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Part 12: Overview of the Defence Sustainability Initiative

Central government: Results of the 2005/06 audits.

12.101
In May 2005, the Government announced the $4.6 billion Defence Funding Package. This is a 10-year programme of additional funding for the Ministry of Defence (the Ministry) and the New Zealand Defence Force (NZDF).

12.102
The Defence Sustainability Initiative (the Initiative) is a major component of the Defence Funding Package, and is aimed at rebuilding the NZDF and the Ministry by addressing shortages in personnel, equipment, and management capability.

12.103
The Auditor-General is interested in the Initiative because there is a significant level of funding involved, and because it aims to improve the performance of the Ministry and the NZDF.

12.104
In this Part, we set out the background to the Initiative, its main objectives, and the arrangements for monitoring and reporting progress. We also provide an outline of progress to date and the risks to achieving the Initiative's objectives.

12.105
The objective of this Part is to provide Parliament with an overview of the most important aspects of the Initiative, and to indicate the Auditor-General's ongoing interest in this subject. We have not done an audit, and this Part does not draw conclusions about the performance of the Initiative to date. To write this Part, we have discussed the Initiative with staff of the Ministry and the NZDF, and have relied on formal NZDF reporting for factual information.

Background to the Defence Sustainability Initiative

12.106
The NZDF provides the Government with a range of military options that can be called on in response to unknown future security events. The NZDF's accountability documents set out the range of Army, Navy, and Air Force options (such as frigates, Special Air Service troops, or transport aircraft) that the Government requires, and report whether the NZDF has maintained enough personnel and equipment (quantity) at the required level of preparedness (quality) to do the tasks required.

12.107
In recent years, the NZDF has not been able to fully deliver the outputs set out in its accountability documents. This has been as a result of shortfalls in military and organisational capability (particularly because of declining personnel numbers), as well as a high number of active deployments.1

12.108
Since 2001, the Government has committed additional capital and operational funding to the Ministry and the NZDF. The Government's Defence Policy Statement of June 2000 announced that the NZDF would be reshaped and rebuilt to meet policy objectives, and that there would be a related capital investment programme for acquiring and upgrading essential equipment. Additional capital funding is allocated towards the projects that are most important for achieving the Government’s defence policy objectives (such as new vehicles for the Army or new ships for the Navy) through the Long Term Development Plan (LTDP).2

12.109
The Government Defence Statement, dated 8 May 2001, made a commitment of additional operating funding to provide the NZDF with financial certainty. In late 2003, the Government commissioned the Defence Capability and Resourcing Review (DCARR) to identify the operational resourcing required for the NZDF to be able to successfully deliver its outputs. The review also looked at management systems and capability in the NZDF and the Ministry. The main findings of the DCARR, issued in 2005, were:

  • Personnel numbers in the three services and in the NZDF Headquarters were below the levels required, and could not be rapidly increased to the required levels.
  • The number and trained state of personnel in some trades was deficient.
  • Some major weapons platforms were not yet aligned with the Government’s intentions, although the LTDP is intended to address this.
  • Some military equipment (other than major weapons platforms) was below the required standard.
  • Contingency reserve stocks were depleted.
  • There was a backlog of maintenance and capital expenditure in the defence estate,3 which could not be fully addressed in the short term.
  • Aspects of corporate management capability were depleted.

12.110
The DCARR recommended a major improvement in strategic planning, resourcing of NZDF initiatives to improve corporate management, and an upgrade of the Ministry’s policy capability.

12.111
The Initiative is a programme of work designed to address the DCARR’s findings and recommendations.

Objectives of the Defence Sustainability Initiative

12.112
The Defence Funding Package was announced as part of Budget 2005. It totals $4.6 billion for the 10-year period to 2014/15. It includes $4.4 billion in additional operating expenditure for the NZDF, a permanent $0.844 million baseline increase for the Ministry, and $209 million in extra capital funding for the LTDP. The extra capital is additional to the $1 billion for major capital projects allocated to the NZDF through the LTDP.

12.113
There are three main phases to the Defence Funding Package – the “foundations” phase (currently under way), the “construction” phase (2008-10), and the “consolidation” phase (2010-15).

12.114
The objectives for the foundations phase are:

  • recruiting and retaining personnel;
  • developing corporate capability;
  • implementing Project Protector;4
  • reviewing the optimal configuration of the Army; and
  • maintaining current levels of operational capability.

12.115
The objectives for the construction phase are:

  • eliminating the backlog of deferred maintenance and expenditure;
  • recruiting and retaining personnel;
  • implementing the future structure of the Army;
  • restoring the defence estate;
  • developing military and corporate capability; and
  • increasing levels of operational capability.

12.116
The objectives for the consolidation phase are:

  • creating depth of talent in personnel;
  • consolidating Air Force operations at Ohakea;
  • upgrading the defence estate;
  • extending corporate capability;
  • consolidating increased levels of operational capability; and
  • rebalancing the NZDF to achieve simultaneous operations.

12.117
The Initiative addresses those areas of the Defence Funding Package associated with addressing personnel shortages and issues of personnel retention, rebuilding corporate capability in the NZDF and the Ministry, and improving defence management systems and processes.

12.118
In June 2005, the NZDF comprised about 10,600 military and civilian personnel. Through the Initiative, the NZDF expects to increase personnel numbers by at least 1600 over a 10-year period (a 15% increase), as well as reduce rates of personnel turnover.

12.119
The Initiative is also intended to increase levels of operational readiness in the NZDF. To assess these levels, the NZDF has developed a system of measuring and scoring the readiness of its various outputs. This Operational Preparedness Reporting System (OPRES), measures the NZDF’s ability to perform its main operational roles. The OPRES score is underpinned by assessments of the NZDF’s actual or predicted readiness, combat viability, ability to prepare for deployment within a specified time, and sustainability.

12.120
The first full year of the Initiative was 2005/06. The specific objectives for that year were to:

  • identify, design, and implement improved organisations, systems, and processes for managing and developing NZDF capability;
  • enhance the Ministry’s ability to conduct policy analysis and provide purchase advice; and
  • begin to address the immediate military and organisational capability priorities outlined in the Initiative.

Monitoring and oversight of the Defence Sustainability Initiative

12.121
There have been two phases of governance over the Initiative. A temporary governance structure was set up to cover the implementation phase during the 2005/06 financial year. This was set up to see that new management systems and processes were developed and integrated into normal business.

12.122
From July 2006, the existing defence governance framework has overseen the Initiative. This is supplemented by specific arrangements for monitoring performance, and includes input from the central agencies.5

12.123
The original plans for the Initiative included a number of milestones for formal progress reports to Ministers. Since the Initiative was introduced, the Ministry is co-ordinating some additional evaluation work.

Governance arrangements during the implementation of the Defence Sustainability Initiative

12.124
The Defence Sustainability Initiative Steering Group provided governance over the implementation phase of the Initiative. This was a joint committee that reported to the Ministers of Defence, Finance, and State Services (the joint Ministers). The Steering Group included the Chief of Defence Force (as chairman), the Secretary of Defence, and representatives from the Department of the Prime Minister and Cabinet, the State Services Commission (the SSC), and the Treasury.6

12.125
The Vice Chief of Defence Force (representing the NZDF) and the Deputy Secretary of Defence Policy and Planning (representing the Ministry) were the project directors of the Initiative. It was their role to monitor the progress of implementation and report back to the Defence Sustainability Initiative Steering Group.

12.126
A project team was established to co-ordinate the implementation of the Initiative. The team was headed by an NZDF project manager and included representatives from the NZDF, the Ministry, the Treasury, and the SSC. The role of the team was to identify the planning, performance management, systems, and structures needed to ensure that the Initiative’s objectives were achieved, and to implement the necessary systems and processes.

12.127
The project team reported regularly to the project directors, who in turn reported to the Defence Sustainability Initiative Steering Group on close to a monthly basis. The deadline for the implementation phase of the Initiative was 30 June 2006. The Defence Sustainability Initiative Steering Group met for the final time on 28 June 2006.

Ongoing governance of the Defence Sustainability Initiative as of 30 June 2006

12.128
With the dissolution of the Defence Sustainability Initiative Steering Group, the NZDF Executive Leadership Team7 now has overall responsibility for monitoring the progress of the Initiative and directing the allocation of the Initiative’s resources. The Ministry’s Senior Management Team oversees areas that are specific to the Ministry, such as the project to enhance the Ministry’s purchase advice.

12.129
The NZDF General Manager Organisational Support has been designated as the Initiative programme sponsor, and is now responsible for overseeing the ongoing Initiative programme and for co-ordinating major Initiative projects. The newly established NZDF Planning Branch is responsible for routine monitoring of progress against the 10-year Initiative targets. This information is reported to the NZDF Executive Leadership Team and to the Government. The central agencies retain a monitoring role through quarterly progress reports and meetings organised by the programme sponsor.

Formal reports on Defence Sustainability Initiative progress

12.130
In addition to ongoing monitoring and reporting activities through the governance framework, there are formal reporting milestones for the Initiative. There were specific milestones for the implementation phase to 30 June 2006, and other milestones for the 10-year Initiative as a whole. Other external reviews and evaluations are planned or are already under way.

12.131
The first three milestone reports covered the implementation phase of the Initiative. The first report was made to the joint Ministers in June 2005, and addressed the planned changes to management systems and structures. This was followed by a progress report to the joint Ministers in November 2005.

12.132
The final report to joint Ministers for the implementation phase to 30 June 2006 summarised performance against Initiative targets for personnel numbers, retention rates, and levels of operational readiness. It also provided an update on the projects under way to improve the organisational capability of the defence agencies.

Milestone reports from July 2006 onwards

12.133
With the integration of the Initiative into the defence agencies’ normal business, progress reports are provided to the inter-agency group that meets quarterly to monitor the Initiative.8 The joint Ministers will receive an annual Initiative update report during the Budget process, as the funding allocated to the Initiative forms part of the yearly appropriation to Vote Defence Force. In addition, the Minister of Defence is updated on Initiative progress in quarterly reports from the Chief of Defence Force. The accountability documents of the NZDF and the Ministry both include references to the Initiative, and the NZDF Annual Report for 2006 includes a report on Initiative progress.

12.134
The original Initiative timetable envisaged some major reports at important milestones. As the Initiative has developed, some additional reviews have been added. Major reports or reviews under way or scheduled include:

  • a Ministry Evaluation Division report on the status of the Initiative’s organisational capability projects, due to the Minister of Defence in early 2007;
  • a report on Initiative progress, due in November 2007;
  • a major mid-term review of Initiative progress, due in the 2009/10 financial year; and
  • a final completion report, due in the 2014/15 financial year.

Progress towards Defence Sustainability Initiative objectives

12.135
As at November 2006, the NZDF reported that it has met or exceeded aggregate personnel recruitment and retention targets for the Initiative. However, it has also reported that increasing the level of operational readiness has not been as successful. It reports that this is primarily because there are more operational deployments than were assumed for the purpose of planning the Initiative.

Expenditure on the Defence Sustainability Initiative

12.136
The NZDF’s current Statement of Intent reports that, in line with the original forecast Initiative funding, $86.9 million was committed to the Initiative in its first full year (2005/06). The latest figures provided to us by the NZDF show that, of this sum, $16.6 million was allocated to the NZDF’s continuing contribution to Operation Enduring Freedom in Afghanistan, another $4.7 million to fund allowances for operationally deployed personnel, and $5.214 million to operating costs associated with Project Protector. This left a balance of $59.763 million available for the Initiative in 2005/06. Of this balance, the NZDF’s latest figures show that the largest funding allocations were $25.2 million for pay and allowances, $13.3 million for recruiting additional personnel, $7.9 million for capability purchases, $8.1 million for real estate, and $4 million for enhancing corporate capability.

12.137
The NZDF Statement of Intent also reports that the estimated allocation for the Initiative in 2006/07 was $72.8 million, again in line with the original forecast. The latest figures provided to us by the NZDF indicate that $14.936 million was transferred to fund operationally deployed forces, leaving a balance of $57.825 million available for the Initiative in 2006/07 for which finalised figures are not yet available.

12.138
For the purposes of this Part, we have not audited the breakdown of Initiative funding into its component parts. However, in our view, it is important that it be clear how the Initiative funding has been allocated, and we intend to carry out future audit work in this area.

Personnel recruitment and retention targets

12.139
The Initiative aims to increase the overall number of defence personnel by at least 1600 in the 10-year period. Annual targets have been set for achieving this increase, and to date the NZDF has reported to Ministers that it has met those targets. At 1 June 2005, there were 10,602 military and civilian personnel employed in the defence agencies. The 30 June 2006 target under the Initiative was to increase this figure to 11,135.

12.140
The NZDF reported that, by 30 June 2006, it had exceeded its overall personnel target by seven. This included recruiting 165 more personnel than expected to the NZDF Headquarters and to the Army, and 141 fewer personnel than expected to the Navy and Air Force. The NZDF has reported to Ministers that, as at September 2006, the overall targets for recruitment were still being achieved, with total personnel numbers up to 11,254, and that the Army, Navy, and Air Force were closer to meeting their individual targets.

12.141
The NZDF reports that the new personnel are a mix of new recruits and experienced personnel. Some experienced personnel have chosen to re-enlist, while others have been “laterally recruited” from overseas (typically from the United Kingdom). The NZDF considers that, while these individuals are two to three times more expensive than new recruits, they bring experience that would otherwise take several years to develop.

12.142
The NZDF reports that improvements to pay and conditions have assisted in retaining staff . The NZDF reported to Ministers that, between September 2005 and September 2006, turnover rates dropped, and that the NZDF is on track to meet or exceed its targets for 30 June 2007. Figure 12.1, taken from the NZDF report to joint Ministers in December 2006, illustrates this performance.

Figure 12.1
Rates of personnel turnover since the Defence Sustainability Initiative was introduced


30 September 200530 September 2006Target 2006/07
Navy13.8% 11.8% 12.5%
Army19.0% 15.0% 14.5%
Air Force9.0%8.5% 10.0%

Operational readiness targets

12.143
The Initiative has a scale and series of annual operational readiness targets based on the NZDF’s OPRES system. Specific OPRES scores and targets for operational readiness are classified information, and are not included in this Part. However, the NZDF expects to make a substantial increase in overall levels of operational readiness as a result of the Initiative.

12.144
As at December 2006, the NZDF was not achieving its overall OPRES targets. NZDF OPRES reporting for each of the individual services shows that, while the Navy and the Air Force are meeting their readiness targets, the Army is not. The NZDF has reported to Ministers that this is primarily because the Army continues to be deployed beyond the levels planned for the initial period of the Initiative. This means that the NZDF’s current operational deployments are affecting its ability to meet its Initiative targets.

Developing corporate capability

12.145
During the implementation phase of the Initiative to 30 June 2006, the NZDF identified a range of projects that it considered necessary for developing its corporate capability. Many of these, such as developing a new NZDF Strategic Plan, were scheduled to be completed and integrated into the NZDF’s normal business by 30 June 2006.

12.146
Of the organisational capability projects that were initiated within the NZDF Headquarters, some have been delivered, others have merged with other projects or been superseded, and others remain in progress. To deliver these projects, the NZDF has made structural changes by setting up the Planning Branch and the Organisational Support Branch. The NZDF reported to Ministers in November 2006 that the bulk of the Initiative projects had been completed and that the outstanding projects were on schedule to be completed in 2007.

12.147
Each project has a plan for its transition to normal business, and a project sponsor who has responsibility for managing milestones. The General Manager Organisational Support has responsibility for ongoing major projects. The Initiative projects have been prioritised and grouped into tiers according to their priority.

12.148
The NZDF has reported that the main results for the highest priority items in Tier 1 as at November 2006 are:

  • The Interim Strategic Plan was completed by June 2005. The subsequent NZDF Strategic Plan 2007-11 is due to be completed by the end of March 2007. Strategic planning within the Army, Navy, and Air Force is now aligned with overall NZDF strategy.
  • An interim Corporate Planning Framework is in place. The project ends in June 2007.
  • The Organisational Structure Review has been completed, and its implementation is due to be reviewed in December 2007.
  • The new NZDF Corporate Planning Branch was established in November 2005.
  • An interim Defence Performance Management System is in place. It provides performance information on achievement of the NZDF Strategic Plan. The project ends in June 2007.
  • The Strategic Human Resource Planning Framework project has been completed.
  • Human Resource Capability: Recruitment and Retention initiatives are under way.

12.149
The main results for the high priority items in Tier 2 as at November 2006 are:

  • The rewrite of the Capability Management Framework is complete. It will be amended to include the relevant recommendations of the Defence Capital Asset Management Practice Review completed in October 2006.
  • The Risk Management Framework project is on time, and is due to be completed in May 2007. Risk management training is under way.
  • Phase 1 of the Information Management and Exploitation project is under way. New systems will be incorporated into the new Defence Headquarters building.
  • A draft Defence Estate Strategic Plan is in place. The timing of future major real estate decisions and opportunities for efficiency gains have been identified.
  • After the provision of policy guidance from the NZDF Executive Leadership Team, the Housing and Accommodation Assistance project is due to be reported back to the NZDF Executive Leadership Team in March 2007.
  • The Army Configuration Review project has been completed and reported to the Minister of Defence. The Army is now preparing an Army Transformation Plan to implement the configuration review.
  • Defining the nature and protocols of the Ministry’s purchase advice role is due to be completed in March 2007.

12.150
The main results for the lower priority items in Tier 3 as at November 2006 are:

  • The Knowledge Management Framework project is being reconsidered and refocused to position the NZDF as “a knowledge edge force”. It is due to be completed in December 2007.
  • The Management of Shared Functions project has been incorporated into the NZDF Efficiency and Innovation Programme that is currently in its design phase.
  • The New Strategy and Capability Analysis Team has been set up.

Risks to achieving the Defence Sustainability Initiative objectives

12.151
In June 2006, the NZDF identified a risk to achieving the Initiative’s objectives. This was that conclusion of the Initiative’s implementation phase and dissolution of the Defence Sustainability Initiative Steering Group would have a detrimental effect on progress. The NZDF has reported to Ministers that this risk has been successfully mitigated by introducing a new framework to oversee the Initiative and report to the NZDF Executive Leadership Team.

12.152
As at November 2006, the NZDF had identified two significant risks to achieving the Initiative’s objectives that have not yet been successfully mitigated. The first of these is because of the ongoing operational commitments beyond those originally agreed with the Government. The NZDF considers it likely that the level of operational activity will remain high, as was highlighted in 2006 with deployments to the Solomon Islands and East Timor in response to unrest in those countries. It has reported to Ministers that these commitments will slow the recovery of the NZDF under the Initiative programme. The mitigation strategy suggested by the NZDF is that the effect on the Initiative’s objectives be considered when taking deployment decisions.

12.153
The second area of risk relates to pressures on operating costs. The NZDF has reported to Ministers that the funding package for the Initiative was based on 2004 costs and has been affected by inflation, the competitive labour market, exchange rate fluctuations, and increasing fuel and ammunition costs. The NZDF reported that it will be difficult to manage cost pressures over the medium term, despite introducing cost-saving measures and other mitigation strategies.

Future involvement of the Auditor-General

12.154
The Auditor-General intends to monitor the progress of the Initiative through the annual audit and through our regular liaison activities with the NZDF and the Ministry. Areas of particular interest include the allocation of annual funding increases, and the outcome of the various scheduled reports and reviews of the Initiative (detailed at paragraphs 12.128-12.134).

12.155
We will keep Parliament informed of progress on the Initiative through our briefing to the Foreign Affairs, Defence and Trade Committee during the annual financial review process, and the Initiative will be included in our annual Strategic Audit Planning process to identify appropriate topics and timing for discretionary audit work, such as a performance audit.

12.156
We look forward to seeing how the Initiative develops through its life. It is a major investment of public funds and has important objectives for the future of the NZDF. We are particularly interested in observing the continuing organisational development of the NZDF, and how the benefits of the Initiative in this area will be measured.


1: During the period from 1999 to 2007, NZDF personnel have been deployed to areas such as East Timor, the Solomon Islands, Afghanistan, Iraq, and Tonga.

2: The LTDP was first released in 2002 with a 10-year timeframe. It committed about $1 billion dollars in capital injections for major new equipment and infrastructure (such as new vessels for the Navy). In 2006, this figure was increased to $1.3 billion.

3: The “defence estate” refers to the various real estate holdings of the NZDF.

4: “Project Protector” is a major capital acquisition under the LTDP that involves acquiring new vessels for the Navy.

5: The central agencies include the Department of the Prime Minister and Cabinet, the State Services Commission, and the Treasury.

6: The Defence Sustainability Initiative Steering Group was also attended by the Vice Chief of Defence Force, the Deputy Secretary of Defence Policy and Planning, the NZDF Chief Financial Officer, and the Chiefs of the Army, Navy, and Air Force.

7: The NZDF Executive Leadership Team is chaired by the Chief of Defence Force, and includes the Chiefs of the Army, Navy, and Air Force, as well as the General Manager Organisational Support, the Vice Chief of Defence Force, Commander Joint Forces, and the Corporate Finance Officer.

8: This inter-agency group comprises essentially the same membership as the Defence Sustainability Initiative Steering Group with the exception of the three Service Chiefs.

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