Part 3: Governance

• Introduction
• Previous recommendations to improve governance
• Changes to governance arrangements
• Governance of the Light Armoured Vehicle project during the introduction of the Executive Capability Board
• Effectiveness of governance arrangements
• Recommendation

Introduction

3.1
In this Part we discuss:

• recommendations to improve governance;
• subsequent changes to governance arrangements;
• governance of the LAV project during the introduction of the new governance arrangements; and
• the effectiveness of the new governance arrangements.

Previous recommendations to improve governance

Recommendations in our first report

3.2
Our first report raised concerns about the governance arrangements for the LAV project. We reported that:

• there was a lack of strategic management of the project, and noted that there was no overarching trilateral governance structure above the MoD project team;²¹ and
• the Defence Planning System – which was intended to ensure a co-ordinated approach to the planning of defence capability – was ineffective.

3.3
We made a number of recommendations that were intended to improve the governance and strategic management of projects such as the LAV project.

3.4
For example, we recommended²² that projects the size of the LAV project should be governed by a steering committee – chaired by the Secretary of Defence, and including senior staff from the MoD, the NZDF, and the single armed services. Such a committee should–

…meet at regular intervals, keep detailed minutes, and receive reports on the state of the project from the Project Director. It should also receive independent reports on the status and progress of projects.

3.5
We also recommended that the Defence Planning System be independently reviewed in order to determine whether it is ever likely to operate effectively, or whether it should be replaced.

Recommendations by the Ministry of Defence’s Evaluation Division

3.6
In addition to our findings and recommendations about improving governance, a March 2003 report by the MoD’s Evaluation Division – MoD (Evaluation)²³ – examined the planning for the LAVs’ introduction into service.

3.7
The report found that the governance structure over the LAV project was not appropriate for a project of its size and complexity, as the governance covered only the capability development and acquisition parts of the project.

3.8
Specifically, the MoD (Evaluation) report stated that (with our emphasis in bold type) –

Governance of a project of the size and importance of the NZLAV should be undertaken jointly by the Secretary of Defence, Chief of Defence Force and Chief of General Staff continuously until the responsibilities of the Ministry cease at the end of the post-delivery warranty period.

and …

Introduction into service of a major capability or asset requires close collaboration between the Ministry’s acquisition organisation and the receiving Service. Significant information flows and coordination activities are involved. We also think that introduction of a major asset or capability into service has implications for HQ NZDF Development and Resources Branches. We do not think it is appropriate to regard the introduction into service phase of a major new capability as something to be overseen entirely by the Service concerned [the Army].

3.9
The MoD (Evaluation) report also stated that –

Responsible managers, whether the Deputy Secretary Policy and Planning, Deputy Secretary Acquisition, or Deputy Chief of Staff of the Service concerned, should account for their phase of the project to a single Governance Board. Chairmanship of the Governance Board might move from the Secretary of Defence to the Chief of Defence Force as the project moves towards delivery and introduction into service.

3.10
MoD (Evaluation) recommended that the MoD and the NZDF extend the governance arrangements for the LAV project, and similar projects, to include oversight of introduction-into-service planning and preparations.

3.11
The Secretary of Defence and the Chief of Defence Force both endorsed this recommendation. The Chief of Defence Force noted that the issue of project governance would be addressed through the development of a “whole of project” approach to governance, known as the “Capability Management Framework”.

Our expectations for improvements to Light Armoured Vehicle project governance

3.12
We expected that the Defence agencies would have given effect to the recommendations of our first report, and to the recommendations of the MoD (Evaluation) report. We expected that joint governance structures would have been introduced over the LAV project, and that we would be able to see evidence that the Secretary of Defence and the Chief of Defence Force had been providing joint governance over the LAV project through these structures.

Changes to governance arrangements

3.13
The Defence agencies have undertaken a range of positive actions in response to the recommendations raised in our first report in 2001. Since then, there has been an evolution in oversight arrangements for the LAV project and military capability acquisition projects in general.

3.14
Changes have included the introduction of:

• the Acquisition Control Group (Army); and
• the Capability Management Framework.

Introduction of the Acquisition Control Group (Army)

3.15
The Secretary of Defence convened the Acquisition Control Group (Army) in November 2001, and chaired the meetings of the Group. The Chief of Defence Force and the Chief of Army were members of the Group.

3.16
In discussing the LAV project between November 2001 and November 2002, the Acquisition Control Group (Army) largely met the recommendations of our first report. Minutes of the Group’s meetings show that regular progress reports were received from the LAV project team. Risks and project issues – and actions to address them – were discussed in detail. The Deputy Secretary of Defence (Evaluation) and a risk management consultant provided the Group with an independent assessment of the LAV project.

3.17
The Acquisition Control Group (Army) last met in November 2002.

Introduction of the Capability Management Framework

3.18
In our first report we recommended that the Defence Planning System be reviewed to determine whether it is ever likely to be effective or whether it should be replaced.

3.19
In April 2003, the Office of the Chief Executives²⁴ approved a project charter to set up a framework that would address the problems identified with the Defence Planning System. A significant amount of effort went into establishing this framework, and the Defence agencies consulted with the wider public sector during its development. The resulting Capability Management Framework was approved on 22 April 2004.

3.20
During the development of the Capability Management Framework, draft elements of the framework were progressively introduced and tested. While this approach assisted the development of the Capability Management Framework, we consider that it also caused some confusion about the role and status of the framework in relation to the LAV project.

3.21
The Capability Management Framework replaced the Acquisition Control Group (Army) with 2 new bodies:

• the Executive Governance Board (now called the Executive Capability Board); and
• the Capability Development Management Committee (now called the Integrated Capability Management Committee).²⁵

3.22
The Executive Capability Board has 2 permanent members – the Secretary of Defence, and the Chief of Defence Force. The Integrated Capability Management Committee mirrors the Executive Capability Board’s membership with second-tier personnel from the Defence agencies.

3.23
We were told that the Executive Capability Board has no executive powers. It is a forum for the Secretary of Defence and the Chief of Defence Force to share information and discuss matters of mutual interest. It does not remove the individual responsibilities of the Chief Executives in relation to the Minister of Defence.

3.24
The Integrated Capability Management Committee first met in April 2003 and the Executive Capability Board first met in May 2003. Given that the Capability Management Framework was not officially approved until 22 April 2004, the early establishment of these groups are examples of the progressive introduction of elements of the Capability Management Framework.

Governance of the Light Armoured Vehicle project during the introduction of the Executive Capability Board

3.25
In our audit, we focussed on how the revised governance arrangements contributed to enhanced oversight over the LAV project. In particular, we looked at:

• governance over the LAV project during the introduction of the Executive Capability Board; and
• the effectiveness of current governance arrangements.

3.26

We were interested to assess the effectiveness of governance arrangements during the period when the Capability Management Framework was being introduced.

3.27
We reviewed the minutes of meetings of the Acquisition Control Group (Army) and the Executive Capability Board and found that, from the time the Acquisition Control Group (Army) last met in November 2002, there was no record of discussion of the LAV project until the Executive Capability Board meeting of October 2003 – a period of 11 months.

3.28
This was of concern to us, given that the March 2003 MoD (Evaluation) report recommended that governance arrangements be extended over this phase of the LAV project, and given that the Chief of Defence Force’s response to the recommendation was that the Capability Management Framework would be used to achieve this.

3.29
We raised our concerns with the Secretary of Defence and the Chief of Defence Force and were told that:

• Between November 2002 and October 2003 there were no relevant issues for either the Acquisition Control Group (Army) or the Executive Capability Board to discuss, and that, had relevant issues arisen, the appropriate group would have discussed those issues.
• The Secretary of Defence and the Chief of Defence Force had oversight of all key LAV project issues through the internal reporting processes of each agency. Each Chief Executive had appropriate knowledge of all matters for which they were individually accountable.
• Responsibilities have been delegated to the appropriate levels. The acquisition of the LAVs is entirely the responsibility of the Secretary of Defence. Introduction into service of the LAVs is the sole responsibility of the Chief of Defence Force, who has delegated the responsibility for managing this activity to the Chief of Army.

3.30
While the Secretary of Defence and the Chief of Defence Force may have received reports through the internal processes of each agency, our first report and the report of MoD (Evaluation) both clearly state that projects such as the LAV project require a joint governance structure to oversee the project as a whole. Neither our first report, nor the MoD (Evaluation) report, suggested that governance meetings be held only when “relevant issues” arise.

3.31
In line with the recommendations of both reports, we consider that the following actions should have been taken during 2003 to ensure robust joint governance over the LAV project:

• The LAV project should have been a standing agenda item for review at the monthly meetings of the Executive Capability Board;
• The Executive Capability Board should have periodically monitored the main risks to the LAV project, as listed in the respective Army and MoD Risk Registers; and
• Some of the risks listed in the LAV project Risk Registers were relevant for discussion at the Executive Capability Board in their own right. The Board should have discussed these risks, as they had potential implications for achieving introduction-into-service targets.

3.32
Examples of risks with implications for achieving LAV project targets include the shortfall in funding for LAV spare parts (discussed in more detail in Part 4 of this report), and the risk that there would be insufficient personnel to fill future LAV-related vacancies (see paragraph 2.31 on page 24).²⁶

3.33
We are concerned that the risks of shortfalls in personnel and funding for spare parts – identified as high risks to the overall project by both the MoD and Army Risk Registers – were not raised for notification or discussion at the Executive Capability Board.

3.34
In addition, although the Secretary of Defence does not hold the legal authority to direct the NZDF to allocate further funding for spare parts, we consider that an aspect of the spare parts funding resolution did in fact relate to the statutory responsibilities of the Secretary of Defence. This was because negotiations between General Dynamics and MoD (Acquisition) about weight compensation were ongoing, and any compensation agreed was to be applied to LAV spare parts (see Part 4).

Effectiveness of governance arrangements

3.35
We were also interested to assess current governance arrangements, now that the Capability Management Framework has been fully introduced.

3.36

Generally, governance, sharing of information, and co-operation have improved since our first report. The Capability Management Framework is an attempt to provide a joint governance and management framework (as recommended by our first report and the MoD (Evaluation) report), while recognising the separate statutory accountabilities of the Chief Executives.

3.37
The Defence agencies have also taken steps to ensure the sharing of information about the LAV project within the Defence agencies, even though this information at times related to the “sole” responsibilities of a single agency. Personnel involved in the wider project have issued regular reports to senior levels, and often copied these reports to the Chief Executives of the MoD and the NZDF.

3.38
However, we found differing views between the Army and the NZDF about the process by which the LAV project would be held to account.

3.39
We understand that the Army expected that it would be called to account for the introduction-into-service part of the LAV project, and would be asked to explain key issues. However, senior NZDF officials stated that they expected the Army to raise issues when guidance was required.

3.40
Good project governance arrangements should allow for issues to be raised both by those responsible for managing projects (in the case of the LAVs’ introduction into service, the Army) and by those with overall responsibility for the final outcome of the project (the Secretary of Defence for acquisition, and the Chief of Defence Force for introduction into service). Governance is therefore a 2-way process, with ultimate responsibility resting with the Secretary of Defence and the Chief of Defence Force.

3.41
Matters of “sole” responsibility have not been raised at meetings of the Executive Capability Board. This is because the Board cannot over-ride the statutory decision-making authority of the Chief Executives on such matters. We consider that joint oversight of major acquisition projects would be improved if matters of sole responsibility were raised for discussion at `Executive Capability Board meetings. Until this happens, there is a risk that issues critical to the statutory responsibilities of each Chief Executive may not be addressed in a timely way.

3.42
In our view, the Capability Management Framework could be amended to require that all major issues and risks related to acquisition or introduction into service of major new capabilities are, in the first instance, elevated to the Executive Capability Board for notification, discussion, and support. This would provide improved joint oversight without diluting or altering individual statutory responsibilities of the Chief Executives to the Minister.

3.43
We are pleased to note that the Defence agencies have now made projects such as the LAV project standing items for the agendas of the Executive Capability Board and the Integrated Capability Management Committee, and that regular meetings have been held to review project risks.

3.44
We also note that a Directorate of Capability Programme Support has been established to manage the setting of agendas for governance meetings under the Capability Management Framework, and to ensure that supporting papers are provided to these meetings. We expect the Directorate to improve the flow of information within the Capability Management Framework, and to improve the effectiveness of the Integrated Capability Management Committee and the Executive Capability Board.

Recommendation

21: Report of the Controller and Auditor-General, Ministry of Defence: Acquisition of Light Armoured Vehicles and Light Operational Vehicles, August 2001, ISBN 0-477-02883-7, page 44. A full copy of our first report is available on our website www.oag.govt.nz.

22: ibid, page 58.

23: MoD (Evaluation) carries out assessments and audits under the authority of section 24(2)(e) of the Defence Act 1990.

24: The Office of the Chief Executives exists to provide co-ordination between the Secretary of Defence and the Chief of Defence Force, and their 2 organisations, in respect of their joint responsibilities.

25: During our audit, the Board and the Management Committee were re-named. To avoid confusion, we use the current titles.

26: Other active risks of high severity noted in the MoD and Army Risk Registers that might have been discussed included:

• the technical capability of Army personnel;

• cost of ownership of the LAVs;

• increase in weight;

• delays to acceptance testing;

• having sufficient fleet management data;

• securing prime contractor support;

• implications of guarantees and warranties; and

• cost of special tools and test equipment.