Overview

In May 2005, the Government approved a Defence Funding Package of up to $4.4 billion in extra operating funds over 10 years to improve the military (personnel and equipment) and corporate capability of the New Zealand Defence Force (NZDF). The Defence Sustainability Initiative (the Initiative) was NZDF's 10-year programme to use the extra funding. In December 2008, the Government ended the Initiative as a distinct programme, but some of its projects will continue.

My staff audited NZDF's progress for the Initiative's first three years from 1 July 2005 to 30 June 2008 (the foundations phase). I wanted to assess whether expected improvements in NZDF's capability had occurred. I also wanted to report to Parliament about the likelihood that NZDF would achieve the Initiative's goals by 30 June 2015.

I am pleased that NZDF set out, in advance, major areas of focus for the short term, medium term, and long term, and corresponding performance measures to assess progress. This approach means that NZDF has suitable management accountability processes to monitor and report progress and adjust timetables or methods as needed. It also enables others, such as Parliament, the public, and my staff to have a more informed discussion about NZDF's progress.

NZDF anticipated that deployments would be kept at the same level as when the Initiative started. NZDF needed the deployment rate to be no more than 11.7% of Regular Force personnel during the foundations phase to ensure that resources would be available to achieve the Initiative's objectives. It deployed 12.4% in the first year, 15.8% in the second year, and 17.2% in the third year. Sustaining these levels of deployment came at a cost: the Army was not able to meet its targets for improving preparedness for potential new deployments because more of its personnel were deployed. The Air Force and Navy were able to meet their targets, except in two cases, because they had fewer resources deployed.

As well as the effects of deployments, which were widespread within NZDF, rising capital and operating costs (which eroded the value of the Initiative's funding) also slowed progress in achieving the expected results for the foundations phase.

The extra funding enabled NZDF to recruit and train more personnel with the right skills and experience to meet the then Government's expectations. The Army met its target for increasing personnel numbers, but the Air Force and Navy missed their targets by about 3% and 4% respectively.

Funds were also made available for pay increases and most personnel received increases of between 10% and 12%. NZDF believes this has helped to reduce attrition: the Army reduced attrition by about 4%. However, attrition in the Air Force increased by about 1% and in the Navy by about 4%. During 2008, the Air Force and Navy commissioned in-depth studies to help them understand the precise causes for attrition. They will carry out the recommendations from those studies over the short term, medium term, and long term.

Higher-than-planned deployments and limited progress in reducing attrition were the main reasons that NZDF had made slow progress in improving the numbers and effectiveness of personnel in critical trades and – for the Army – in critical ranks. Improvements were needed because these trades and ranks are critical to starting and completing missions safely and effectively.

Before the Initiative, NZDF had a backlog of minor capital equipment shortages and was also short of the stock that it needed to hold in case there were new deployments. NZDF made good progress in rectifying shortages in both areas for minor capital items. Because of the priority given to those items, NZDF postponed (until the construction phase) projects to increase the quantity of major capital stock.

NZDF was meant to, and did, safeguard enough operating funds to recruit and prepare personnel to use seven new vessels (the Protector Fleet) when they arrived. The vessels' late arrival meant that not all the funding was needed during the foundations phase.

NZDF had to make a significant number of improvements in the delivery of corporate services. NZDF centralised and consolidated the supply of corporate services to the Air Force, Army, and Navy: about 370 fewer personnel now provide these services. Headquarters NZDF increased, as planned, its numbers of personnel, although there are still shortages in numbers and capability in some areas. NZDF's effectiveness and efficiency programme continues to examine the best method for providing corporate services for the organisation.

NZDF faced a significant challenge in carrying out 16 major projects to improve corporate capability. Although slower than planned, NZDF made good progress towards completing all of them. New timetables were set for the delayed projects. The main reasons for delays were optimistic early planning, rising costs, and the effects of deployments.

NZDF is now using its new performance management system to model the level and mix of military capability that it can deliver within specific funding regimes, and to integrate capital and operating resource flows. NZDF had not been able to do this before the Initiative because it did not have the right systems and expertise available.

Although we make some suggestions to NZDF, we have not found it necessary to make any formal recommendations in this report.

I thank NZDF's staff for their helpful and professional co-operation with the audit team.

1 September 2009