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Capital Budget

Defence Capability Plan

The Defence White Paper 2000 set out a new approach to capability planning. The Defence Capability Plan is a detailed plan for Australia's military capabilities with broad guidance on major investments over the decade to 2010-11. The plan is reviewed annually to take account of changing strategic circumstances, new technologies and changed priorities. It is currently being reviewed to take account of changed strategic circumstances since 2000.

The Capital Investment Program

The capital investment program is not exclusively developed on the basis of the Defence Capability Plan. While representing the key element, there are other components in the investment program, such as facilities and minor capital projects, purchase of repairable items, and other plant and equipment items which are valued above the capital threshold of $10,000 ($50,000 for grouped items). Total capital investment expenditure for 2002-03 was $3.75b as summarised in Table 3.1 below.

Table 3.1: Defence Financial Performance for the Capital Program 2002-03(1)
Group/Item Description 2002-03
Budget Estimate Revised Estimate Projected Result Result Variance
$m $m $m $m $m
Not Yet Approved Major Capital Equipment (VCDF)(2) 277.9 224.6 24.6 0.0 -24.6
Capital Component (USDM) 3,014.5 3,033.2 2,569.2 2,571.3 2.1
Operating Component (USDM)(3) - - 204.0 278.3 74.3
Approved Major Capital Equipment 3,014.5 3,033.2 2,773.2 2,849.6 76.4
Major Capital Facilities (DepSec CS) 355.0 369.0 336.6 352.3 15.7
Other Capital (Various Group Heads) 424.9 570.3 535.1 545.9 10.8
Total Capital Investment Program(4) 4,072.4 4,197.2 3,669.5 3,747.8 78.2
Net Capital Receipts (see Table 3.2) 40.3 63.2 109.5 181.5 72.0
Overall Capital Investment 4,032.1 4,134.0 3,560.0 3,566.3 6.2
Notes
  1. Since publication of the Portfolio Additional Estimates Statements 2002-03, Defence has changed the format in which it reports on the capital budget to reflect the way the capital program is managed by Defence and the accountability for each element of the investment program. The figures presented in Table 3.1 have been presented in this new format to align with the 2002-03 Projected Result contained within the Portfolio Budget Statements 2003-04 (see page 133).
  2. Government agreement was given for Defence to retain $200m in Cash Reserves, quarantined specifically for reprogramming in the Defence Capability Plan, subject to further review and approval by Government in the 2004-05 budget. |
  3. To ensure that Defence's estimates and actuals are budgeted and reported in accordance with accounting standards, the Government has agreed to make a budget neutral adjustment to the existing capital operating mix contained in the Defence Capability Plan. |
  4. The Total Projected Result differs from Table 3.4 in the Portfolio Budget Statements 2003-04 as a result of a change in the accounting treatment of operations funding from specialist military equipment to inventory ($124m). |

Total capital expenditure was $78.2m greater than the projected result. Explanations for the variations in each category follow.

Not Yet Approved Major Capital Program (-$24.6m)

In addition to the retained $200m which is held in the cash receivable (see note 2 to Table 3.1), the 'Not Yet Approved Program' under spent against the projected result for 2002-03 by a further $24.6m because of delays in the approval of Defence Capability Plan projects. The estimates methodology is being reviewed in the 2004-14 Defence Management and Finance Plan.

Approved Major Capital Equipment Program (+$76.4m)

As the Australian dollar substantially appreciated during 2002-03, Defence was able to return $220m of capital equipment funding which was no longer required to meet foreign commitments. Following this variation, the year-end result for the capital component of the Approved Major Capital Equipment Program exceeded the budget by $76.4m including $74.3m in relation to the Capital/Operating adjustment. Information in regard to the current status of specific projects is contained in the Major Capital Equipment section of this report.

Capital Operating Adjustment

In 2002-03, the mix between the capital budget and operating budget was adjusted to more accurately reflect the way in which funding for the major capital equipment program is actually spent and accounted for, in accordance with Australian accounting standards. To ensure that Defence's estimates and actuals were budgeted and reported correctly in 2002-03, an amount of $204m in specialist military equipment funds was included as part of operating funds in the projected result in the Portfolio Budget Statements 2003-04 (page 133). This was to cover operating expenditure for project office costs, studies, research and development, project maintenance contracts and other project overheads. In the event, total operating costs associated with the capital program totalled $278m or $74.3m higher than projected.

Major Capital Facilities Projects (+$15.7m)

Expenditure on Defence's Major Capital Facilities Program exceeded the projected result by $15.7m. This result reflects variation in the cash flow requirement of a number of capital facilities projects, details of which are in the Capital Facilities section of this chapter.

Other Capital Purchases (+$10.8m)

This category of the investment program comprises purchases of other capital items including minor capital equipment projects, purchase of repairable items, other plant and equipment exceeding the capitalisation threshold of $10,000, and other property, plant and equipment, software and intangibles. Expenditure on other capital items in 2002-03 was $10.8m higher than the projected result. This variation is primarily due to variations in minor capital equipment projects, and higher levels of expenditure on repairable items in order to remediate shortfalls, the capital cost of the IBM Software Licence, and a change in accounting procedures for equipment purchases by the Defence Science and Technology Organisation.

Summary

When account is taken of the re-programming of Not Yet Approved Capital funding ($200m) and the foreign exchange savings ($220m), the capital program exceeded the projected result by $78.2m but was broadly in line with the revised estimates contained in the 2002-03 additional estimates.

Capital Receipts Program

Net capital receipts for 2002-03 totalled $181.5m or $72m more than the projected result. Details are shown in Table 3.2 with an explanation of the variations for each category shown below.

Table 3.2: Defence Capital Receipts - 2002-03
Capital Receipts 2002-03
Budget Estimate Revised Estimate Projected Result Result Variance
$m $m $m $m $m
Proceeds from the sale of specialist military equipment - - 22.9 29.7 6.8
Property Sales
Proceeds from the sale of land and buildings 659.5 659.5 519.8 578.0 58.2
Less: Capital withdrawal (DoFA requirements) 659.5 659.5 473.5 473.5 -
Proceeds retained by Defence - - 46.3 104.5 58.2
Proceeds from sales of other property, plant and other equipment 40.3 63.2(1) 40.3 47.3 7.0
Other capital receipts - - - - -
Net Capital Receipts 40.3 63.2 109.5 181.5 72.0
Note
  1. This amount includes $22.9m later reclassified as proceeds from the sale of specialist military equipment.

Sale of Specialist Military Equipment ($+6.8m)

Although initially estimating nil proceeds in 2002-03, Defence realised $29.7m from the sale of specialist military equipment, $6.8m more than the projected result. This figure is predominantly due to higher than expected receipts from a program of sales of F/A-18 radar equipment back to the United States Navy.

Property Sales ($+58.2m)

In finalising the 2003-04 Budget, the Government determined that it would not proceed with the sale of Russell Offices and accordingly, the property sale estimates were reduced, leaving a revised sales target of $473.5m. The Government agreed that Defence could retain any proceeds in excess of $473.5m. At the time of the 2003-04 Budget this was estimated to be $46.3m. In the event, Defence received proceeds of $578.0m which was $104.5m more than the target, due to higher than anticipated sale prices. In accordance with incentive arrangements agreed by Government, Defence retained the $104.5m.

Other Property, Plant and Equipment ($+7.0m)

Other property, plant and equipment sales exceeded the projected result by $7.0m Included in this amount was $4.5m for the sale of administrative assets that was not foreseen in the preparation of the 2002-03 Budget. The remaining variation relates mainly to higher than planned disposals of commercial vehicles.