defence annual report 2006-07: volume 2 - defence materiel ... · chief finance officer—mr tim...

Section 3management�and�accountability

CHAPTER 5 Materiel reform driving change

CHAPTER 6 Governance, management and accountability

CHAPTER 7 The DMO’s financial performance

seC

TiO

n 3

Materiel reform in the DMO was restructured in 2004 by the CEO DMO to reflect six key themes for driving change and ensure that the DMO achieves its vision of becoming the premier program management and engineering services organisation in Australia. These themes are listed under ‘Business improvement’ on page 15 of this volume.

perfOrmance aGaInSt GuIDInG tHemeS

Professionalise

The DMO Professionalisation Agenda is a central strategy for meeting the DMO’s future challenges and involves the implementation of an integrated, consistent and disciplined approach to professional development, with activities closely aligned to business practices. It aims to strengthen workforce capability through developing sustainable initiatives to meet skill requirements for the delivery of successful project and sustainment outcomes.

The Professionalisation Agenda incorporates two main elements:

chartering and certifying—involving assessment of competence against the highest professional standards available and ongoing development programs

professional development—achieved through accredited education and training programs and involving designing, developing and administering integrated, tailored and accredited education and training through the DMO Institute.

>

>

The DMO has agreements with peak professional bodies for chartering and certifying individuals in the project management, engineering and technical, business and commercial, and legal job families. For the project management job family, industry certification is the base element of a wider project management certification framework that ensures DMO project managers (accountable for managing capital acquisition projects) have the necessary professional status, knowledge, work experience and performance attributes.

Reprioritise

The DMO Support Services Panel commenced operations in November 2005; the result was rationalisation of a number of standing offer panels previously in operation and covering a wide range of activities. The reporting year was the first full financial year of operation, and over $80m of tasking was channelled through the panel. Feedback from industry has been positive, and work continues to refine the panel’s operation across all areas of DMO and Defence.

Chapter�5�Materiel reform driving change

� defence annual report 2006–07 / volume two96

Standardise

The DMO has started a project aimed at rationalising information technology applications and systems. The purpose is to progress standardisation, remove unnecessary duplication, close any gaps in required capabilities, and reduce training overheads.

Under the Procurement Improvement Program, the DMO procurement and contracting documentation has undergone changes. The approach has involved a thorough review of the existing suite of templates, consultation with internal and external stakeholders, and consideration of contracting best practice. A phased roll-out of new templates and supporting training is planned.

Benchmark

The initiative to strengthen performance management and reporting in the DMO progressed well in 2006–07. An initial set of performance indicators and measures was identified for validation for each output and enabling function depicted in the DMO Business Model. Work is in progress to implement this revised framework. The framework will be enabled by the enhancements to the corporate data warehouse and will provide a means to enhance decision making and increase reporting accuracy and consistency.

Improve industry relationships and industry performance

The DMO has a significant level of engagement with industry and places a strong emphasis on managing its industry relationships to ensure the cost-effective delivery of equipment and support to the ADF.

The DMO also seeks to develop a sustainable and capable local defence industry sector, as required to support ADF operational capability and military self-reliance. The focus is a local industry base that can maintain, repair and modify the equipment the DMO purchases from overseas and design, manufacture and adapt equipment to meet the unique requirements of the ADF.

In the second half of 2006 and first quarter of 2007, the DMO facilitated a major review of defence industry policy. The review outcomes were detailed in the Defence and Industry Policy Statement 2007, released by the Government on 1 March 2007. The policy statement detailed key strategies to meet the challenge of ensuring the cost-effective delivery of equipment and support to the ADF, in line with Australia’s strategic circumstances.

Lead reform

The DMO has established Emerging Project Teams that comprise approximately 25 experienced project managers who work in integrated teams with Capability Development Group staff in developing first pass proposals for government consideration. Where there is a large number of new capability proposals, the teams are embedded in the Capability Development Group. Following first pass approval, the DMO establishes a Project Office that works with the Capability Development Group to further develop capability proposals for second pass consideration by government; following government approval, the Project Office manages the acquisition phase.

The overall objective of the Emerging Project Teams is to enhance the likelihood of success of proposed projects in achieving their schedule, cost and quality objectives at the earliest possible stage in the project development life cycle. The teams are intended to provide a DMO perspective on the delivery of new capability as early as possible, to minimise or eliminate the risk of potential capability issues arising.

Through this initiative, a more cooperative relationship is developing between the DMO and the Capability Development Group.

defence annual report 2006–07 / volume two

seC

TiO

n 3

97

materiel reform driving change :�chapter�5

Chapter�6Governance, management and accountability

The DMO’s governance focused on planning, stewardship, performance management, assurance, reporting and audit activities. The DMO has established a governance framework that reflects its objective of becoming more business-like; this framework drives and shapes the structures, systems, controls and processes in the DMO.

The principles of good corporate governance were outlined in the Review of the Corporate Governance of Statutory Authorities and Office Holders (the Uhrig Report),19 released in June 2003. While the focus of the report was statutory authorities and their office holders, the report identified principles of good governance that may have wider applicability across other agencies within portfolio bodies. In conjunction with Defence, the DMO conducted an assessment of its corporate governance arrangements—both within the organisation and between it and Defence. The key outcome of this assessment was that the DMO’s current governance arrangements are appropriate.

19. More information can be found at www.finance.gov.au/governancestructures/docs/The_Uhrig_Report_July_2003.pdf.

accOuntabIlIty anD fInancIal manaGement

Prescription has clarified and strengthened the separate accountabilities of both Defence and the DMO. Upon prescription of the DMO as an Agency on 1 July 2005, under the Financial Management and Accountability Act 1997, the CEO DMO became directly responsible for managing the affairs of the DMO in a way that promotes proper use of the Commonwealth resources for which the DMO is responsible.

The financial statements for 2006–07 are set out in Appendix 17 of this volume. The CEO DMO and the Chief Finance Officer DMO concluded that they could attest that the overall statements were true and fairly stated.


http://www.finance.gov.au/governancestructures/docs/The_Uhrig_Report_July_2003.pdf

DMO’s place -in context

DMO’s Owners/Players“Equip and Sustain the ADF”

DMO Advisory Board Members

DMO’s Customers

Department of Defence

Minister for DefenceThe Hon. Dr Brendan

Nelson MP

Chief of theDefence Force

ACM Angus Houston

Minister Assisting Minister for DefenceMr Bruce Billson MP

Chief of Air ForceAIRMSHL

Geoff Shepherd

Chief of ArmyLTGEN

Peter Leahy

Chief of NavyVADM

Russ Shalders

Parliamentary Secretaryto Minister for DefenceMr Peter Lindsay MP

Vice ChiefLTGEN

Ken Gillespie

Chief CapabilityLTGEN

David Hurley

Secretary of DefenceNick Warner

Chief of theDefence Force

ACM Angus Houston

Secretary of DefenceNick Warner

Chief Executive OfficerDr Stephen Gumley

Nick Warner

Dr Ken Henry

ACM AngusHouston

Dr John White Dr Ian Watt

ChairDavid

Mortimer

MalcolmKinnaird

KevinMcCann


seC

TiO

n 3

99

governance, management and accountability :�chapter�6

The DMO’s relationship with key stakeholders during 2006–07 is shown in FIgure 6.1.

Figure 6.1—The DMO’s relationship with key stakeholders

OrGanISatIOnal Structure anD SenIOr executIve cHanGeS

The DMO Executive

At 30 June 2007, the DMO delivered its business through the CEO DMO and Executive Management team within the following organisational groupings:

Domains—acquisition and sustainment activity related to a specific environment. At July 2007, the term ‘Domains’ was replaced with ‘Systems’

Operations—responsible for corporate or business services. At July 2007, the term ‘Operations’ was replaced with ‘Corporate’

>

>

Major Programs—activities associated with the acquisition of specific high-value, high-profile capabilities.

Led by the CEO DMO, Dr Stephen Gumley, the individuals of the Executive during 2006–07 had the following roles:

depuTy CeO—mr kim Gillis

Standardised the DMO’s business practices and managed a range of strategic projects in support of defence capability requirements. The Deputy CEO was also the Program Manager for the Amphibious Deployment and Sustainment Project.

>

The DMO Executive at 30 June 2007. Back row, left to right: Mr Frank Lewincamp, Air Vice-Marshal Clive Rossiter, Major General Tony Fraser, Rear Admiral Trevor Ruting, and Mr Tim Youngberry. Front row, left to right: Ms Shireane McKinnie, Mr Warren King, Mr Kim Gillis, Dr Stephen Gumley, Mr Colin Sharp, and Air Vice-Marshal John Harvey.

Not present: Mr Kerry Clarke and Ms Gillian Marks.


chapter�6�: governance, management and accountability

ChieF OperaTinG OFFiCer—mr Frank lewinCamp

Brought together corporate governance, human resources, legal and procurement services, business improvement, information technology, strategic communication and parliamentary liaison functions within one division. In July 2007, the name of this position was changed to Corporate Strategy and Assurance.

ChieF FinanCe OFFiCer—mr Tim yOunGberry

Was responsible for strategic resource management and reporting, financial accounting, and the establishment of supporting business systems.

General COunsel—ms Gillian marks

Provided advice on high-level, high-risk legal issues related to major projects and initiatives.

head indusTry divisiOn—mr kerry Clarke

Facilitated industry engagement to help build the necessary strategic industry capabilities for the acquisition and sustainment of ADF capability.

head mariTime sysTems—rear admiral TrevOr ruTinG

Managed the acquisition, upgrade and sustainment of maritime capability to support the ADF. Rear Admiral Boyd Robinson was officially appointed Head Maritime Systems Division, effective 4 July 2007, on the retirement of Rear Admiral Trevor Ruting.

head land sysTems divisiOn—mr COlin sharp

Managed the acquisition, upgrade and sustainment of all land-based equipment across the three Services, with a focus on the land elements of the Army.

head aerOspaCe sysTems divisiOn—air viCe-marshal Clive rOssiTer

Managed acquisition and sustainment of aerospace systems for the ADF.

head heliCOpTer sysTems divisiOn—majOr General TOny Fraser

Managed acquisition and sustainment of rotary wing systems for the ADF.

head eleCTrOniC and weapOn sysTems divisiOn—ms shireane mCkinnie

Managed the acquisition and sustainment of electronic and guided weapon systems and explosive ordnance for the ADF.

ChieF prOGram manaGer air warFare desTrOyer—mr warren kinG

Worked to provide the timely and efficient delivery of an affordable, effective, flexible and sustainable Air Warfare Destroyer capability for the ADF.

prOGram manaGer airbOrne early warninG and COnTrOl—air-viCe marshal Chris deeble

Will establish, operate and maintain a world-class aerospace surveillance and remote-sensing capability for Australia.

prOGram manaGer new air COmbaT CapabiliTy inTeGraTed prOjeCT—air viCe-marshal jOhn harvey

Responsible for delivering a new air combat capability to replace the capability currently provided by the F/A-18 and F-111 and maximising the level and quality of Australian industry participation in the global Joint Strike Fighter program.

deFenCe maTeriel advOCaTe—majOr General jim mOlan

Provided operational expertise to the DMO and assisted in the promotion of Australian defence industry exports. Major General Jim Molan left the DMO in March 2007. Under the Government’s new industry policy, this function has been subsumed within the Defence Export Unit.


seC

TiO

n 3

101


Changes to the organisational structure

On 2 July 2007, the DMO management structure underwent several changes. The DMO has been actively seeking change and implementing a challenging reform agenda. Structural, management and cultural change over the past two years has seen the DMO become a more performance and outcome driven organisation.

The Government requires the DMO to achieve a significant increase in productivity over the life of the Defence Capability Plan. Within this context, the Defence Procurement Advisory Board recommended that the DMO—as an agency of scale and scope similar to that of some of Australia’s largest public companies—must have an appropriately structured and commercially skilled senior management team as a prerequisite for success.

The Secretary agreed and from July 2007, two Band 3 executives and a Band two senior adviser on major programs will assist the DMO to continue the rapid transformation of its culture and to develop a true commercial focus. The new appointments are:

General manaGer COrpOraTe—ms jane wOlFe

This position is directly responsible to the Chief Executive Officer. The General Manager Corporate will oversee the DMO’s governance and reporting and will drive reform in the DMO’s corporate areas, including finance, legal, information technology, policy, people, and learning and development. The Chief Finance Officer, Corporate Strategy and Assurance (previously titled Chief Operating Officer) and General Counsel directly report to this position.

General manaGer sysTems—mr kim Gillis

This position will oversee the acquisition and sustainment business of the DMO and drive reform in these processes. The Heads of Aerospace Systems Division, Electronic and Weapon Systems Division, Helicopter Systems Division, Land Systems Division and Maritime Systems Division all report directly to the General Manager Systems.

General manaGer prOGrams—mr warren kinG20

This position has a senior advisory role on major projects. Mr King will continue in his role as Program Manager Air Warfare Destroyer.

Business improvement

To further drive materiel reform, the Business Improvement Branch was formed in March 2007 to provide greater focus on business improvement initiatives in the DMO. The Branch’s functions include program management of agreed business improvements; information technology governance, development, acquisition and sustainment; quality management and assurance; and policy coordination and support. The Branch is applying a structured and comprehensive approach to scoping, implementing and monitoring DMO business improvement.

Relationship with Defence

The close relationship between the DMO and Defence is formalised through a suite of agreements covering acquisition, sustainment, military workforce, and shared services. During 2006–07, significant progress was made in the maturing of both the agreements themselves and in both organisations’ understanding of the way the agreements contribute to better outcomes. Improved business practices and behaviours are now consolidating in support of these output-focused agreements. Notably, pricing and cost monitoring methodology has been substantially refined to enhance the fidelity of monthly reporting, and the responsibilities for data collection and reporting have been clarified and refined. Business rules governing resource flexibility and limitations are now embedded, and performance reporting is facilitating a more balanced appreciation of financial and service-level achievement. Importantly, processes and mechanisms for efficiently adjusting the agreements in response to changing requirements have been standardised across the two organisations.

The coming year will see further work on the various agreements to enhance the communication of customer requirements, the understanding of pricing of services (including the service fee structure), and the refinement of performance metrics.

For more information, see Appendix 5 in this volume.

20. Mr Warren King was promoted to a Band 3 on 12 September 2007



GOvernance

Defence Procurement Advisory Board

The creation of the Defence Procurement Advisory Board arose from a recommendation of the Defence Procurement Review. The primary roles of the Board are:

to monitor implementation of the recommendations of the Defence Procurement Review

to provide advice and support to the Secretary of Defence and the CEO DMO on strategic issues relating to the direction and management of the DMO.

The Board is accountable to the Ministers for Defence and Finance and Administration and reports to the Government on the implementation of all Defence Procurement Review recommendations.

The Board consists of four private sector members (one of whom is the chair), the Secretaries of Defence, Finance and Administration, and Treasury, and the Chief of the Defence Force. The CEO DMO attends as an ex officio member of the Board. A senior representative from the Department of the Prime Minister and Cabinet is present at all meetings.

In 2006–07, the Board met five times.

>

>

Materiel Information Management Stakeholder Group

The Materiel Information Management Stakeholder Group, originally formed in 2003, was reconstituted in 2005–06. During 2006–07, the Group met 10 times; its membership consists of DMO SES Band 1 and Executive Level 2 officers.

The Group advises the DMO Executive on issues related to the DMO’s current information management environment, assessment or analysis of business requirements, priorities in the acquisition and sustainment of information management capability, governance arrangements for information management capability developments, and ongoing information management service delivery.

Remuneration Committee

All non–Senior Executive Service Australian workplace agreements are considered by the DMO Remuneration Committee, which is made up of the CEO DMO, the Deputy CEO and the Chief Operating Officer. At 2 July 2007, the titles of Deputy CEO and Chief Operating Officer were changed to General Manager Systems and Program Manager Corporate Strategy and Assurance respectively.

Figure 6.2—The DMO Business Model during 2006–07


seC

TiO

n 3

103


Internal manaGement

Business Model

The DMO Business Model represents the major elements of the DMO’s governance framework. The model, shown in Figure 6.2, is a depiction of how business is managed in the DMO to deliver the best possible outcome. The model highlights the important components of the DMO’s business and maps the important inter-relationships between the DMO’s core and enabling functions in delivering the organisation’s three outputs.

The model also provides the central framework for the DMO Quality Management System, which encompasses a number of key corporate tools and components, including DMO’s vision, goals and purpose, the monthly Business Plan Review, senior committees and assurance boards, materiel councils, performance reporting, the collection of Defence Materiel Instructions, the Quality Environment Management System, business and information systems, and corporate key performance indicators.

Business planning and review

The DMO Business Plan Review, established in 2004 by the CEO DMO, continued to be used in 2006–07 by the DMO Executive Group to communicate with DMO staff around Australia about the organisation’s objectives, priorities and key activities. The review has proven a valuable tool for nurturing and promoting cultural change, as well as emphasising the values, behaviours and workplace activities that are the most important for achieving organisational success.

Approximately 4,600 DMO staff attended the Business Plan Review presentations in 2006–07. Staff can also access the presentations on the DMO intranet.

Ethics awareness and fraud control

The DMO maintains consistency with Defence policy on ethics awareness and fraud control; this is facilitated by a Shared Services Agreement with the Inspector General Division. Under the agreement, the Inspector General Division investigates misconduct and fraud for the DMO. The DMO statistics for incidents and investigations are in Volume 1 of this report.

In 2006–07, the Inspector General Division provided training on ethics awareness and risk management, investigation of complaints of misconduct and fraud, and guidance on fraud and risk management policy. The training on ethics awareness included face-to-face sessions along with online interactive packages and training videos.

The DMO is required to complete an agency-wide fraud risk assessment and update its Fraud Control Plan every two years. In 2007–08, the next DMO Fraud Control Plan will be completed, in accordance with the Financial Management and Accountability Act 1997 and Commonwealth Fraud Control Guidelines. Until then, the DMO Fraud Control Plan of 30 October 2005 remains current. During 2006–07, the DMO revised its Chief Executive Instruction on Fraud Control, developed fraud control policy guidance, and carried out agency-wide fraud awareness training in preparation for the new Fraud Control Plan.

Business continuity management

Defence policy requires that Groups have a comprehensive and effective program of business continuity management to ensure the continuity of critical Defence processes in all circumstances. In addressing this requirement, the DMO has developed a Business Continuity Plan and continues to refine its Business Continuity management framework through ongoing testing and staff awareness initiatives. For details of Defence’s Business Continuity Plan, see Chapter 8 in Volume 1 of this report.



aSSurance

Materiel Audit Committee

The Materiel Audit Committee, the only DMO committee required by law, has consolidated its place within the DMO’s management framework. It met 15 times during 2006–07. The primary objective of the committee is to assist the CEO DMO in discharging his responsibilities. The committee achieves this by monitoring and advising on risk management, financial management, internal controls, internal and external audit, and compliance matters in DMO.

In 2006–07, the committee comprised three external members: Ms Jennifer Clark, Mr David Lawler, and Mr Graeme Lawless. The Chief Finance Officer DMO, the Chief Operating Officer and the Inspector General attended as advisers. Representatives of the Australian National Audit Office attended as observers.

The committee’s highest priorities were the controls framework underpinning the production of the 2006–07 financial statements, the Department of Finance and Administration Certificate of Compliance, and management accounting. The committee reviewed existing fraud control plans in preparation for the revised Fraud Control Plan. After endorsing the DMO’s internal audit strategy and 2006–07 Audit Work Plan, the committee worked with DMO management to ensure the 2007–08 Audit Work Plan reflects the DMO’s enterprise risks.

The committee continued to work in conjunction with the Defence Audit Committee to oversee matters of shared importance to the DMO and Defence.

Materiel assurance boards

The DMO established the Project Governance Board function in November 2001. A review of the function in November 2005 resulted in a restructure to sharpen the focus on acquisition and sustainment governance. On 1 February 2006, the Governance Boards were replaced by five Materiel Assurance Boards, which aligned closely to a system division. Each board provides independent assurance to the CEO DMO on the adequacy of the governance framework for each project and sustainment activity and on risks involving schedules, costs, capability and sustainability.

Probity advice

The DMO engages probity advisers to provide independent monitoring of the DMO acquisition and contracting processes, to ensure that they are conducted in accordance with identified probity principles.

Inspector general

Internal audit services were provided to the DMO by Defence under a Shared Services Agreement. Twenty-two Inspector General audit reports, relating specifically to the DMO, were finalised during 2006– 07.

External audit and scrutiny

External audit for the DMO was undertaken by the Australian National Audit Office. Seven Auditor-General performance audit reports relating specifically to the DMO were tabled during 2006–07. Further information is provided in Appendix 3 in this volume.


seC

TiO

n 3

105


The DMO was prescribed as an agency on 1 July 2005 under the Financial Management and Accountability Act 1997. A description of the DMO business model and the accounting model that was established to support the management of DMO can be found in the Defence Annual Report 2005–06, Volume 2.21 These arrangements have not varied significantly since their introduction.

The DMO receives the majority of its funding from Defence under agency agreements; about one per cent of its funding is provided via a direct appropriation and own-source revenue. All the DMO’s funding is departmental by nature.

This chapter provides an assessment of the DMO’s financial performance in 2006–07 against budget projections. The audited financial statements for the DMO are included in Appendix 17 in this volume.

21. The Defence Annual Report 2005–06, Volume 2 can be found at www.defence.gov.au/annualreports.

2006–07 Summary

Including all supplementary funding, the projected level of resourcing available to the DMO in 2006–07 was $8,682.0m. This comprised $46.4m as a direct appropriation, $8,561.4m from the Department of Defence as payment for goods and services provided by the DMO, own-source revenue of $32.3m, and revenue of $41.9m for services received free of charge.

The DMO’s total resourcing for 2006–07 was $559m lower than the estimated result, due mainly to project reprogramming and an overstatement of revenue estimates. Table 7.1 summarises total DMO resourcing in 2006–07.

Chapter�7The DMO’s financial performance


http://www.defence.gov.au/annualreports/

Explanation of major variations

The main variations in the DMO’s resourcing were the result of:

reprogramming within projects in Output 1.1

lower than anticipated cost of free services provided from Defence

overstatement of the revenue estimates

higher than anticipated foreign exchange net gain.

>

>

>

>

OperatInG perfOrmance

At the time of the Additional Estimates, the DMO expected income and expenses to equal each other. This was because the DMO is funded for the activity it performs.

The DMO had an operating surplus of $34m in 2006–07, which, in a budget set for a zero operating result, indicates that expenses and revenue differed by less than 0.5 per cent. Table 7.2 provides a full comparative income statement.

Table 7.1—Resources for outcome

Actual2005–06

($’000)

Estimatedactual[1]

2006–07($’000)

Actualexpenses2006–07

($’000)

Variationcolumn�2

minus�column�1

($’000)

Budget�estimate[2]

2007–08($’000)

Price�of�departmental�outputs

3,939,133 Output 1.1Management of capability acquisition

4,245,577 3,960,945 -284,632 4,827,465

3,593,107 Output 1.2Management of capability sustainment

4,077,244 4,078,511 1,267 4,681,598

59,862 Output 1.3Provision of policy advice and management services

59,391 49,416 -9,975 106,400

7,592,102 Total�outputs 8,382,212 8,088,872 -293,340 9,615,463

44,257 Revenue from government (appropriation) for departmental outputs

46,431 46,120 -311 93,413

7,556,623 Revenue from other sources 8,635,781 8,076,833 -558,948 9,522,050

7,600,880 Total�revenue 8,682,212 8,122,953 -559,259 9,615,463

Total�for�outcome��(Total�price�of�outputs)

8,382,212 8,088,872 -293,340 9,615,463

Notes1. The estimated actual for 2006–07 and budget estimate 2007–08 were published in the Portfolio Budget Statements 2007–08.2. Own-source revenue (serial 4) includes sales of goods and services, interest, net foreign exchange gains, other revenues,

and resources received free of charge.


seC

TiO

n 3

107

the dmo’s financial performance :�chapter�7

Table 7.2—Income statement for the year ended 30 June 2007

2005–06Actual�result

($’000)

2006–07

Budget�estimate

($’000)

Estimated�actual

($’000)Actual�result

($’000)Variance[1]

($’000)

INCOME

Revenue

44,257 Revenue from government 45,469 46,431 46,120 -311

7,432,989 Goods and services 8,669,587 8,593,852 7,938,588 -655,264

81,251 Other 32,260 – 88,491 88,491

7,558,497 Total�revenue 8,747,316 8,640,283 8,073,199 -567,084

Gains

– Net gains from sale of assets 34,411 – – –

42,383 Other 1,500 41,929 49,754 7,825

42,383� Total�gains 35,911 41,929 49,754 7,825

7,600,880� Total�income 8,783,227� 8,682,212 8,122,953 -559,259

EXPENSES

353,892 Employees 362,075 418,857 409,262 -9,595

7,221,709 Suppliers 8,313,752 7,956,426 7,669,300 -287,126

6,374 Depreciation and amortisation 72,989 6,929 6,964 35

304 Write-down of assets and impairment of assets

– – 586 586

– Net losses from sale of assets 34,411 – – –

8,365 Net foreign exchange losses – – – –

1,458 Other expenses – – 2,760 2,760

7,592,102 Total�expenses 8,783,227 8,382,212 8,088,872 -293,340

Notes1. The variation is between the actual result as disclosed in the 2006–07 audited financial statements and the estimated actual

result published in the Portfolio Budget Statements 2007–08.


The variation in the DMO’s overall operating performance of $34m comprise:

goods and services income (-$655.2m)—due to reprogramming of projects and an overstatement of the revenue estimate

other revenue ($88.5m)—due to an increase in activities performed on behalf of foreign governments

>

>

other gains ($7.8m)—due to an increase in net foreign exchange gains offset by a reduction in the cost of free services provided by Defence

employee expenses (-$9.6m)—reflecting lower than anticipated employee costs

supplier expenses (-$287.1m)—mainly reflecting the results of project reprogramming.

>

>

>


chapter�7�:�the dmo’s financial performance

Table 7.3—Balance sheet as at 30 June 2007


($’000)

2006–07

Budget�estimate

($’000)

Estimated�actual


($’000)Variance[1]

($’000)

ASSETS

Financial�assets �

23,581 Cash 30,176 23,581 21,967 -1,614

253,948 Receivables[2] 281,746 509,381 627,810 118,429

277,529 Total�financial�assets 311,922 532,962 649,777 116,815

Non-financial�assets

11,018 Infrastructure, plant and equipment 256,775 8,082 11,136 3,054

7,999 Intangibles 54,228 4,006 5,707 1,701

898,794 Other non-financial assets 602,663 898,794 1,279,015 380,221

917,811 Total�non-financial�assets 913,666 910,882 1,295,858 384,976

1,195,340 Total�assets 1,225,588 1,443,844 1,945,635 501,791

LIABILITIES

Provisions �

125,804 Employees 118,364 125,804 138,438 12,634

125,804 Total�provisions 118,364 125,804 138,438 12,634

Payables �

740,526 Suppliers 623,805 740,526 840,040 99,514

214,465 Other payables 175,352 162,969 782,574 619,605

954,991 Total�payables 799,157 903,495 1,622,614 719,119

1,080,795 Total�liabilities 917,521 1,029,299 1,761,052 731,753

114,545 NET�ASSETS 308,067 414,545 184,583 -229,962

EQUITY �

105,767 Contributed equity 308,067 105,767 141,724 35,957

8,778 Retained surplus or accumulated deficits

– 308,778 42,859 -265,919

114,545 Total�equity 308,067 414,545 184,583 -229,962

Notes1. The variation is between the actual result as disclosed in the 2006–07 audited financial statements and the estimated actual

result published in the Portfolio Budget Statements 2007–08.2. ‘Appropriation receivable’ represents funds available but not drawn down from the Official Public Account at 30 June 2007.

fInancIal pOSItIOn

Table 7.3 sets out the DMO’s assets, liabilities and equity as at 30 June 2007. Its purpose is to provide a snapshot of the DMO’s long-term viability.


seC

TiO

n 3

109



The movement in the balance sheet since 2005–06 mainly reflected:

an increase in assets ($750m)—representing the increased availability of funds in the receivables for reprogrammed projects and an increase in prepayments required for foreign military sales

an increase in liabilities ($680m)—representing an overstatement of unearned income combined with reprogramming of projects within the same liability account, as well as an increase in the trade creditors balance in 2006–07

an increase in equity ($70m)—representing recognition of the value of the foreign military sales account and the accumulated surplus for 2006–07.

>

>

>

caSH pOSItIOn

The DMO receives the majority of its cash from Defence in payments for goods and services provided by the DMO. Once funds are paid by Defence, received from other sources or appropriated by the Government, they remain in the DMO’s special accounts, even if not fully used in the budget year. They are held as an appropriation receivable in the Official Public Account and are available to meet liabilities as they fall due, including employee liabilities, subject to government approval.

Use of cash in 2006–07

At 30 June 2007, the DMO had a special account balance of $22m. During the year, the DMO used $8,878m. Table 7.4 provides details of cash sources and cash use and shows the actual movement of cash in 2006–07.

Table 7.4—Sources and use of cash, 2005–06 and 2006–07


($’000) �


($’000)

SOURCES�OF�CASH

50,270 Section 32 (transfer of appropriation from Defence) –

44,257 Direct appropriation 46,120

7,728,753 Goods and services[1] 8,303,047

498,771 Net GST received 519,463

7,438 Other cash receipts 7,476

8,329,489 Sub-total�cash�available 8,876,106

� USE�OF�CASH�

343,499 Employees 396,630

7,443,726 Suppliers 7,956,557

506,150 GST paid to suppliers 514,386

4,144 Other operating activities 4,955

6,492 Purchase of plant and equipment 3,263

1,897 Purchase of software and intangibles 1,929

– Purchase of inventory –

8,305,908 Sub-total�cash�used 8,877,720

23,581 Closing�cash�at�bank 21,967

Note1. Includes funds provided by Defence and foreign governments.



Special accounts

The DMO has two special accounts:

the Defence Materiel Special Account

the Other Trust Monies Special Account.

The Defence Materiel Special Account is the main operating account from which most business activities are conducted. The Other Trust Monies Special Account holds any other public money on trust.

The main purposes for which the funds in the Defence Materiel Special Account can be used are:

supporting the ADF’s capability through development, acquisition, sustainment, disposal, and provision of goods and/or services

>

>

>

developing, acquiring, sustaining and providing goods and/or services for foreign governments and other bodies

managing and marketing the agency whose chief executive has been allocated responsibility for this special account

developing and implementing policies for, and providing advice to, the Australian Government on defence, defence industry and other matters related to the provision of goods and/or services.

Movements to flows in the DMO’s special accounts are shown in Table 7.5.

>

>

>

Table 7.5—Actual special account flows and balances 2006–07

Account Outcome

Opening�balance($’000)

Credits($’000)

Debits($’000)

Adjustments($’000)

Closing�balance�($’000)

Defence Materiel Special Account[1] 1 190,785 9,246,811 8,872,777 – 564,819

Other Trust Monies Special Account[2] 1 375 530 – 905

Total�special�accounts 191,160 9,247,341 8,872,777 – 565,724

Notes1. The Defence Materiel Special Account is established under section 20 of the Financial Management and Accountability Act.2. The Other Trust Monies Special Account is established under section 20 of the Financial Management and Accountability Act.


seC

TiO

n 3

111


The balance of funds in the Defence Materiel Special Account are held to fund:

employee liabilities

activities to be undertaken for other governments and other Australian government departments

future acquisition activities for the Department of Defence

trade creditors.

>

>

>

>

Appropriations and other resources

Outputs 1.1 and 1.2 were funded by payments from Defence for goods and services provided, as set out in the materiel acquisition agreements and materiel sustainment agreements for Outputs 1.1 and 1.2 respectively. Agency agreements were first established between Defence and the DMO in 2005–06, and new agreements were signed in 2006–07. Output 1.3 was funded largely through a direct appropriation. Table 7.6 shows the total resources from all origins for 2006–07, including appropriations.

Table 7.6—Total DMO resourcing, 2006–07[1]


($’000)

2006–07

Budget�estimate

($’000)

Estimated�actual


($’000)Variance

($’000)

INCOME �

44,257 Revenue from government 45,469 46,431 46,120 -311

7,428,446 Revenue from Defence 8,669,587 8,593,852 7,927,390 -666,462

76,585 Funds from foreign government 30,000 30,000 87,117 57,117

51,592 Own-source revenue, foreign exchange and other gains

38,171 11,929 62,326 50,397

7,600,880 Total�income 8,783,227 8,682,212 8,122,953 -559,259

Purchase of assets—capital from Defence

– – – –

7,600,880 Total�DMO�resourcing 8,783,227 8,682,212 8,122,953 -559,259

Note1. Includes gains from foreign exchange and services obtained free of charge.



defence annual report 2006-07: volume 2 - defence materiel ... · chief finance officer—mr tim...

Documents