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Financial performance

Ofcom’s statutory framework

Ofcom’s duties and powers are derived principally from the Communications Act 2003, which received Royal Assent on 17 July 2003.

Ofcom is an independent statutory corporation accountable to Parliament. Its specific duties, which are derived principally from the Communications Act 2003, fall into six areas:

ensuring the optimal use of the electro-magnetic spectrum;
ensuring that a wide range of electronic communications services – including high-speed data services – are available throughout the UK;
ensuring a wide range of television and radio services of high quality and wide appeal;
maintaining plurality in the provision of broadcasting;
applying adequate protection for audiences against offensive or harmful material; and
applying adequate protection for audiences against unfairness or the infringement of privacy.

The Communications Act 2003 requi res us to act in a way which is transparent, accountable, proportionate, consistent and targeted.

Financial framework

Under Paragraph 8(1) of the Schedule to the Office of Communications Act 2002, Ofcom is required to balance its expenditure with its income in each financial year.

Sections 38 and 347 of the Communications Act 2003 also require Ofcom to raise income from each of the sectors it regulates such that it covers the costs to be incurred by Ofcom in regulating that sector.

Ofcom must also apportion its common operating costs – those which do not relate directly to any one sector – in a proportionate manner across each of those sectors.

Ofcom raises its funds from the following sources:

television broadcast licence fees;
radio broadcast licence fees;
administrative charges for electronic networks and services and the provision of broadcasting and associated facilities; and
funding to cover Ofcom’s operating costs for spectrum management in the form of grant-in-aid from the Department for Business, Enterprise and Regulatory Reform (BERR).

Grant-in-aid covers the costs of regulating and managing the UK radio spectrum. It also covers those statutory functions and duties, which Ofcom must discharge under the Communications Act but for which the Act provided no matching revenue stream. Examples include the statutory public interest test for media mergers and ex post Competition Act investigations in relation to networks and services.

Ofcom also receives rental income from properties surplus to its requirements and bank interest in respect of bank balances.

Operating results

Ofcom’s actual operating expenditure outturn on an adjusted cash basis, and used to calculate the tariffs charged to stakeholders each year, was £130m in 2007/8 (2006/7: £129.4m), £0.2m lower than budget.

Ofcom’s total operating expenditure in the income and expenditure account in 2007/8 increased by £8.8m from expenditure in 2006/7. Significant changes from previous year were as follows:

An increase in average employee numbers of 21; pay increases in line with inflation; an increased provision in restructuring costs; an accrual for sabbaticals compensated by a release of National Insurance accrual from previous year has led to a net increase of £5m in staff costs.
Operating costs increased by a net £3.7m after achieving savings of £2.6m in administrative expenses through the progression of a number of efficiency initiatives and a £4m reduction in spectrum-related research and development projects, mainly due to non-recurring expenditure including:
- Development, data cleansing and training activities for our IS renewal programme, particularly relating to the implementation of new licensing systems.
- Compensation payments made to license holders as part of our planned programme for spectrum liberalisation.
- Increased facility costs arising from rent reviews and rates increases.
- Increased legal provisions as explained further in Note 18.

A reconciliation is set out in Note 2 of Section E which highlights the differences between the total operating expenditure as presented in the income and expenditure account and Ofcom’s actual operating outturn of £130m.

Note 2 to the financial statements also presents Ofcom’s actual operating outturn for 2007/8, by sector.

Surplus for Financial Year

Ofcom calculates its required operating revenue based on its statement of charging principles taking into account the actual funds that it needs to collect to discharge its cash liabilities during the year. This results in an accounting surplus only. Ofcom returns any surplus funds to stakeholders through a reduction in the annual tariffs raised in the following two financial years.

The surplus for the year under review, recorded in the income and expenditure accounts, was £8.3m (2006/7: £22.1m). In addition to the reduction explained above, the further reduction in the surplus is mainly due to:

2007/8 accelerated amortisation of certain assets which no longer provide economic benefit to Ofcom
2006/7 benefited from an exceptional credit in respect of a net adjustment from the surrender of a lease.

The surplus is required to cover expenditure not reflected in the Income and Expenditure Account, including capital expenditure and contributions to the two defined benefit pension plans.

HM Treasury Spending Caps

Ofcom collects fees from Wireless Telegraphy Act licensees. Ofcom then passes the monies collected to BERR, which remits a proportion back to Ofcom in the form of grant-in-aid to fund Ofcom’s spectrum management activities and remits the remaining amount to the UK Exchequer. Ofcom’s Section 400 accounts, published on the Ofcom website, details the monies collected and grant payments received.

During 2007/8 Ofcom agreed, under Section 401 of the Communications Act, to examine an alternative approach where Ofcom would collect the WT Act fees, deduct the costs of its spectrum management activities, and remit the remaining monies directly to the UK Exchequer. After a detailed review, Ofcom has decided not to implement Section 401 at this current time as the current legislation does not allow the anticipated process efficiency benefits for Ofcom and its stakeholders to be realised.

2007/8 Tariffs

On 31 March 2008, Ofcom published the Tariff Tables for 2008/9, which were based on an estimated operating expenditure outturn for 2007/8 of £129.8m.

A total of £0.4m – the difference between the original budget of £130.2m and the estimated operating expenditure outturn – is already being passed back to stakeholders in 2008/9 as part of the current regulatory tariffs or reimbursement of grant-in-aid claims.

On a like-for-like basis, Ofcom’s budget for 2008/9 will be £133.7m, which is 1.5% lower in real terms than its budget for 2007/8. This is the fourth consecutive real terms reduction in Ofcom’s budget and 17.5% lower in real terms than Ofcom’s original full-year budget set in 2004/5.

Ofcom is confident that, following several years of major efficiency improvements and initiatives, the organisation now operates with greater stable budgetary requirements.

The £133.7m operating budget is reflective of anticipated RPI increases and the rescheduling of some projects from 2007/8. The budget is based on an adjusted cash basis, which includes capital expenditure and actual contributions to pension schemes, but excludes depreciation.

However, some stakeholders will experience an increase in their regulatory fees for 2008/9 compared with the previous financial year due to a higher allocation of work planned for that sector.

Sector regulatory fees will specifically change by:

an average decrease of 6.3% for the radio sector;
an average decrease of 2.4% for the television sector; and
an average increase of 4.1% for network and services operators.

People

At 31 March 2008, Ofcom had 812 employees (2006/7: 800).

Pensions

Ofcom’s primary means of providing pension benefits is through a defined contribution pension allowance that is provided to all new employees and to those colleagues from the legacy regulators who have chosen this option. This allowance may be used to contribute to the Ofcom defined contribution stakeholder pension plan. Over 80% of Ofcom, colleagues are employed on terms with access to a stakeholder pension plan. Other colleagues from the legacy regulators are provided with membership of the defined benefit pension schemes.

For those colleagues who joined Ofcom from the legacy regulators and who elected to retain membership of a defined benefit pension scheme, Ofcom operates two such schemes, which are closed to new entrants; Notes 1j and 25b provide further detail.

The latest actuarial valuations (as at 1 January 2007 for the Ofcom (former ITC) Pension Plan and 31 March 2007 for the Ofcom Defined Benefit Pension Plan) highlighted a combined funding deficit of £17.7m. However, the financial statements show a surplus of £10m, primarily because the pension liabilities under the financial statements are prepared on the basis that the liabilities are discounted in line with the yields on high-quality bonds which (particularly under current market conditions) differs significantly from the approach used for determining Ofcom's contributions.

Ofcom made (and continues to make) cash contributions to the Ofcom Defined Benefit Plan and the Ofcom (former ITC) Pension Plan on the basis of the actuarial valuation. Cash contributions, rather than the amount charged to operating surplus (as calculated under FRS 17), are included in operating expenditure outturn used to calculate the tariffs charged to stakeholders each year.

During the year, contributions to the two defined benefit pension plans amounted to £6.9m; £1.8m of which was paid into a trust account. Funds transferred to and held in the trust account can only be paid into one of the two Defined Benefit Pension Schemes and are not able to be used for any other purpose.

Additional funds collected on behalf of HM Treasury

In 2007/8, in accordance with Section 400 of the Communications Act, Ofcom invoiced and collected £232.4m (2006/7: £229.1m) from wireless communications and broadcasting companies in spectrum revenues and licence receipts. Ofcom prepares a separate set of Financial Statements for the purposes of S400 of the Communications Act 2003.

At 31 March 2008, requests for payment in respect of spectrum fees amounting to £52.5m (2006/7: £40.7m) remained unpaid. A significant proportion of these amounts are due by way of instalment payments. No significant debts may be written off without the written authorisation of HM Treasury. At the balance sheet date, an amount of £1m was outstanding for more than 12 months from Inquam Telecom (Holdings) Limited. Inquam has an agreed payment plan to reduce the debt over time.

Investments in fixed assets

Ofcom continues to deliver its Information Systems renewal programme; part of which has now been deployed into the business. As at the year-end, assets under construction, which relate to systems development amounted to £4.1m.

IS renewal programme

During 2007/8 Ofcom’s IS renewal programme completed the development of a new system for spectrum licensing covering fixed links; this was implemented in April 2008. The system will enable Ofcom to manage spectrum licensing and licence renewal more efficiently. Ofcom will leverage this investment by migrating the remainder of the spectrum licences in the following year.

The IS project, known internally as Unify, is wide-ranging and complex, bringing together a variety of information systems used by the legacy regulators that Ofcom replaced. During 2007/8 it emerged that the spectrum solution was more complex than originally understood. As a result, the duration of the programme and the overall cost of implementation has exceeded initial estimates.

The renewal programme was subject to a thorough internal review during the financial year, resulting in tasks being replanned, a revised financial forecast and the implementation of a new governance structure. Risks identified have been closely monitored at project management, Operations Board and Board level and appropriate action was taken to address cost, time and functionality risks and issues.

Payments of suppliers

Ofcom’s target is to make all payments not in dispute within 30 days or less of acceptance of the relevant goods and services, or the receipt of a legitimate invoice if that is later. For 2007/8, we achieved a performance of 97.2 per cent against this target (2006/7: 98.8 per cent).

BERR loan

During 2007/8, Ofcom completed the repayment of the loan originally received to establish the organisation; this is further explained in Note 16.

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