Auditor-General's overview

The New Zealand Defence Force (NZDF) carries out vital work in New Zealand and overseas and its staff are valued for their high standards of professionalism, training, and skill. The Defence White Paper 2010 highlighted the importance of getting value for money from the defence budget. It provided a framework for reform, and addressed financial issues in detail. In the paper, the then Minister of Defence highlighted the forecast gap between current defence spending and projected costs.

In September 2010, the Government told NZDF to reduce costs so that money could be redistributed within NZDF, primarily to the front.

Cabinet required NZDF to meet three conditions:

• save $350-400 million in annually recurring savings by 2014/15;
• enhance frontline capabilities and activities; and
• maintain specified outputs.

The civilianisation project was one of several projects that NZDF initiated to generate savings for redistribution. Initially, the redistribution programme represented 16-18% of the overall defence budget of $2.25 billion for the 2010/11 financial year.

To remain effective and be able to conform to government policy, NZDF designed the civilianisation project to change the balance of its workforce. It aimed to get a higher proportion of military staff in "front" (deployable military capability) positions compared to direct and indirect support positions.

In September 2010, NZDF committed to converting 1400 military positions in the "middle" (logistics and training) and "back" (administrative and similar functions) into civilian positions (civilianisation). This would save money and allow NZDF to improve the proportion of military staff in the front compared with the middle and back. NZDF planned to carry out the civilianisation project in three stages, converting several hundred positions at each stage.

However, when NZDF told the Government that it would convert 1400 military positions into civilian positions, it did so without knowing how many military positions it would need from 2015. NZDF had started a project to calculate how many and what kind of military staff it would need from 2015 but this work had not been completed. Once NZDF had completed the work at some time between December 2010 and March 2011, it found that:

• it needed more military staff overall; but
• some ranks and trades had surplus military staff.

I consider that NZDF should have found out how many and what kind of military staff it would need before telling the Government that it would convert 1400 military positions into civilian positions.

NZDF planned for the civilianisation project to save $20.5 million a year by 2014/15. My staff estimate that the civilianisation project will save $14.2 million a year by 2014/15. Therefore, savings are less than planned. Also, most of the savings from the civilianisation project are not from converting military positions to civilian positions. Despite this, NZDF has told us that it still expects to achieve the overall redistribution target of $350-400 million in annually recurring savings by 2014/15.

NZDF always intended to reduce the number of military staff through the civilianisation project but has lost far more military staff than intended. The loss of so many military staff (which can be attributed in part to the civilianisation project), has made it more difficult for NZDF to do its job.

Converting 1400 military positions into civilian positions would always be difficult. Discharging military staff has to be carried out with great care to avoid damaging the bonds of camaraderie, integrity, and commitment that are part of NZDF culture. Instead, NZDF chose a course that led to a drop in morale and an increase in attrition resulting in reduced capability. NZDF now needs to recover from the damage caused by the civilianisation project.

I consider that NZDF's decision to move quickly to put the civilianisation project into effect meant that it did not:

• fully consider the civilianisation project's potential effect on staff; and
• address the significant risks of the process.

My staff saw much evidence in reviews and in briefings to Cabinet and the Minister of Defence that NZDF recognises that it made mistakes during the civilianisation project. NZDF has decided that further conversion of military positions to civilian positions will, in general, take place gradually, as staff leave particular positions. NZDF has a focus on rebuilding morale and restoring mutual trust with military staff.

I commend NZDF's honesty and willingness to adapt in learning lessons from the civilianisation project.

I thank NZDF staff for their co-operation and help with our work auditing the civilianisation project.

Lyn Provost
Controller and Auditor-General

24 January 2013