The Defence Portfolio
Briefing to the Incoming Government 2002
Votes: Defence & Defence Force (continued)
Vote: Defence Force
The NZDF has approximately 13,000 employees, assets of $3.2 billion and an annual operating budget of about $1.4 billion. By New Zealand standards it is a big business with a number of characteristics that have a bearing on defence funding and financial management.
Operating Statement
The following is a simplified statement of the actual financial performance for the year ending 30 June 2001 and the forecast financial performance for the 2002/2003 financial year. It highlights the personnel intensive nature of NZDF activity with personnel costs totalling over one third of all Output expenditure.
Statement of Financial Performance
| (GST Exclusive) | Actual FY00/01 ($millions) |
Forecast FY02/03 ($millions) |
|---|---|---|
| Revenue | ||
| Crown | 1,452.7 | 1,399.4 |
| Departmental | 9.8 | 9.5 |
| Other | 21.3 | 10.7 |
| Interest | 0.6 | 0.5 |
| Total Revenue | 1,484.5 | 1,420.2 |
| Expenditure | ||
| Personnel Costs | 517.3 | 517.9 |
| Operating Costs | 416.6 | 430.1 |
| Depreciation | 218.2 | 219.8 |
| Capital Charge | 332.1 | 251.7 |
| Total Output Expenses | 1,484.4 | 1,419.7 |
| Net Gain on disposal / retirement of fixed assets | 0.6 | |
| Other Expenses | 103.9 | |
| Total Expenses | 1,587.7 | 1,419.7 |
| Net Operating Surplus / (Deficit) | (103.2) | 0.5 |
Defence Outputs - This funding purchases the Output Classes provided to the Government by the NZDF. The following table is taken from the financial year 2002/2003 Departmental Forecast Report.
Forecast Expenditure in Outputs for FY02/03
Statement Of Appropriations
| Appropriations | 2002/03 Vote |
Description of 2002/03 Appropriations | |
|---|---|---|---|
| Annual $000 |
Other $000 |
||
| Departmental Output Classes (Mode B Gross) | |||
| D1 Military Policy Development, Coordination and Advice | 9,664 | - | Purchase of advice to the Minister of Defence on military contributions to New Zealands foreign policy and military responses to contingencies. This includes military intelligence, responses to ministerial correspondence, parliamentary questions, and Official Information Act inquiries. |
| D2 Naval Combat Forces | 514,292 | - | Purchase the capabilities of HMNZ Ships Te Kaha, Te Mana and Canterbury, and associated Seasprite helicopters, prepared to conduct maritime operations and to contribute support services to the community. |
| D3 Naval Support Forces | 31,190 | - | Purchase the capabilities of Fleet Replenishment Ship, HMNZS Endeavour, prepared to conduct operational and maritime logistic support for deployed military forces, and to contribute some support services to the community. The military sea-left ship, HMNZS Charles Upham, has been sold. |
| D4 Mine Counter Measures, Diving and Diving Support Forces | 35,837 | - | Purchase the capabilities of the Inshore Patrol Craft prepared to conduct mine counter measure (MCM) operations and route surveys in selected New Zealand ports, and coastal patrols, and purchase the capabilities of the Diving Support Vessel and Operational Diving Team prepared to support MCM operations and conduct independent diving tasks, and to contribute some support services to the community. |
| D5 Naval Control of Shipping Forces | 5,142 | - | Purchase the capabilities of the Naval Control of Shipping (NCS) Organisation prepared to conduct control of shipping in times of threat. This includes the provision of Royal New Zealand Naval Volunteer Reserve (RNZNVR) NCS Cells. |
| D6 Hydrographic Data Collection and Processing for LINZ and Third Parties | 8,456 | - | Purchase the capabilities of the hydrographic and oceanographic survey ship, HMNZS Resolution, to conduct hydrographic data collection and processing that meets contractual commitments to LINZ and third parties. This includes support by the Hydrographic Office. |
| D7 Land Combat Forces | 238,690 | - | Purchase the capabilities of Land Combat Forces (command, control and intelligence, and infantry, armoured and reconnaissance force elements) prepared to conduct land operations, and to contribute support services to the community. |
| D8 Land Combat Support Forces | 154,814 | - | Purchase the capabilities of Land Combat Support Forces (artillery, engineers and communications force elements) prepared to conduct land operations, and to contribute support services to the community. |
| D9 Land Combat Service Support Forces | 117,541 | - | Purchase the capabilities of Land Combat Service Support Forces (transport and movements, medical, supply, repair and military police) prepared to conduct land operations, and to contribute support services to the community. |
| D10 Specialised Forces | 32,713 | - | Purchase the capabilities of Specialised Forces prepared to conduct special forces operations in support of land operations, counter-terrorist operations, and the disposal of explosive devices and neutralisation of chemical and biological devices that threaten public safety or national interests. |
| D11 Air Combat Forces | - | - | This output class was for the purchase of the capabilities of No 75 Squadron (A-4 Skyhawk aircraft) prepared to conduct maritime strike, close air support for ground operations and air interdiction, and No 2 Squadron, under the Nowra Agreement, for air defence support flying in Australia for the Australian Defence Force. The Air Combat Forces have been disbanded and the aircraft are under disposal action. |
| D12 Maritime Patrol Forces | 132,131 | - | Purchase the capabilities of No 5 Squadron (P-3 Orion aircraft) prepared to conduct, in priority, maritime surveillance of New Zealands EEZ, the Pacific region and the Southern Ocean, to conduct search and rescue missions, and to conduct maritime air operations. This class also includes some support services to the community. |
| D13 Fixed Wing Transport Forces | 188,250 | - | Purchase the capabilities of No 40 Squadron (Boeing 727 and C-130 Hercules aircraft) prepared to conduct strategic and tactical air transport operations, including aeromedical evacuation, and to contribute support services to the community. |
| D14 Rotary Wing Transport Forces | 87,210 | - | Purchase the capabilities of No 3 Squadron (Iroquois helicopters) prepared to conduct tactical air transport, including aeromedical evacuation, and counter-terrorist operations, and to contribute support services to the community. |
| D15 Miscellaneous Support Activities | 8,098 | - | Purchase the NZDF training infrastructure and planned support to regional defence forces and the New Zealand community. It includes support provided under the auspices of the Mutual Assistance Programme, support for the New Zealand Cadet Forces and training of Limited Service Volunteers. |
| D16 Operationally Deployed Forces | 29,853 | - | Purchase of deployed force elements on military tasks, including the commitments agreed by Government under which the NZDF contributes to peace support operations conducted in support of the United Nations and other international agencies. It includes the provision of individuals, observers, advisers, instructors, headquarters staff, and complete force elements and contingents, when necessary, to peace support missions, and the conduct of any additional training required to meet any special conditions or the higher threat levels anticipated. |
| Total Appropriations for Departmental Output Classes (Mode B Gross) | 1,593,881 | - | |
| Capital Contributions to the Department | |||
| Capital Investment | 1,844 | - | To provide for the purchase of basic equipment for the newly implemented NZDF Chemical and Biological Response capability. |
| Total Appropriations for Capital Contributions to the Department | 1,844 | - | |
| Total Appropriations | 1,595,725 | - | |
The NZDF Operating Baseline
The Operating Baseline contains four elements:
- Operating (fuel, ammunition, equipment maintenance, spare parts, and other consumables);
- Personnel;
- Depreciation; and
- Capital charge.
The primary source of revenue for the NZDF is Revenue Crown with only 1.4% of NZDF funding coming from third parties (Revenue Department and Revenue Other).
The NZDF operating budget for the financial year 2002/2003 is approximately $1.4 billion excluding GST. This figure excludes any capital contribution, which may be made to support capability acquisition. The following two pie charts show how this figure is distributed by cost category, and by Service.
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View text equivalent of the above two pie graph images.
In the chart on the right (above), the highest area of cost is personnel. In the chart on the left, the three Services each share approximately one third of the budget with Army having the largest share, Navy the smallest, and Air in between the two. Headquarters New Zealand Defence Force and Headquarters Joint Forces New Zealand (which commenced operating on 1 July 2001) each have a small share. The makeup of each Service budget, however, is quite different.
The next chart is a composite bar chart, which show the NZDF budget by Service and cost category.
Text equivalent of the above bar graph is not available by the New Zealand Defence Force.
Personnel is the highest proportion of each Services operating expenses. This reflects the number and level of personnel required to operate, maintain and support the current military platforms. NZDF is currently mid way through a phased approach to address the relativity of Regular Force pay rates to those of the market. The recent announcement of an additional $19 million per annum for Regular Force personnel was the second step in this approach. Together, Personnel and Operating costs make up over 60% of the operating budget. It should be noted that the three Services operate in different ways:
- Army has significantly higher personnel costs, reflecting the fact that armies are manpower intensive;
- Air has significantly higher operating costs, reflecting the fact that maintaining and operating aircraft is cost intensive; and
- Navy activities attract a higher depreciation regime, reflecting the equipment orientation of this service (most notably the frigates).
Both Air and Navy are responsible for most of the NZDF capital charge as they are very much asset dependent services (ships, aircraft, airfields, dockyards etc).
Variable Costs
A significant feature of the operating costs components of the NZDF is the breakdown between fixed and variable costs. Some 95% of the total costs are fixed costs that cannot be easily changed in the short term. These include personnel costs, capital charge, depreciation and the operating costs associated with significant equipment and property holdings which cannot be disposed of easily. The variable costs that can be changed in the short term are those associated with consumables such as ammunition, fuel, rations, travel costs, and repairs and maintenance. Variable costs constitute 5% of total costs.
Short term savings can only be made by cutting back on these variable costs. Where this is done, it results in less training and exercising, or other supporting activities such as maintenance, which are necessary for the NZDF to maintain its operational effectiveness. Although variable costs are minimal in financial terms, they are critical to achieving and maintaining operational effectiveness.
Movements in the NZ dollar against the major overseas currencies is another variable cost. In the past, with the NZ dollar converting to US$0.40, considerable pressure has been placed on the variable costs such as fuel, spares and services purchased overseas. The most recent surge in the NZ dollar, provided it is sustained, may help relieve some of this pressure and other continuing pressure felt from the price increases for military consumables and spares.
Additional Costs
The Government purchases annual outputs from the NZDF at the DLOC and known activity levels. If the Government decide to activate force elements as part of an unplanned initiative, the additional costs associated with generating the OLOC required, the deployment, and the sustainment of the force for the duration of the task, need to be met. These additional costs are appropriated under Output Class 16 (Operationally Deployed Forces). Funding is provided by a reprioritisation of existing expenditure and/or further appropriation as necessary. Cabinet considers funding proposals for unplanned initiatives, including trade-offs against existing activities, on a case-by-case basis.
Defence Spending In New Zealand
The following graphs depict the movement in defence expenditure in New Zealand (excluding the Ministry) over the past decade. The totals in the graphs include all elements of the NZDF budget: personnel, operating, depreciation, capital charge, and any capital contribution which may have been made.
The first graph "Total Defence Expenditure" contains two lines. One shows defence expenditure in actual dollars. The second adjusts these figures for the CPI and shows the results in 2002/2003 dollars. The trend has clearly been a fall in funding from $1.7 billion in 1992/1993 (in 2002/2003 dollars) to the current $1.4 billion. These figures are based on actual expenditure and are exclusive of GST, which has a cost neutral impact.
Total NZDF Expenditure
View text equivalent of above image.
NZDF Spending as a Percentage of GDP
View text equivalent of above image.
The higher trend line shows defence expenditure inclusive of the capital charge (but not including the Ministry). The lower line has the capital charge removed from the equation as it is simply an accounting item and does not represent funds over which the NZDF has any control. It is funded by Revenue Crown and returned to the Crown.
With capital charge excluded, defence spending as a percentage of GDP falls away from a high of almost 1.4%, levelling off at just over 1.0% over the latter half of the decade.
