Part 12: Managing the Defence Sustainability Initiative

12.1
In this Part, we discuss NZDF's:

• ability to manage expectations of its performance, given its workload and capacity;
• responsibility to ensure that annual independent reviews of the Initiative's progress were conducted; and
• arrangements for ensuring that it managed the Initiative effectively and reported its progress.

Balancing expectations, workload, and capacity

During the foundations phase, NZDF's deployment rate and rising costs meant that progress in some areas took longer than planned. NZDF now uses its new performance management system to model the level and mix of military capability that it can deliver within specific funding regimes.

12.2
In general terms, there are four elements that any organisation can alter to balance expectations of its performance with workload and capacity. These elements are the:

• funding available to meet expectations;
• organisation's workload;
• expected results; and
• timetable for achieving those results.

12.3
We considered how these elements affected NZDF during the foundations phase. We note that NZDF had little ability to control rising costs, which needed to be absorbed within the Defence Funding Package.¹ For political and security reasons, it can be difficult for the Government to turn down some deployment requests. Only some of the Initiative's expected results were reviewed during the foundations phase.² Therefore, NZDF took longer than planned to achieve improvements in some areas.

12.4
During our audit, NZDF told us that it used its new performance management system to model the resources needed to achieve all the Initiative's goals.

12.5
NZDF expects that it will be able to:

• set out the level and mix of military capability it can deliver within specific funding regimes; and
• integrate capital and operating resource flows, which had not occurred before the Initiative was approved or during the foundations phase.

12.6
Although NZDF's modelling work was in its early stages, these actions met our expectations for sound planning and management accountability.

12.7
In our classified report (see paragraph 1.16), we considered that NZDF would not be able to achieve the Initiative's goals in the time available, given its deployment workload and available resources. Therefore, we suggested that NZDF adjust its performance targets for the Initiative to better reflect its workload and resources.

12.8
Since then, the Government's decisions effectively ended the Initiative as a distinct programme, which made our suggestion redundant. The Defence Review and resulting Defence White Paper will set the Government's defence policy. We expect NZDF to consider the intent of our earlier recommendation during this policy review and as it conducts its regular planning.

12.9
We reflected on the matters that affected the quality of NZDF's planning for the foundations phase. We discussed our assessment with some senior NZDF personnel and they agreed with our view. We consider that, at the outset, NZDF underestimated the:

• effect that many years of depleted corporate resources had on its ability to produce realistic timetables for projects; and
• time that would be needed for the new and improved corporate systems to become established.

12.10
NZDF knew that completing the 16 corporate capability projects was a significant task. However, it did not necessarily understand what would be involved in ensuring that each project delivered the best results for NZDF, or how the Initiative would change NZDF's approach to management. For example, during the foundations phase, NZDF replaced its military management structure with an Executive Leadership Team. The changes to the methods for delivering corporate services were significant.

12.11
The size of the task facing NZDF in carrying out the Initiative was affected by NZDF's deployment rate during the foundations phase. It had been recommended that the deployment rate should be reduced in the first few years.³ If this had been possible, more personnel would have been available to rebuild military and corporate capability more quickly. Instead, the deployment rate kept increasing, which eroded the capacity available to carry out the Initiative as planned. NZDF responded to these constraints by setting priorities to guide decision-making (see paragraph 12.15) and adjusting timetables for some matters (see paragraph 11.6). These were sensible responses.

Independent reviews of the Initiative's progress

Compulsory annual reviews of the Initiative's implementation and progress have occurred. NZDF has dealt with, or is dealing with, matters arising from these reviews.

12.12
NZDF needed to ensure that independent reviews of the Initiative's implementation and progress occurred each year, and it did.⁴

12.13
Matters raised by the reviews were responded to. The report from the third review made seven recommendations, and NZDF (with the Ministry of Defence) accepted six of them. One recommendation was not accepted because it sought to redefine the roles of both organisations, which Cabinet had decided in 2003.⁵

12.14
Progress on implementing the recommendations was reported to the regular meeting that NZDF and the Ministry of Defence have with staff from the Department of the Prime Minister and Cabinet, State Services Commission, and the Treasury (see paragraph 12.17). We agree that routine reporting should continue until the recommendations are implemented or until the organisations agree there is no further benefit from preparing the reports.

Management and reporting arrangements

NZDF had sound arrangements for managing the Initiative and reporting on its progress. Priorities were set to guide decision-making. Significant unmitigated risks to achieving the Initiative were identified and reported.

12.15
NZDF set three main priorities for the Initiative and seven priorities for deciding how to use the Defence Funding Package. The combined priorities guided NZDF's decision-making. As part of the usual planning cycle common to state sector organisations, NZDF's strategic initiatives were reviewed each year. They were consistent with the improvements in military and corporate capability that were expected from the Initiative, which we discussed in earlier Parts of our report.

12.16
We expected NZDF to have clear accountability arrangements and management practices for carrying out the Initiative, and it did. For example, the 16 corporate capability projects (see Appendix 1) were managed using accepted project management practices during the first year of the foundations phase. From about June 2006, the uncompleted projects were transferred to the relevant line managers and became part of business as usual.

12.17
Even though the matters that were part of the Initiative were managed and reported as part of business as usual, NZDF had a system for bringing together and reporting information about the Initiative's progress as a total programme. For example, NZDF met regularly with the Ministry of Defence and staff from the Department of the Prime Minister and Cabinet, State Services Commission, and the Treasury to discuss the Initiative's progress and related matters. Separate written reports were produced for these meetings.

12.18
NZDF identified two significant unmitigated risks to the Initiative – higher-than-planned deployments, and rising capital and operating costs. We agree that these risks were significant and we have referred to their effects in the relevant Parts of our report.

12.19
We reviewed NZDF's reports about the Initiative and found that most of them met our expectations for good reporting because they:

• documented progress towards achieving the Initiative's goals;
• highlighted any significant risks to achieving the goals; and
• documented any changes to timetables or methods for achieving the goals.

12.20
Reports about the Initiative's progress brought together information extracted from an increasingly comprehensive performance management system. Information was brought together from systems such as those used for personnel, finance, and programme management, as well as NZDF's system to report preparedness for potential new deployments. NZDF improved or introduced these systems as part of carrying out the Initiative's corporate projects.

12.21
The routine consultation processes for the Government's annual budget round also provided year-by-year assurance on the Initiative's progress to the chief executives of the Ministry of Defence and the Treasury, and relevant Ministers.

1: The Defence Funding Package was based on 2004 costs. NZDF has had to absorb increased costs from inflation and currency changes. The Crown bore the risk of increased depreciation from asset revaluations for the Initiative's first five years, which was estimated at about $230 million.

2: This was to have occurred during the mid-term review of the Initiative. The review has been superseded by the Defence Review and the Defence White Paper that will follow it.

3: The review report that led to the Defence Funding Package and Initiative said the level of deployment was an important matter that needed to be considered while NZDF was rebuilding its capabilities. Significant resources are needed to manage deployments, which means time and effort is directed towards meeting current needs and away from long-term rebuilding. For this reason, the review report recommended that there be a reduced level of deployment during the Initiative's early years. The review report also said that a 10% deployment rate placed a considerable strain on NZDF.

4: Our performance audit effectively formed the fourth annual review because NZDF decided not to commission a separate review covering the same period as our audit. We agreed with NZDF's rationale and decision.

5: Cabinet's decisions were based on a 2002 report (Hunn, D, Review of Accountabilities and Structural Arrangements between the Ministry of Defence and the New Zealand Defence Force).