30 June 2003	Variation from 30 June 2002	Growth
Employee Liability	$m	$m	$m	$m	$m	$m	%
Military
Outstanding claims liability	-	-	-	-	1,463.6	-	-
Administrative Costs	-	-	-	-	131.8	-	-
Total workers compensation	1,070.4	1,031.0	1,196.0	1,342.4	1,595.4	253.0	18.8
Annual leave	337.6	374.7	394.7	452.4	480.8	28.4	6.3
Long service leave	529.4	599.7	585.7	588.6	591.6	3.0	0.5
Other	62.9	126.9	223.1	185.8	201.4	15.6	8.4
Sub-total Military	2,000.3	2,132.3	2,399.5	2,569.2	2,869.2	300.0	11.7

Civilian
Annual leave	103.0	115.6	128.3	146.0	180.7	34.7	23.8
Long service leave	231.4	187.5	177.9	207.6	222.5	14.9	7.2
Other	29.2	24.1	27.2	31.8	45.3	13.5	42.4
Sub-total Civilian	363.6	327.2	333.4	385.4	448.5	63.1	16.4
Total Employee Liabilities	2,363.9	2,459.5	2,732.9	2,954.6	3,317.7	363.1	12.3

Explanation of Significant Item Movements

During 2002-03, employee liabilities increased by $363.1m or 12.3 per cent. Significant variations are explained below.

Workers Compensation: The accrued liability to 30 June 2003, estimated at $1,595.4m, comprises two elements. The first is outstanding claims liability of $1,463.6m. The second element, which has been included for the first time in Defence's financial statements, is for administrative costs of $131.8m which covers future costs expected to be incurred in processing these claims. This latter element brings Defence in line with the normal accounting practice for general insurers.

Military Annual Leave Provision: The key drivers for the increase in this provision are the increase in personnel numbers, the three per cent pay rise in November 2002 for non-star ranked officers, and the increasing average leave balances due to the heightened operational tempo.

Military Worker's Compensation Provision: Increases in the provision are based on an assessment by the Australian Government Actuary. The actuarial assessments are based on historical data, with the increase attributable primarily to the impact of past workers' compensation claims.

Other Military Employee Provisions: This includes accrued salaries and wages, redundancies provision and employee tax payable. The reduction of $19m in 2002-03 is a net impact of the rise in accrued salaries and wages provision, and a reduction in other employee provisions due to the running down of the completion bonus provision as the program nears its end.

Civilian Annual Leave and Long Service Leave Provisions: The key drivers for the increase in these provisions include increases in the number of civilian personnel and the average civilian salary.

Explanation of the Defence Capability Plan Cash Receivable (+$200m)

The Government also agreed in the 2003-04 Budget that Defence should retain $200m of Defence Capability Plan funds to be reprogrammed to 2004-05, subject to review in the 2004-05 Budget. This will quarantine the $200m specifically for the Defence Capability Plan to ensure that the investment program can be fully delivered in accordance with the Government's commitments.

Planned Rundown in Cash Levels

Table 1.12 shows how Defence intends to progressively reduce its cash reserves over the Forward Estimates in accordance with the schedule agreed by the Government, noting that some adjustments may be proposed for Government consideration in the 2003-04 Additional Estimates.

Table 1.12: Use of Cash (Appropriation Receivable) Over the Forward Estimates
2002-03		2003-04	2004-05	2005-06	2006-07	2007-08
$m		$m	$m	$m	$m	$m
-	Appropriation Receivable at 1 July 2003	870	994	902	849	774
718	Return of cash reserves to receivables held in the Official Public Account⁽¹⁾	-	-	-	-	-
-113	Use of cash for Operation Bastille and refunded in 2003-04	113	-	-	-	-
-15	Use of cash for Bougainville and refunded in 2003-04	15	-	-	-	-
-	Increase in cash to meet future liabilities	43	143	-	-	-
-	Cash used to reduce employee liabilities	-47	-35	-53	-75	-97
200	Defence Capability Plan reprogramming⁽²⁾	-	-200	-	-	-
105	Retention of property sales	-	-	-	-	-
138	Discharge of capital use charge receivable to appropriation receivable	-	-	-	-	-
-163	Other suppliers	-	-	-	-	-
870	Appropriation receivable 30 June	994	902	849	774	677

Notes

Defence has been given approval to retain $718m in cash reserves to contribute to meeting existing employee liabilities in future years, commencing in 2003-04.
Defence will retain $200m in Defence Capability Plan reprogramming funds in the cash reserve. Its usage in 2004-05 is subject to Government consideration in the 2004-05 Budget.