Part 3: The results of the civilianisation project

3.1
In this Part, we compare the results of the civilianisation project with:

• the targets for converting military positions into civilian positions and saving money for redistribution that were agreed with the Minister of Defence (and by him with Cabinet); and
• NZDF's stated success criteria.

Summary of our findings

3.2
In 2011, the Minister of Defence told Cabinet that NZDF would save $20.5 million a year by 2014/15, by civilianising 1400 positions. However, the target of converting 1400 military positions into civilian positions will not be met.

3.3
Civilianisation has saved money, but not as much as NZDF forecasted. Most of the savings have not been from the conversion of military positions to civilian positions. It is too early to tell whether the civilianisation project has resulted in a higher proportion of military staff in the front compared to the middle and back. Staff costs have been reduced – although by less than predicted – and overall attrition has increased, partly because of the civilianisation project. The increased level of attrition has affected NZDF's ability to deliver outputs.

How the results of the civilianisation project compare with the New Zealand Defence Force's targets

Revised targets

3.4
The target of converting 1400 military positions into civilian positions will not be met. In March 2012, the Minister of Defence and Chief of Defence Force told the Foreign Affairs, Defence and Trade Committee that:

... because of the high rates of attrition and the damage caused by the civilianisation process, further civilianisation will not be undertaken.

3.5
NZDF revised the target to 600 positions, to be converted by December 2012.

Success criteria

3.6
NZDF's success criteria for the civilianisation project were:

• saving money (the estimated savings were revised several times);
• reducing the cost for each full-time equivalent staff member without affecting normal patterns of staff attrition;
• rebalancing the military and civilian mix of staff and positions without affecting outputs; and
• ensuring that a higher proportion of military staff are in the front compared to the middle and back.

Saving money

3.7
In September 2010, before the civilianisation project began, the Minister of Defence told Cabinet that NZDF would save $26 million a year by civilianising 1400 positions by 2014/15. In 2011, NZDF revised its estimate to say that it would save $20.5 million a year. In May 2012, NZDF estimated that savings to date from the first stage of the civilianisation project were $14.7 million a year.

3.8
Then, in July 2012, NZDF estimated that the total savings from the civilianisation project (including ongoing staff attrition and contracts finishing) would be $17.4 million a year.

3.9
In our view, NZDF overstated the expected savings from the civilianisation project. We recalculated the savings from the first stage of the project and estimate that $11.5 million a year will be saved. In total, we estimate that the civilianisation project will save $14.2 million a year by 2014/15, comprising $11.5 million from the first stage and $2.7 million from staff attrition and contracts finishing (see paragraph 2.3).

3.10
NZDF has accepted our recalculation of estimated savings from the civilianisation project. Figure 1 explains how we calculated the savings.

Figure 1
Calculating how much money the civilianisation project has saved

3.11
The savings from the first stage rely largely on the component of the project that sought to permanently reduce military staff. For the other component – converting military positions into civilian positions – we estimate that, potentially, $3.5 million a year will be saved. The $3.5 million figure is an estimate because provisions for salary protection will not expire until the end of 2013. The estimate is based on salary figures provided by NZDF for 262 civilian grade positions.

3.12
In paragraph 2.41, we note the changes in the number of civilian positions since the end of the first stage of the civilianisation project. However, as the changes happened after the first stage was completed, we did not take them into account in our estimate of the savings.

3.13
We note that NZDF expects to achieve the overall redistribution target of $350-400 million in annually recurring savings by 2014/15.

Reducing staff costs without affecting attrition

3.14
Staff costs have been reduced because of civilianisation, although by less than estimated. Staff attrition has increased since the start of the civilianisation project (December 2010) to May 2012 from 8.8% to 21.1% a year. Not all of the attrition can be attributed to the civilianisation project, but comments by senior NZDF staff in internal documents and to the Foreign Affairs, Defence and Trade Committee suggest that NZDF views the civilianisation project as one of the major causes of the increase in attrition.

3.15
Figure 2 sets out the military staff attrition rates since December 2006 expressed as a 12-month rolling average. NZDF has commented on the increasing attrition rate as follows:

Attrition was already rising prior to the commencement of the civilianisation project. As the project progressed, a number of NZDF personnel anticipated the likely outcomes of the review and made their choices accordingly.¹⁰

Figure 2
Annual rates of attrition for the Armed Services (Regular Force)

Source: New Zealand Defence Force

3.16
The increase in attrition overall is from a historically low base of about 8% in 2009/10.

3.17
From 30 June 2011 to 30 June 2012, the total Regular Force headcount decreased by 1015. During that time, the number of front, middle, and back staff each reduced significantly. Analysing the results from the fourth quarter of 2011, NZDF noted that:

... both intent to leave and disengagement remain significantly higher than they were during 2010. Additionally, an improving economy further increases the risk of voluntary attrition. Without intervention, these trends may negatively impact NZDF's ability to deliver outputs.¹¹

Changing the military and civilian mix of staff and positions without affecting outputs

3.18
For NZDF, an important requirement for the civilianisation project, and for the entire savings programme, was that outputs would be unaffected and frontline capabilities improved.

3.19
It is clear that the increased attrition, which can be attributed in part to the civilianisation project, has made it more difficult for NZDF to do its job. This is because the level of attrition has reduced the depth of NZDF's capabilities, which in turn reduces how well NZDF can sustain deployments. NZDF's Statement of Intent for 2012 to 2015 drew attention to the importance of maintaining depth of capabilities by stating that:

Operational experience over the past decade has underlined the importance of ensuring NZDF has sufficient depth in its capability.¹²

3.20
To maintain depth in capability, NZDF must have enough experienced military staff to maintain deployments and respond to changes and events. For example, for every Regular Force person deployed by the Army, the Army needs three skilled and experienced people available – one on deployment, one just returned, and one preparing to deploy.

3.21
In the 2011 Briefing for the Incoming Minister of Defence, NZDF stated:

The civilianisation process has inevitably impacted on morale, leading to staff retention issues and associated costs and risks from lost expertise.

3.22
An example of the effect on outputs is the decrease in sea days available for inshore patrol vessels (IPVs). The IPVs did not sail the funded number of sea days in 2011/12 because of a shortage of staff and having to complete operational trials.

3.23
In 2011/12, the IPVs sailed 397 sea days instead of the planned 534-590 sea days. The target number of sea days in 2012/13 (484-535) is less than the 2011/12 target.

3.24
NZDF told us that recruitment to fill vacant positions is going well. However, in the meantime, NZDF could struggle to have enough staff with the required skills and experience to sustain:

• significant tasks at the same time;
• larger operations; or
• operations that require ongoing rotations.

3.25
We consider that NZDF must find ways to address the gap in capability in the short to medium term.

Ensuring that a higher proportion of military staff are in the front compared to the middle and back

3.26
It is too early to tell whether the civilianisation project has resulted in a higher proportion of military staff in the front compared to the middle and back.

10: New Zealand Defence Force internal document.

11: New Zealand Defence Force internal document.

12: New Zealand Defence Force (2012), Statement of Intent for 2012 to 2015.