Reports and Publications

• Defence Long-Term Development Plan (LTDP)
  • Contents
  • Introduction
  • The Long-Term Development Plan and Defence Policy
  • Funding
  • Managing the LTDP
  • Projects Approved and in Acquisition Phase
  • Projects Approved in Principle by Government
  • Projects Necessary to Avoid the Failure of Policy
  • Projects Necessary to Provide a Well-Equipped Land Force
  • Projects Necessary to Avoid Significant Risks to Policy
  • Projects that have Benefit but are Less Critical to Achieving Policy Objectives

Within this section

• Funding Guidelines
• Affordability, Options and Trade-Offs
• Financial Risks
• Projects Currently ‘Below the Funding Line’

Defence Long-Term Development Plan (LTDP)
(November 2004 Update)

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Funding

Funding Guidelines

1. Following a review of the financial effects caused by revaluation of the NZDF’s assets on the LTDP (CAB Min (03) 11/4), the Government directed the following financial parameters:
   1. up to $1 billion, in nominal terms, in capital injections over 10 years commencing 2002;
   2. any inflationary pressure to be managed within these constraints until 2005/06; and
   3. leasing options may be considered where there is a neutral trade-off between capital and operating expenditure.

Affordability, Options and Trade-Offs

2. Funding constraints, cash flow management (both from depreciation and new capital) and defence industry considerations will also affect priorities, timing and the overall affordability of the LTDP. Trade-offs within and between projects are necessary. The projects presented in the LTDP take into account the Government’s existing funding parameters. Solutions have been developed to provide capabilities within the financial parameters that are appropriate for New Zealand’s circumstances and will deliver the Government’s policy. For most projects, however, accurate costing information cannot be determined until tender responses are received. It is acknowledged that in order to determine the affordability of the LTDP, Defence needs to improve the individual costing data on which the plan is based, on a project-by-project basis.
3. In order to provide more robust decision-making information the costing options for acquisition projects are modelled through the Defence Resource Allocation Model (DRAM). This modelling considers all elements of defence capital expenditure, including acquisition costs, through-life costs and cost/risk mitigation as they become available. The model is regularly updated when projects are integrated into the plan, accurate costs become available or when depreciation funding changes due to asset revaluations. Life cycle costing policy is being developed and through-life costs are being obtained for projects currently at the acquisition phase. The full introduction of life cycle costing into long-term development will take some time to be completed. NZDF and Treasury officials are continuing to work on strategies to minimise financial risks.
4. By changing the model to examine different levels of capability, cost and policy compliance it is possible to identify options within projects. These options, which can be investigated for each project, could include phasing projects to spread the cash flow or reducing the size and/or scope of a project. Reducing the level of capability acquired could affect the NZDF's ability to deliver outputs designed to achieve the Government’s policy objectives.

Financial Risks

5. There are several financial risks associated with the LTDP that will have to be managed to ensure the plan remains affordable.
   1. Inflation. Estimated costs need to reflect the potential impact of inflation.
   2. Foreign Exchange Movements. The majority of the project costs included in the revised LTDP have been converted from USD into NZD using exchange rate projections advised by Treasury (below). Any change to these projections will result in changes to project costs.

      Foreign Exchange Movements

      FY 04/05	FY 05/06	FY 06/07 Onwards
      0.55	0.53	0.52

   3. Upgrades. Military equipment requires regular upgrades to ensure that it is able to provide the required capability. Upgrades are also important to keep pace with technological changes and to maintain interoperability with other defence forces. Known upgrades have been included in the LTDP. Other unpredicted upgrades may be required during the life of the equipment.
   4. Personnel and Operating Costs. Operating baseline changes will need to be managed to take account of pay increases and changes in NZDF personnel numbers, training requirements, maintenance and operating resulting from new equipment.
   5. Asset Revaluations. The majority of procurement funding is derived from depreciation of the current defence asset base, much of which is purchased in US dollars. Significant reductions in the valuation of the asset base, most likely triggered by a high NZ dollar value, result in less depreciation funding. This in turn requires increased use of direct capital injection to cover planned expenditure.

Projects Currently ‘Below the Funding Line’

6. The LTDP contains those projects currently deemed necessary to deliver the capability required by the Government, and which are being processed by the NZDF. Given the current financial parameters, however, projects in the category of those that have benefit but are less critical to achieving policy objectives are unlikely to be funded. This underlines the importance of reviewing projects that are ‘above the line’ in order to realise potential savings. These projects will still require work to clarify their scope, utility across the policy objectives and cost, and will be included in future reviews of the LTDP. Changing strategic circumstances could result in reprioritisation of projects.

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