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| Total operating costs
increased by 35% in the 2001 financial year to £20,759 million after increasing
by 15.4% in the 2000 financial year. As a percentage of group turnover,
operating costs, excluding goodwill amortisation, increased from 79% in the
1999 financial year to 82% in the 2000 financial year and to 85% in the 2001
financial year. In all three financial years, net exceptional costs were
incurred. These amounted to £2,857 million, £111 million and £69 million in the
2001, 2000 and 1999 financial years, respectively. These exceptional costs are
considered separately in the table below and the discussion which follows. |
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| Staff costs |
4,625 |
|
4,283 |
|
3,871 |
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| Own work capitalised |
(693 |
) |
(498 |
) |
(428 |
) |
| Depreciation |
3,045 |
|
2,704 |
|
2,568 |
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| Goodwill and other intangibles amortisation |
386 |
|
89 |
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– |
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| Payments to telecommunication operators |
3,802 |
|
3,068 |
|
2,106 |
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| Other operating costs |
6,737 |
|
5,602 |
|
5,119 |
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Total operating costs
before exceptional costs |
17,902 |
|
15,248 |
|
13,236 |
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| Exceptional costs |
2,857 |
|
111 |
|
69 |
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| Total operating costs |
20,759 |
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15,359 |
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13,305 |
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Staff costs increased by
8.0% in the 2001 financial year to £4,625 million, after rising by 10.6% in the
2000 financial year. In the 2001 financial year, the numbers employed in the
group increased by 200 to 137,000 at 31 March 2001. Over 5,800 people left the
group on voluntary release and other incentive terms and some 3,000 people
transferred to joint ventures. Over 7,500 people joined through the
acquisitions of Viag Interkom and Telfort. Higher pension costs and the annual
pay awards were the main reasons for the increase in staff costs. In the 2000
financial year, the numbers employed in the group increased by 12,100. This net
increase included 5,000 individuals employed outside the UK mainly through
acquisitions, 2,500 former agency workers now working for BT, and around 4,500
people needed in the UK to meet increased demand and to roll out the ADSL
broadband product. These increases and the impact of pay awards caused the
increase in staff costs in the 2000 financial year.
The allocation for the employee share ownership scheme, included
within staff costs, was £32 million in the 2001 financial year.
This represents 2% of the pre-tax profit for the year, before the
exceptional goodwill impairment charges and the gains made on certain
disposals. The allocation for the 2000 financial year was £59 million
and represented 2% of pre-tax profit for that year. The allocation
for the 1999 financial year of £64 million represented 2% of pre-tax
profit for that year, before the gain on the sale of MCI shares.
The depreciation charge
increased by 12.6% in the 2001 financial year to £3,045 million after
increasing by 5.3% in the 2000 financial year, reflecting BT’s continuing high
level of investment in its networks and, in the 2001 financial year, the
acquisition of its new businesses.
Goodwill amortisation in
respect of subsidiaries and businesses acquired since 1 April 1998, when BT
adopted FRS 10, and amortisation of other intangibles amounted to £386 million
in the 2001 financial year compared with £89 million in the 2000 financial
year. Of the total in the 2001 financial year, £150 million relates to the BT
Cellnet minority acquisition in November 1999 and £93 million relates to the
Esat group acquisition in March 2000.
Payments to other
telecommunication operators grew by 24% in the 2001 financial year to £3,802
million after increasing by 46% in the 2000 financial year. The growth in these
payments was primarily as a result of the growing number of calls originating
on or passing through BT’s networks and terminating on UK competitors’ fixed
and mobile networks. This is due, in particular, to the increase in mobile
phone usage and internet-related calls. The payments include those made to
Concert for the delivery of BT’s outgoing international calls from early
January 2000 and those made by BT to international operators for outgoing and
transit calls prior to that time. Also included are payments made to mobile
phone operators on behalf of BT Cellnet Lumina and DX Communications’
customers.
Other operating costs,
which rose by 20% in the 2001 financial year to £6,737 million and by 9.4% in
the 2000 financial year, include the maintenance and support of the networks,
accommodation and marketing costs, the cost of sales of customer premises
equipment and redundancy costs. The increase in costs in the 2001 financial year
is mainly attributable to the other operating costs of acquired businesses. The
costs incurred in supporting the high growth of BT Cellnet was the main factor
behind the increase in costs in the 2000 financial year. Also, in the 1999
financial year, a currency gain of £87 million from investing the proceeds of
the MCI shares was offset against these costs.
Redundancy costs of £104
million were incurred in the 2001 financial year, compared with £59 million in
the 2000 financial year and £124 million in the 1999 financial year. The
redundancy costs in the 2001 financial year and to a much lesser extent in the
2000 financial year include the costs of over 3,000 managers who took early
voluntary release as part of BT’s plans to improve efficiency. In view of a pension
fund surplus, which for accounting purposes includes the provision for pension
costs in the group’s balance sheet, and in accordance with BT’s accounting
policies, redundancy charges for the three financial years 2001, 2000 and 1999
do not include the costs of the incremental pension benefits provided to early
retirees, which totalled £429 million, £140 million and £279 million,
respectively.
We are changing the
arrangements under which people leave BT in advance of the normal retirement
age. Under our NewStart programme launched during the fourth quarter of the
2001 financial year, BT employees will be expected to leave with a leaving
payment in place of a redundancy payment, and incremental pension benefits are
to be scaled down. This should reduce early leaver costs, which have been very
significant in recent years.
The exceptional items within operating costs are summarised in the
table below. The most significant item in the 2001 financial year
is the impairment of goodwill in Viag Interkom. We completed the
acquisition of the 55% interest in the company for £8,770 million
in January and February 2001 including repayment of loans. Goodwill
of £4,992 million arose on this transaction, the consideration for
which was negotiated in August 2000. We have undertaken an impairment
review under the requirements of the UK Accounting Standard FRS
11, incorporating reduced expectations for the rate of growth in
profits in the medium term reflecting current market views.
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| Impairment of goodwill in Viag Interkom |
3,000 |
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– |
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– |
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| Write off of Viag Interkom’s IT systems |
43 |
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– |
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– |
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| Infrastructure rates refunds |
(193 |
) |
– |
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– |
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Write off of cellular
subscriber acquisition costs |
7 |
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– |
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– |
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Costs relating to the
disengagement from MCI |
– |
|
64 |
|
69 |
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| Costs relating to the closure of the BT Cellnet analogue network |
– |
|
47 |
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– |
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| Total exceptional costs |
2,857 |
|
111 |
|
69 |
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An impairment in goodwill
of £3,000 million resulted from this review.
Other exceptional items within operating costs in the 2001 financial
year mainly comprised:
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a write off of £43 million on Viag Interkom’s
IT systems following its division into fixed and wireless
business on BT’s acquisition; |
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a credit of £193 million for the refund
of rates on BT’s infrastructure following a successful
legal action taken by BT in 2000 to challenge the rateable
valuations on which it was charged for its network assets. |
The exceptional costs for the 2000 financial
year included £47 million for the exit of BT Cellnet’s analogue
network in autumn 2000. Additionally, in the 2000 and 1999 financial
years, costs of £64 million and £69 million, respectively, involved
in the work to ensure that BT’s business became fully independent
of MCI have been shown as exceptional items in the group profit
and loss account.
In the 2002 financial year productivity improvements and cost savings
will be sought and initiatives to reduce costs totalling approximately
£575 million have been identified.
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