Reports and Publications

• Defence Long-Term Development Plan (LTDP)
  • Contents
  • Preface by the Minister of Defence
  • Introduction
  • The LTDP and Defence Policy
  • Funding
  • Managing the LTDP
  • Capability Delivered
  • 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

• Affordability of the LTDP
• Defence Sustainability Initiative
• Whole-of-Life Costing
• Financial Risks

Defence Long-Term Development Plan (LTDP)
(October 2008 Update)

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3. Funding

1. The NZDF manages its funding through two envelopes: the LTDP for capital expenditure; and the Defence Sustainability Initiative (DSI) for operating expenditure.
2. The LTDP capital envelope is defined by the sum total of funds from depreciation, asset sales and available capital injections, and the operating envelope by the baseline and annual increments under the DSI.
3. Should these fiscal envelopes be unable to fund all projects on the current LTDP, prioritisation will be required with some projects being deferred, scaled down, or cancelled.

Affordability of the LTDP

4. Affordability depends on matching approved and planned expenditure for LTDP projects against the NZDF’s inward cash flows. The cash flows for some of these projects are already known since contracts have been approved and contractual payments have been determined. For those projects that have not yet gone out to tender, cash flows reflect estimates of how contractual payments are likely to be structured once negotiations have been concluded with the successful tenderer.
5. Cost estimates for planned projects are made on the best evidence at the time and are updated regularly, but by definition, are less accurate for projects planned for later time periods. As such, there is a degree of uncertainty surrounding the cost of those projects within the LTDP that have not yet been the subject of a request for proposal or request for tender. In this update, estimates for projects not under contract are provided in bands rather than in the form of a point estimate.

Defence Sustainability Initiative

6. In December 2003 the Government initiated a review to identify both current and optimum configuration and resource requirements for the defence organisation to undertake the roles and tasks set out in the Government’s statements of defence policy and in the LTDP. The resulting Defence Capability and Resourcing Review was presented to Ministers in February 2005. It confirmed that operational and organisational capabilities in a number of areas of the NZDF and Ministry of Defence were below what is required by government policy. This led to the May 2005 DSI policy statement which outlined a major remedial programme and a firm commitment of increased resources over the next 10 years to achieve long-term sustainability for Defence. It saw additional funding being provided (excluding GST) of $4.6 billion (operating) and $209 million (capital) over the period 2005 through to 2015.

Whole-of-Life Costing

7. Whole-of-life costing incorporates both capital and operating costs for a project or capability. This provides a way of determining the overall affordability of projects or new capabilities for the NZDF.
8. LTDP cost estimates need to be consistent with the new Capital Asset Management (CAM) requirements, which have been developed by Treasury in conjunction with the State Services Commission. CAM is designed to achieve greater value for money from capital purchases by assessing the cost of an asset through its entire life, with life cycle costing forming a vital part of this process.
9. Project sheets, where applicable, include the estimated life of the capability, their estimated acquisition cost, and their estimated whole-of-life cost. The whole-of-life cost figures in the project sheets are provisional and are being further refined. This will ensure that CAM requirements are fully met. In addition, for this LTDP update, the figures for whole-of-life costs are based on the total estimated cost in nominal dollars rather than being discounted.

Financial Risks

10. In addition to the uncertainty surrounding the cost of projects within the LTDP that have not yet entered their acquisition phase, there are several financial risks associated with the LTDP that have to be managed to ensure the LTDP remains affordable. These include:
    1. Inflation. Estimated costs of projects reflect the impact of military inflation, and where appropriate consumer price index and construction price inflation.
    2. Foreign Exchange Movements. Project costs in this LTDP update have been converted from USD/EURO into NZD using exchange rate projections advised by Treasury (below). Notably, these are official forecast rates based on a Treasury model. Actual rates at the time when contracts are signed are likely to differ from these forecasts resulting in changes to actual project costs. Ministers have recently agreed to a foreign exchange policy which extends the methods by which foreign exchange risk can be managed. This should help to reduce, but will not eliminate the uncertainty of project costs. The policy includes the establishment and maintenance of a “Foreign Exchange Risk Register” to record and monitor foreign exchange exposures. Work is underway to make the register operational.
       

       Foreign Exchange Movements

       	FY 08/09	FY 09/10	FY 10/11 Onwards
       USD	0.7567	0.7031	0.6554
       EURO	0.4966	0.4513	0.4158

    3. Upgrades. Military equipment requires regular upgrading 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. When the actual cost, or timing, of an upgrade differs from what was expected there are financial repercussions for both the capital and operating envelopes. Known upgrades have been included in the LTDP. Other unpredicted upgrades as a result of unexpected obsolescence, urgent operational requirements or the introduction of new technologies may be required in the life of military equipment. These will also be managed and prioritised against the current LTDP, or its replacement.
    4. Personnel and Operating Costs. The NZDF is aware of the need to manage the fiscal risks that result from:
       • Operating baseline changes that will need to take account of pay increases and changes in NZDF personnel numbers, training requirements, maintenance and the actual operating costs resulting from new equipment.
       • Changes in operational tempo which impact on both capital and operating costs.
    5. Asset Revaluations. Most of the NZDF’s capital equipment is purchased in USD or EURO. Changes to New Zealand Financial Reporting Standards dictate that all assets are to be revalued annually, with a consequential impact on the funding arising from depreciation. Should the depreciation funding be greater than that forecast, the NZDF is able to seek this additional funding from the Government up to and including 2009/10. Future arrangements for the management of depreciation are under consideration.

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