Reports and Publications

• Defence Long-Term Development Plan (LTDP)
  • Contents
  • Preface by the Minister of Defence
  • 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 Critical to Avoid the Failure of Policy
  • Projects Essential to Avoid the Failure of Policy
  • Projects Necessary to Avoid the Failure of Policy
  • Projects that have Benefit but are Less Critical to Achieving Policy Objectives
  • Projects Previously on the LTDP and Moved to the Defence Capital Programme - Minors

Within this section

• Funding Guidelines
• Affordability, Options and Trade-Offs
• Financial Risks

Defence Long-Term Development Plan (LTDP)
(October 2006 Update)

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3. 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;
   3. leasing options may be considered where there is a neutral trade-off between capital and operating expenditure.
2. Since then additional funding from the Defence Sustainability Initiative (DSI) and the proceeds from the sales of defence assets has been added to the Government's investment in defence capital. This has resulted in $1.3 billion now being available in the form of capital injections.

Affordability, Options and Trade-Offs

3. 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 continue to improve the individual costing data on which the plan is based, on a project-by-project basis.
4. 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.
5. A first effort at integrating life cycle costing into the LTDP has now been made in this latest update. For the majority of projects on the LTDP, life cycle costing models have been developed that capture the ongoing annual personnel and operating costs as well as any mid-life upgrades. These models are based on projected costs adjusted for domestic and military inflation as well as the impact of expected movements in foreign exchange. The result is that estimated costs now include the estimated life, the total operating costs through that life and therefore the total cost of ownership.
6. 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. NZDF and Treasury officials are continuing to work on strategies to minimise financial risks.

Financial Risks

7. 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 of projects reflect the impact of military inflation, and, where appropriate, internal and construction price indexation.
   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.

      FY 06/07	FY 07/08	FY 08/09 Onwards
      0.62	0.57	0.55

   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 operations costs 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 USD. Recent changes to NZ Financial Reporting Standards dictate that all assets are to be revaluated annually, with a consequential impact on the funding arising from depreciation. Should the depreciation funding be greater than that forecast during the Defence Funding Package (DFP), the NZDF is able to seek this additional funding from the Government up to and including 2009/10. After this date, the risk of funding depreciation flows greater than that allowed in the DFP is a risk to the NZDF.

8. This LTDP was based on a bottom-up assessment of Defence capability requirements in relation to policy objectives. These have been rated in order of priority, and funding was planned accordingly. There is a natural tendency for projects in later years to be less critical in meeting current policy, but these relative assessments will change with time and circumstances. Those changes will be reflected in future iterations of this document. In this current plan, projects have been funded first on the basis of criticality to policy and remaining funds have been applied to some lower priority projects that had time imperatives associated with platform upgrades.

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