Part 1: Background

• Introduction
• The main parties
• Responsibilities of the main parties
• The purchase of Light Armoured Vehicles
• The military capability systems life cycle
• Objectives of our follow-up audit
• Structure of this report
• Key events

Introduction

1.1
This is our second report into issues relating to the acquisition of Light Armoured Vehicles (LAVs) for the New Zealand Army (the Army).

1.2
In August 2000, Cabinet approved in principle the purchase of 105 LAVs. Cabinet had earlier, in July 1999, approved in principle the purchase of 308 military Light Operational Vehicles (LOVs)¹. LAVs carry troops and provide gunfire support in battlefield situations, and LOVs are all-wheel-drive vehicles that are used for purposes such as transporting ammunition, equipment, and supplies. The proposed purchases represented the Army’s largest re-equipment programme since World War II.

1.3
In November 2000, the Secretary of Defence asked the then Auditor-General to undertake a review of the processes used in the acquisition of both the LAVs and the LOVs. Our report on that review – Ministry of Defence: Acquisition of Light Armoured Vehicles and Light Operational Vehicles – was published in August 2001.

The main parties

1.4
The 3 main parties involved in the matters covered in this report are:

• the Ministry of Defence (the MoD);
• the New Zealand Defence Force (the NZDF); and
• the Army.

1.5
Each party has individual responsibilities and accountabilities under the Defence Act 1990 (the Act). For ease of reading, we use the term Defence agencies when referring to all 3 parties.

Responsibilities of the main parties

1.6

The Act sets out the roles and responsibilities of the Secretary of Defence and the Chief of Defence Force.

1.7
The Secretary of Defence (who heads the MoD) is the principal civilian adviser to the Government. As Chief Executive of the MoD, the Secretary of Defence has responsibility for:

• advising the Government on defence policy; and
• purchasing military equipment.

1.8
The Chief of Defence Force is the principal military adviser to the Government, and commands the NZDF (comprising the 3 armed services – the Army, the Royal New Zealand Navy, and the Royal New Zealand Air Force). The Chief of Defence Force is responsible to the Minister of Defence (the Minister) for:

• carrying out the functions and duties of the NZDF;
• the general conduct of the NZDF; and
• the efficient, effective, and economic management of the activities and resources of the NZDF.

1.9
The Chief of Army commands the Army, and is responsible to the Chief of Defence Force for the implementation of policies, plans, and programmes in relation to the Army. The Chief of Army is responsible to the Minister, through the Chief of Defence Force, on any matters relating to the Army.

1.10
Section 31 of the Act requires the Secretary of Defence and the Chief of Defence Force to consult each other in relation to any advice that either of them intends to give to the Minister on major matters of defence policy.

1.11
In June 2000, the Government announced that it intended to review the accountabilities and structural arrangements between the MoD, the NZDF, and the 3 armed services. The review, undertaken by former State Services Commissioner Mr D. K. Hunn, was released in March 2003.

1.12
After the Hunn Review, the Minister directed the Secretary of Defence and the Chief of Defence Force to achieve greater co-operation and collaboration between their agencies. In particular, the Minister directed that accountabilities be assigned on a “shared”, “prime” and “sole” basis².

1.13
In relation to planning for and investing in new equipment, the Secretary of Defence and the Chief of Defence Force have “shared” responsibility for analysing future needs and setting out the requirements of the military.

1.14
The Secretary of Defence has “sole” responsibility for equipment purchasing (known as “acquisition”), while the Chief of Defence Force has “sole” responsibility for commissioning new equipment (known as “introduction into service”).

1.15
Figure 1 below shows the organisational structure of the Defence agencies in relation to the acquisition of military capability³, such as the LAVs.

Figure 1
Organisational structure relating to the acquisition of military capability

The purchase of Light Armoured Vehicles

1.16
The Government signed a contract on 29 January 2001 with a Canadian company, General Motors Defence – now called General Dynamic Land Systems (General Dynamics) – to purchase 105 LAVs.

1.17
The LAV project⁴ represents a considerable investment of public money. Figure 2 on the opposite page shows that the cost of foreign exchange cover for the LAV project has varied since the original contract was signed, but the capital cost has remained the same.

Figure 2
Total cost of the Light Armoured Vehicle project

1.18
At the time the contract was signed, the annual operating cost for the LAVs was estimated at $39 million (including about $30 million a year in depreciation). The Army’s current estimate of steady-state⁵ annual operating cost for the LAVs is $48.8 million (including about $35.1 million a year in depreciation). Each LAV has a life expectancy of 25 years.

1.19
The LAVs are central to the future role of the Army. The vehicles are the main platform in the significant change from the Army’s traditional light infantry role to a motorised light infantry configuration.

1.20
The LAVs have been delivered on time⁶, and the capital cost of the acquisition is within budget. The first batch of 7 LAVs was delivered in August 2003, and the NZDF expects to have received and accepted⁷ 104 LAVs by the end of 2004. One LAV will remain in Canada until late-2005 for the purpose of testing add-on armour options.

1.21
The NZDF 2004/2005 Output Plan states 2 targets for the introduction into service of the LAVs. These are, to have:

• a motorised company group to be at the directed level of capability by December 2004; and
• a motorised battalion group to be at the directed level of capability by December 2005.

1.22
Descriptions of these groups as units within the Army are explained in Figure 3 on the next page.

Figure 3
Units of the Army*

* Source: Ministry of Defence, New Zealand Defence Force Capability Reviews, Phase One - Land Forces and Sealift, November 2000.

1.23
The Army has 2 standing infantry battalions:

• 1st Battalion, Royal New Zealand Infantry Regiment - 1 RNZIR, based with the Second Land Force Group at Linton.
• 2nd Battalion, Royal New Zealand Infantry Regiment - 2/1 RNZIR, based with the Third Land Force Group at Burnham.

The military capability systems life cycle

1.24
The military capability systems life cycle has 5 distinct phases that cover planning for the purchase, acquisition, use, and disposal of military equipment. The 5 phases are shown in Figure 4 below. Our first report focussed on the assessment and definition phase, and the acquisition part of the delivery phase of the LAV project. This report looks at the acquisition and introduction-into-service parts of the delivery phase.

Figure 4
Five phases of the military capability systems life cycle

1.25
The Secretary of Defence and the Chief of Defence Force are separately accountable for acquisition and introduction into service respectively. Both parts occur simultaneously. The overlap between these 2 parts of the delivery phase since the LAV contract was signed in January 2001 is shown in Figure 5 below. Acquisition activity tapers off as introduction-into-service activity increases.

Figure 5
Overlap of acquisition and introduction-into-service activities for the Light Armoured Vehicle project*

* Adapted from Capability Management Framework, New Zealand Defence Force, May 2004.

Objectives of our follow-up audit

1.26
Our first report about acquisition of the LAVs highlighted problems in the key areas of governance, relationships, accountabilities, and defence planning.

1.27
We intended to undertake a follow-up audit on the accuracy of the Army’s analysis of the maintenance requirements for the LAVs. However, it became apparent at an early stage that our audit required a wider scope. We therefore not only looked to see if progress had been made since our first report, but also examined issues arising from the introduction into service of the LAVs.

1.28
The objectives of our follow-up audit were to:

• give assurance to Parliament about whether the Defence agencies’ governance arrangements for the LAV project are appropriate and robust;
• identify shortfalls, if any, between the approved costs and actual costs for the LAVs; and
• assess the analysis that has been undertaken to identify the costs of operating and maintaining the LAVs in accordance with the purchase agreement.

1.29
In order to meet these objectives, we:

• interviewed staff from the Defence agencies;
• reviewed documents and files held by the Defence agencies relating to the introduction into service of the LAVs; and
• visited the Army Training Group at Waiouru to observe acceptance testing and driver training for the LAVs.

Structure of this report

1.30
During our follow-up audit, we noted that the August 2000 Cabinet paper did not set targets for the introduction into service of the LAVs. We also became aware that the Army did not intend to operate the LAVs in the way envisaged in that Cabinet paper. We set out our findings on the current targets and plans for the introduction into service of the LAVs in Part 2.

1.31
In Part 3 we discuss the recommendations to improve governance arrangements that were made in our first report and by the MoD’s Evaluation Division, subsequent changes to governance, and the effectiveness of LAV project governance in relation to those recommendations.

1.32
Part 4 identifies the shortfalls in funding for spare parts and the Logistic Support Agreement for the LAVs. We examine how the shortfalls have been addressed by the Defence agencies. We also discuss the lack of funding for a moving target range for LAV training.

1.33
Part 5 discusses the Defence agencies’ use of life cycle costing analysis to identify ongoing funding requirements of the LAV project. We discuss how life cycle costing analysis has been introduced throughout the Defence agencies.

Key events

1.34
Figure 6 on the opposite page shows the key events for the LAV project, including the expected timing of events still to take place.

Figure 6
Timeline of key events for the Light Armoured Vehicle project since 1999, and future goals

1: The tender for the LOVs was cancelled in May 2000 pending an inquiry into the conduct of the tender. The tender process was subsequently restarted. The Minister of Defence signed contracts in March and June 2004 to purchase a total of 321 LOVs. Delivery of the vehicles began in October 2004.

2: The Hunn Review stated that, under “shared” accountability, “both principals would be equally accountable for results”, whereas for “prime” accountabilities “the process itself would be collegial, [but] one person would assume the lead role and be responsible and accountable…“Prime” responsibility [goes] well beyond the normal expectations of consultation and requiring the full involvement of all parties.”

3: The term “capability” refers to the equipment, and the training and infrastructure that must be put in place for the effective use of the equipment.

4: We use the term “LAV project” to collectively describe the acquisition and introduction into service of the LAVs.

5: From the time that all of the LAVs are in service with the Army.

6: The timetable for delivery was extended by about 6 months from the schedule originally agreed. This was because it was decided to take advantage of installing the latest generation 28-volt electric drive turret on the vehicle.

7: Each LAV is tested upon delivery, before being formally accepted by the Army.