FINANCIAL PERFORMANCE OF THE TRADING FUND

  B1  Several submissions have discussed Ordnance Survey's financial performance as a Trading Fund.[90] The Ordnance Survey Framework Document 2004 makes it clear that Ordnance Survey is required only to generate sufficient revenue to cover operating costs, investments and repayments and a return on capital employed, year on year in a sustainable manner. The Framework Document makes it clear that, rather than focus on generating profit:

  "Financial management of Ordnance Survey is underpinned by three principles:

—  The Trading Fund model is one of breaking even taking one year with another after allowing for operating costs, investment needs, loan repayments and agreed levels of dividend.

—  In the event that Ordnance Survey is more profitable than forecast after investing in national interest and customer driven improvements, surpluses in excess of those needed to sustain future development can be avoided by lowering prices.

—  Revenue shortfalls will be compensated, where possible, by an appropriate combination of increased productivity, efficiency savings, reduced costs, lower dividends and curtailing loss-making non-core activities."

  B2  Any consideration of Ordnance Survey's financial performance with regard to NIMSA[91] should take into account that NIMSA was a cost-recovery contract not a grant. NIMSA funding covered only those agreed activities actually undertaken.

  Any analysis which disregards revenue from NIMSA[92] must also disregard equivalent costs, since the costs incurred on NIMSA-related activities would not have been incurred in the same period without the NIMSA funding. As the outputs of NIMSA-funded activities have benefited all users, it is more correct for financial analyses of Ordnance Survey's performance to include both costs and revenue related to NIMSA.

  B3  Government support for workforce restructuring[93] (a total of £18m over the financial years 1999-2000 to 2001-2002) assisted Ordnance Survey to transfer organisationally into the Trading Fund environment. Ordnance Survey would otherwise not have invested in this restructuring with the consequential implications for long term operating costs and business efficiency.

  B4  The AA settlement [94] related to unpaid royalties (including royalty liabilities incurred after the start of the Trading Fund) and to costs of investigation and pursuance of the infringements that Ordnance Survey would not have incurred had AA been properly licensed for those uses of the Crown copyright material.

  Disregarding the value of the AA settlement as an exceptional item is only appropriate if other exceptional items are also disregarded, such as a significant sum to cover the ongoing costs of Voluntary Early Retirement resulting from a staff restructuring that reduced the size of the workforce by 20% during 2002-03.

  B5  Discussions on Ordnance Survey's financial performance as a Trading Fund since its inception on 1 April 1999, and particularly in relation to suggestions that Ordnance Survey's prices have remained broadly unchanged[95] during the life of the Trading Fund, must be set in the context of:

—  Introduction, with effect from 1 November 1999, of the Business Geographics product group covering a portfolio of 13 medium and small scales digital products, many with significantly reduced prices;

—  Significant reductions in the standard list price of Land-Line (5%), 1:10,000 Scale Raster data (10%), OSCAR Asset-Manager (12.5%), and Digital Use Licence charges (5%) with effect from 1 September 2000;

and significant other cost expenditure during the life of the Trading Fund related to:

—  Technical restructuring of the large scales database from the OS 93 specification to the OS 96 specification and to the introduction of the OS MasterMap topographic layer;

—  Data management, customer ordering and data delivery technology to support OS MasterMap products;

—  A significant proportion of the Positional Accuracy improvement and rural revision programme (ie: the 60% of the programme not funded by NIMSA);

—  Major new business systems to support long term efficiencies in business operations;

—  Provision of over 3 million free maps for 11-year-olds up to 31 March 2006 as part of Ordnance Survey's continuing support for education.

  In addition through efficiency savings Ordnance Survey has absorbed over 20% cumulative cost inflation during the life of the Trading Fund.

  B6  In assessing Ordnance Survey's financial performance, comparisons made in some submissions of costs of activities and Ordnance Survey staff numbers,[96] it is necessary to recognise that Ordnance Survey has contracted commercial companies to undertake activities such as rural revision.

  B7  Ordnance Survey believes that meaningful analysis of its performance as a Trading Fund should be based upon those trading items on which Ordnance Survey is targeted as a Trading Fund to make a return on capital employed, and which therefore form the basis of the Ordnance Survey's business model.

  B8  There may be confusion among some who have contributed evidence to the Committee, regarding the payment of dividends to Government by Ordnance Survey.[97]

  During the first five years of the Trading Fund (from 1 April 1999-31 March 2004), Ordnance Survey was required to demonstrate an ROCE of at least 9.5% averaged over the five-year period. In the period 1 April 2004-31 March 2007 the target was 5.5% ROCE, again averaged over the three years.

  In the five-year period up to 31 March 2004, Ordnance Survey was permitted to re-invest the ROCE back into the business during a period of major investment. Since 1 April 2004, Ordnance Survey has been required to pay over annual dividends to Government in line with the ROCE target, albeit with payments phased across the three years to accommodate anticipated working capital availability.

91   Uncorrected Evidence 04, paragraph Q1.3; Uncorrected Evidence-05; Background-6th paragraph. Back

92   Uncorrected Evidence 04, paragraph Q1.3; Uncorrected Evidence-05; Locus Response to Q1-6th paragraph. Back

93   Uncorrected Evidence 04, paragraph Q1.3 Back

94   Uncorrected Evidence 04, paragraph Q1.3 Back

95   Uncorrected Evidence 04, paragraph Q1.3, paragraph Q6.1 Back

96   Uncorrected Evidence-04, paragraph Q6.5. Back

97   Uncorrected Evidence-04, paragraph Q6.2; Uncorrected Evidence-05, Background 6th paragraph; Defence Intelligence, Intelligence Collection Strategy and Plans, Ministry of Defence-Uncorrected Evidence-10, paragraph 10 Q6. Back