Part 2: Acquisition and introduction into service

• Background
• Cabinet authority for the purchase of 105 Light Armoured Vehicles
• Defence policy changes after Cabinet approval in August 2000
• Current requirements and plans for the Army’s use of Light Armoured Vehicles
• Achievement of the Army’s targets and plans
• Our overall conclusions
• Lessons learned
• Recommendations

Background

2.1
Our first report in August 2001 set out the background to the purchase of the LAVs, giving details of the initial Cabinet approvals in March 1998 and May 1999; the tender process that was undertaken in late-1999, and discussions between General Dynamics and MoD (Acquisition) that took place in early-2000.

2.2
In August 2000, the Minister presented a paper to the Cabinet Policy Committee that set out options for the purchase of LAVs. It contained 4 options:

• to purchase 55 vehicles – to be delivered over a 3-year period, with an option of purchasing a further 50 vehicles later;
• to purchase 75 vehicles – to be delivered over a 3 to 4-year period, with an option of purchasing a further 30 vehicles later;
• to purchase 105 vehicles to be delivered over a 5-year period; or
• to redefine the requirements of the project.

2.3
In particular, the August 2000 Cabinet paper stated that the purchase of 105 LAVs delivered over a 5-year period would –

… provide commonality of equipment across both battalions. This would:

(1) Provide a deployable and sustainable battalion group, consisting of three motorised rifle companies, able to meet intended policy outcomes, and which is seen as both credible and usable by our defence partners.

(2) Enable the reinforcement to the battalion group to arrive in the unit with a high level of skills in motorised operations, both during mobilisation in NZ and once the force is deployed.

(3) Enable the battalion group commitment to be sustained by rotating the complete battalion at the time of change.

2.4
This established the rationale for the option of acquiring 105 LAVs with delivery over a 5-year period. The acquisition of 105 LAVs would enable the Army to deploy⁸ and sustain⁹ a motorised battalion group of 51 LAVs¹⁰, and a deployed battalion group could be fully replaced by an identical new battalion group, if and when required¹¹.

Cabinet authority for the purchase of 105 Light Armoured Vehicles

2.5
At a meeting on 21 August 2000, after reference from the Cabinet Policy Committee, Cabinet approved in principle the purchase of 105 LAVs for delivery over a 5-year period at a cost not to exceed $611.764 million (GST-inclusive).

2.6
An approval in principle is a decision that authorises further investigation with a view to specific action being taken at a later date. Accordingly, Cabinet invited the Minister to submit to the Cabinet Policy Committee detailed proposals for the project implementation covering funding and timing.

2.7
The Minister submitted the requested information to the Cabinet Policy Committee on 15 September 2000. This paper provided an estimated cost of the LAV project and included a breakdown of the total costs. It set out the expected payment schedules and detailed the necessary changes to appropriations.

2.8
However, the Minister was not asked for, nor did his paper provide, any estimate of when or how the Army would deliver the capability outlined in paragraph 2.3.

2.9
On 18 September 2000, Cabinet authorised the Cabinet Policy Committee to have Power to Act at its meeting on 20 September 2000, to consider proposals for the purchase of the LAVs.

2.10
On 20 September 2000, the Cabinet Policy Committee approved the expenditure of $646.018 million (GST-inclusive)¹², estimated in the Minister’s paper for the purchase of 105 LAVs.

Figure 7
Timeline of Cabinet authority to purchase Light Armoured Vehicles

2.11
The Committee delegated authority to the Secretary of Defence to enter into contract negotiations for the purchase of the LAVs, and the MoD was directed to report the final assessment of the project costs¹³ to the Ministers (of Finance and Defence) before the contract was signed. The Committee also delegated authority to the Ministers to approve any changes in appropriations required as a result of the MoD’s final report.

2.12
In January 2001, the Secretary of Defence and the Chief of Defence Force presented this report to the Ministers, and recommended that a contract be signed for the supply of 105 LAVs at a cost of $652.833 million (GST-inclusive). The report did not provide any estimate of when or how the Army would deliver the capability outlined in paragraph 2.3.

2.13
The Ministers approved the recommendations of the report, and the Government signed a contract on 29 January 2001 with General Dynamics to purchase 105 LAVs.

Defence policy changes after Cabinet approval in August 2000

2.14
The Defence agencies told us that Government policy had changed subsequent to the August 2000 Cabinet decision and the signing of the contract with General Dynamics in January 2001.

2.15
The Secretary of Defence and the Chief of Defence Force consider that, as a result of this policy change, the Army is now not required to be able to operate a complete motorised infantry battalion in the manner that had been set out in the August 2000 Cabinet paper (as described in paragraph 2.3 on page 18). We were told that the Army is required to meet the Government Defence Statement dated 8 May 2001. Two previous statements had been released since the LAV project began.

2.16
The first of these policy statements was The Government’s Defence Policy Framework, released in June 2000, which sets out the Government's defence policy objectives, and the roles and tasks of the NZDF. The framework signalled further reviews in a range of areas.¹⁴

2.17
The second relevant statement was the New Zealand Defence Force Capability Reviews – Phase One – Land Forces and Sealift review, dated November 2000. The review found that, with its current structure, the Army had the ability to deploy and sustain a battalion group of 600-900 personnel for up to 1 year. It could provide a larger force (900-1200 personnel) for 6 months. The review identified options for increasing the size of the Army and its ability to sustain larger forces on deployment for longer periods.

2.18
With the Government Defence Statement dated 8 May 2001, the options chosen as a result of the earlier reviews were expressed as Government policy. In relation to the Army, the 8 May 2001 Statement noted that the Army’s current structure would continue –

… based on two light infantry battalions within a brigade framework. These two battalions provide a capacity to sustain a 600-900 person commitment for a year and a 900-1,200 size battalion for six months. These levels can be enhanced by the deployment of Territorials when and where necessary.

2.19
The statement did not stipulate the number of LAVs that would make up a motorised infantry battalion group or company.

Current requirements and plans for the Army’s use of Light Armoured Vehicles

2.20
Given that the Defence agencies consider that the Army is now no longer required to be able to operate the LAVs in the manner suggested in the August 2000 Cabinet paper, we tried to identify exactly what the current requirements are for the Army’s use of the LAVs, and how the Army plans to meet these requirements.

Output plan requirements

2.21
The NZDF 2004/2005 Output Plan identifies the land combat force options that the Army must provide to the Government in relation to the LAVs. The Output Plan refers to:

• an Infantry Company Group – consisting of an Infantry Company (motorised or non-motorised) and supporting elements; and
• an Infantry Battalion Group – consisting of an Infantry Battalion (motorised or non-motorised) and Reconnaissance Troop.

2.22
The Output Plan states 2 current 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.

The Army’s plans for Light Armoured Vehicle distribution

2.23
As of 28 June 2004, the Army planned to distribute the LAVs as follows:

• 12 LAVs in Waiouru for ongoing LAV crew¹⁵ training;
• 49 LAVs with the motorised 1st Battalion in Linton;
• 14 LAVs based in Linton alongside the 1st Battalion in support roles; and
• 30 LAVs with Queen Alexandra’s Squadron¹⁶, to be based in Burnham alongside the 2nd Battalion.

2.24
In effect, 93 LAVs will be available for operational deployments, while 12 will be dedicated to ongoing training.

2.25
The Army told us that the 28 June 2004 plan was the result of 18 months of development work, and that the current intended distribution of the LAVs is designed to offer the Government the greatest flexibility in terms of options for LAV use.

2.26
The Army also told us that, in the event that the Government directs the deployment of Army units, the number of LAVs deployed as part of a battalion would be dependent upon an assessment of threat, terrain and task. As long as 600-900 personnel were deployed for 12 months, or 900-1200 personnel for 6 months, the Army could meet the requirements of the 8 May 2001 Statement. This deployment might involve: many LAVs, a small attachment of LAVs, or no LAVs at all.

The Army's plans for training Light Armoured Vehicle crews

2.27
In a letter to us, dated 6 August 2004, the Secretary of Defence and the Chief of Defence Force stated that 80 trained LAV crews is the requisite number to meet the targets required by the 8 May 2001 Statement.

2.28
By October 2004, the Army had 16 trained LAV crews. These crews had taken part in Exercise Predator’s Gallop in Australia in July 2004, and were to form the basis of the motorised company group due to be at the directed level of capability by December 2004.

2.29
The Army’s schedule for training more LAV crews is to have:

• 32 trained crews by the end of 2004;
• 64 trained crews by December 2005; and,
• between 80 and 96 trained crews by December 2006.

2.30
The Army told us that this plan would provide trained crews for the 93 operational LAVs. Instructors and students will operate the remaining LAVs issued to training units. The Army considers that it has the ability to increase training throughput in 2005 and 2006 if required.

2.31
Achievement of these training targets is not without risk. For example, the Army has worked for some time against the background of a general shortage of personnel and a high attrition rate¹⁷, and a range of initiatives has been undertaken in response to this risk¹⁸.

2.32
We were told that, in order to meet the introduction-into-service targets, the Army’s priority is to fill the personnel requirements for the LAV project. Consequently, the personnel requirements of some non-LAV units will not be filled in the short-term. The implications of this include:

• temporary closure of one infantry company in the 2nd Battalion;¹⁹ and
• maintaining Queen Alexandra’s Squadron reconnaissance skills at the minimum level.

2.33
We were told that the NZDF and the Army have consistently informed the Minister of Defence that the LAV project remains on track to meet its December 2004 and December 2005 milestones (as stated in paragraph 2.22).

Achievement of the Army’s targets and plans

2.34
Neither the 8 May 2001 Statement, nor the NZDF 2004/2005 Output Plan, stipulate the number of LAVs and LAV crews in either a motorised company group or a motorised battalion group.

2.35
We expect that, subject to meeting its training targets, the Army will be able to meet its obligations under the Output Plan as it will have:

• 49 LAVs based with the 1st Battalion in Linton, with 14 additional LAVs in support roles, plus 32 trained LAV crews, by December 2004; and
• up to 64 trained LAV crews (as stated in paragraph 2.29) with which to make up a motorised battalion group, by December 2005.

2.36
Although the Defence agencies consider that there is no policy requirement to maintain 2 battalions of 51 LAVs, the Army told us that it would be able to provide a motorised battalion group deployment consisting of 51 LAVs if required by the Government.

2.37
However, the Army is unable to sustain such a deployment for longer than 6 months, without some LAV crews being deployed for longer than the 6-month “Tour Length” planning figure noted in Schedule 4 of the NZDF 2004/2005 Output Plan. This is not consistent with “rotating the complete battalion at the time of change”, which was the rationale set out in the August 2000 Cabinet paper for purchasing 105 LAVs for delivery over a 5-year period.

2.38
Deploying personnel for longer periods could have an adverse affect on the morale of personnel on deployment, and also on the Army’s overall attrition rate. Another possibility is that fewer LAVs are deployed, in order to allow LAV crews to be rotated in line with the 6-month “Tour Length” planning figure.

Our overall conclusions

2.39
The LAVs have been delivered on budget and on time, and acceptance testing is due to be completed in December 2004. The Army has put a great deal of effort into preparing a distribution plan to make the most effective use of the LAVs, given the time needed to train crews and a general shortage of personnel.

2.40
The Defence agencies consider that the Army’s 28 June 2004 distribution plan for the LAVs represents a flexible approach to configuring the LAVs in a way to best meet the Government’s required outputs and expectations. The distribution plan states that this approach is “a refinement of and not a major variation from” the original rationale for 105 LAVs.

2.41
We have no reason to doubt that the Army’s distribution plan is appropriate in the context of the 8 May 2001 Statement. However, this approach clearly means, in our view, that the LAVs will be used in a different way to that set out in the August 2000 Cabinet paper.

2.42
We would have expected such a change in approach to be communicated to Cabinet, consistent with Cabinet having made the original decision in principle to purchase the 105 LAVs. We saw no evidence that this happened.

2.43
In addition, we note that, less than 4 months after the LAV contract was signed (29 January 2001), the 8 May 2001 Statement was released. We would have expected Cabinet to be advised, during preparation of the 8 May 2001 Statement, of the implications of the statement on the intended use of the LAVs. Again, we saw no evidence of this.

2.44
We understand from our communications with the Secretary of Defence and the Chief of Defence Force that the Minister is kept well informed of how the LAV project is progressing against targets, and that the Minister is satisfied with the Defence agencies’ current plans for the LAVs.

2.45
The Army’s current plan for using the LAVs is, in our view, significantly different from that which formed the rationale for purchasing 105 LAVs. That rationale envisaged a configuration that would have required 105 LAVs.

2.46
We tried to establish whether, under the current distribution plan, 105 LAVs were needed to meet the 8 May 2001 Statement and the 2004/2005 Output Plan obligations. It was not possible for us to do this because:

• the Army proposes to adopt a flexible approach to the way it uses and configures the LAVs; and,
• the concept of a battalion size is variable, and therefore the Army could meet its obligations by having a smaller or larger sized battalion depending on an assessment of threat, terrain, and task.

2.47
However, in our view, it could be possible for the Army to deliver its obligations under the 8 May 2001 Statement and the 2004/2005 Output Plan with fewer than 105 LAVs. This is because of the flexibility provided to the Army in these documents.

Lessons learned

Papers seeking Cabinet “approval in principle”

2.48
Recommendations seeking Cabinet “approval in principle” are discussed in paragraph 4.37 of the Cabinet Office Manual of 1996, which was in force at the relevant time –

Recommendations seeking approval in principle should be made sparingly and must state the intended source of authority for future action, ie, that the matter will be referred back to Cabinet, a Cabinet committee, or a Minister. Submissions should not seek approval in principle to the whole of a major policy issue when further investigation or discussion is needed before the government should consider entering into a substantive commitment. In such cases, a Minister should seek approval for the specific action to be taken at that time (for example, to begin certain negotiations) and, if necessary, for Cabinet or a Cabinet committee to note that further action will need to be taken later.

2.49
We consider that both of the Minister’s Cabinet papers – the August 2000 paper and the paper dated 12 September 2000 – met the requirements of the Cabinet Office Manual because they sought approval for a specific course of action, and advised that implementation and funding proposals for the LAV project would be forthcoming.

2.50
The August 2000 paper to the Cabinet Policy Committee noted that further detailed proposals would be submitted to the Committee on the option for the purchase of LAVs selected by the Committee (to purchase 105 LAVs over a 5-year period – described at paragraph 2.3 on page 18). Similarly, the September 2000 paper to the Cabinet Policy Committee dealt with the funding and timing issues as requested by Cabinet on 21 August 2000.

2.51
However, in our view, the August 2000 paper to the Cabinet Policy Committee should have included an indication of how and when the Army would be able to deploy and sustain a motorised battalion group (as outlined in paragraph 2.3). The inclusion of such an indication would, at a minimum, have required the Army to make an assessment of:

• its ability to train the LAV crews required;
• the timetable for training sufficient LAV crews;
• future personnel levels; and,
• an HR strategy with respect to the LAVs.

2.52
The paper did not include any such assessment.

2.53
Officials from the Defence agencies should also have ensured that these issues were included in the Minister’s September 2000 paper to the Cabinet Policy Committee. These issues were not addressed in that paper.

2.54
Our view that the August 2000 Cabinet paper was not sufficiently robust is further supported by our findings detailed in Part 4 of this report; that funding for items important to the LAV project²⁰ was either not incorporated, or was under-estimated in the project budget.

2.55
There is a vital lesson for the wider public sector flowing from these findings. It is that proposals for capital purchasing need to identify and assess the full range of financial and capability implications of the proposed purchase.

2.56
In addition, should plans to use a major new capital asset differ from the rationale for the purchase agreed to by Cabinet, then the agency involved should report this change back to Cabinet for explanation and approval.

2.57
Since our first report, the Secretary of Defence and the Chief of Defence Force have put in place a Capability Management Framework that is designed to ensure that proposals for defence acquisitions are fully robust and realistic (discussed, in the context of governance, in Part 3 of this report). We have not audited any proposals prepared under this new framework, but we will pay specific attention to this area in any future audits of defence acquisitions.

Recommendations

8: Deployability is the ability of a force to be safely transported within a specific timetable to a theatre of operations.

9: Sustainability is the ability to support a force through the duration of an operation. It includes, for example, sufficient personnel for initial deployment, rotation and casualties, and logistic stocks required by the deployed forces.

10: An annex to the August 2000 paper to the Cabinet Policy Committee describes a motorised battalion group as consisting of 51 LAVs.

11: The August 2000 paper to the Cabinet Policy Committee states that the Army is required to be able to deploy, at 60 days’ notice, a battalion group to participate in conventional mid-level conflict or in a range of UN and peace support operations. A second battalion is required to deploy at 6 months’ notice.

12: The increase in the cost of the LAVs between 21 August (see paragraph 2.5) and 20 September 2000 was a result of exchange rate fluctuations.

13: The report was also to include an appropriate foreign exchange hedging policy, a detailed risk analysis and risk management plan, how the contract price differed from the original cost, analysis of potential future cost variation, a breakdown of New Zealand project costs, an appropriate monitoring and reporting regime, and any required changes to appropriations.

14: The NZDF 2004/2005 Output Plan shows how the NZDF intends to contribute to the achievement of the Government’s Defence Policy Framework 2000 (a document that sets out the Government’s approach to defence) and the subsequent Government statements, such as that of 8 May 2001, that provide added detail on defence policy.

15: A LAV crew comprises a driver, a gunner, and a commander.

16: The Army’s Armoured Reconnaissance Squadron. This unit previously operated the Army’s M113 Armoured Personnel Carriers. The LAV remaining in Canada (see paragraph 1.20 on page 13) will be assigned to this unit when it arrives in New Zealand.

17: The attrition rate for the Army has remained steady during the last 2 years at between 16.5% and 17.5%.

18: Initiatives include (in co-operation with the NZDF) establishing a working group to identify how to improve retention rates and recruitment, using the NZDF’s capacity planning model to help analyse capability needs, completing a Personnel Shortfall Study, liaising closely with strategic human resource, recruitment, and training organisations, and undertaking the Defence Capability and Resourcing Review – a Defence-wide exercise that seeks to identify the current and optimum capability configuration and resource requirements for the Defence agencies to undertake the roles and tasks prescribed by the Government (due to report by the end of 2004).

19: New recruits that would otherwise go to this company will be diverted into LAV crew training.

20: Such as funding for spare parts, a Logistic Support Agreement, and a moving target range.