2016/17 Annual review of the Ministry of Defence and the New Zealand Defence Force

Transcription

1 2016/17 Annual review of the Ministry of Defence and the New Zealand Defence Force Report of the Foreign Affairs, Defence and Trade Committee March 2018 Contents Recommendation... 2 Introduction to this report... 2 Part A: Ministry of Defence... 2 The ministry s growth... 2 Frigate Systems Upgrade project... 3 Possible purchase of maritime patrol planes... 6 Part B: New Zealand Defence Force... 6 Largest deployment in the Middle East... 7 Proposal for Singaporean fighter pilots to train at Ohakea... 7 Centenary of Armistice Day in Appendix... 8

2 Ministry of Defence and New Zealand Defence Force Recommendation The Foreign Affairs, Defence and Trade Committee has conducted the annual review of the Ministry of Defence and of the New Zealand Defence Force for 2016/17, and recommends that the House take note of its report. Introduction to this report We have divided our report into two parts to reflect the separate operations of the two entities we have reviewed. Part A covers the 2016/17 performance of the Ministry of Defence, and Part B focuses on the performance of the New Zealand Defence Force (NZDF) for the same period. We would like to begin by thanking the defence agencies for their service to New Zealand, here and overseas. The positive relationships they have formed internationally means that New Zealand s contribution is greater than our size might suggest. We consider that the respect the defence agencies command is a tribute to the skill and professionalism of their personnel. Part A: Ministry of Defence The Ministry of Defence provides advice to the Government on the defence of New Zealand, and security challenges internationally. It manages the procurement, replacement, and repair of military equipment, and audits the performance of the NZDF. Financial overview and audit results In 2016/17 the ministry s total income was $18.05 million, a $3.25 million increase on the previous year. The increased funding was used to strengthen the defence capability management system. The ministry s total expenses for the year were $18.57 million (including Kaikōura earthquake costs of $1.06 million), resulting in a deficit of $524,000. The Auditor-General s rating of the ministry s management control environment, financial information systems and controls, and its performance information and associated systems and controls remained good. The ministry s growth We heard that the ministry is changing the way it operates to enhance the management of its procurement and acquisitions programme. Over the last two years the ministry has increased its staff from 70 to 130 people. It has reviewed its systems and controls in light of this. The ministry has sought to improve its gender balance and the diversity of its staff. Women now make up 52 percent of its staff and 50 percent of its managers. 2

3 Improvements to strengthen procurement The Secretary of Defence told us the ministry has systematically reviewed its approach to the development and delivery of military capability. This has included reviewing its project management disciplines, procedures, policies, and practices according to international best practice. The ministry previously employed eight permanent project management staff in its capability delivery division. It now has 57 such staff. We heard that this has enabled the ministry to build specialist expertise in commercial project management, financial management, and risk management. The ministry s leaders now also have commercial experience. The ministry has introduced project teams that integrate ministry and NZDF staff, and it has strengthened its governance and assurance functions. The Secretary of Defence said all of these changes have been implemented in partnership with the NZDF. Frigate Systems Upgrade project Much of our discussion with the ministry focused on the cost increases and delays experienced with its project to upgrade the capabilities of New Zealand s frigates. The two frigates, HMNZS Te Kaha and Te Mana, are used for military and national security tasks, including constabulary, humanitarian, and combat work. The frigates were commissioned in 1997 and 1999, and will remain in service until around The frigates effectiveness is being maintained through a series of five upgrade projects. The Frigate Systems Upgrade project is the largest of the five. It is designed to maintain the frigates surveillance, combat, and self-defence capabilities until the end of their lives. The project has three phases: purchase of the equipment and systems design of how the systems will be installed on the frigates installation. Phases one and two have been completed within the estimated budget. Lockheed Martin Canada will undertake phase three, installation of the systems. This work is expected to be completed in May Cost of the Frigate Systems Upgrade project In the April 2014 business case, the capital cost for the project s implementation, including contingencies, was estimated at $446 million. We heard that this amount was fully hedged when the funding was appropriated. The amount was based on request-for-tender information and an independent technical assessment of the installation costs. In October 2015 Cabinet approved increased funding of $491 million for the project. We were told that the increase on the 2014 price was due to a foreign exchange rate adjustment. We consider the 10 percent increase large, particularly at a time when the New Zealand dollar was strengthening against the US dollar. 3

4 The Secretary of Defence explained that in October 2015 the cost of the installation could still only be estimated. She said it was not possible at that time to enter into a firm fixed price contract with any provider because the level of uncertainty was too high without a detailed design. Additional $148 million needed for higher installation costs The Secretary of Defence told us that the actual installation costs are considerably higher than the estimated costs. We heard that Cabinet approved an increase of $148 million to cover these costs and complete the project, bringing the total to $639 million. The additional cost has been met by reallocating defence funding. The Secretary of Defence said that $26 million of that amount is an allowance for contingencies. We asked whether the previous Government should have taken action earlier when it became aware in September 2016 of the higher cost of the upgrade. The secretary said the ministry first needed to go through a detailed design process to assess what was needed. We heard that in June 2017 an offer of a fixed price contract for the upgrade was made. However, even then the ministry could not be certain the price would not increase. Secretary of Defence regrets ministry s performance The Secretary of Defence told us she deeply regrets the ministry s performance on the Frigate Systems Upgrade project. She acknowledged that it does not do the ministry credit. It is the ministry s responsibility to ensure that the projects it manages are delivered on time, on budget, and to specification. The Secretary of Defence said the ministry did not meet this standard with the Frigate Systems Upgrade project. She told us the increase in cost was due to the ministry s failure early in the project s life to establish robust cost estimates. Delay of 18 months unacceptable The Secretary of Defence said the delay of 18 months in completing the project by May 2021 is unacceptable. She said that although the frigates continue to function they are fast reaching obsolescence, which makes the upgrade critical. The upgrade means the frigates can continue operating until at least Lockheed Martin Canada s involvement with the project The ministry told us that the calculation of the additional funding needed was based on a negotiated fixed price from Lockheed Martin Canada to install the systems on the frigates. The price includes a component for contingencies, warehousing, and project management. We asked the Secretary of Defence whether she sees a problem with Lockheed Martin Canada providing the final design, pricing the work, and doing the installation. The secretary said that this concern was addressed by engaging an international firm to evaluate the possibility of another company completing the installation work. Five options were selected for detailed analysis, and Lockheed Martin Canada was recommended. We heard that it offered the best value in terms of lower risk and cost, availability to do the work, and its experience in upgrading frigate systems. Lockheed Martin has recently completed the upgrade of Canada s Halifax frigates using much of the same equipment as needed for the 4

5 upgrade of New Zealand s frigates. Therefore, the decision to go with Lockheed Martin was based on analysis and evidence. We heard that Australian businesses were also considered, and that the Australian defence force has recently upgraded its fleet of ANZAC frigates. However, its cost for a similar upgrade was double the cost of New Zealand s upgrade. We asked whether New Zealand businesses could do the upgrade. We were told that when the money was appropriated in April 2014, businesses here did not have the capacity to undertake the project. Lessons learnt from the cost overrun The Secretary of Defence said the ministry has sought to understand how the cost estimate went wrong in the project s early stages, and what changes are needed to ensure that the situation does not recur. We heard that the following errors contributed to the cost increase: The contracting strategy chosen by the ministry meant that the installation costs had to be estimated in the business case for funding approval. The ministry contracted an independent company to develop a cost model. It then based the estimate of the installation costs on that model, and the estimate turned out not to be accurate. However, the ministry compounded the problem by changing some aspects of the model without assessing the effect of the changes. The contracting strategy meant that equipment was purchased in advance of the installation. The level of investment already made then limited the choices for the Government. The ministry s cost estimate did not take into account order-of-magnitude costings provided by Lockheed Martin Canada. That rough cost information proved to be more accurate than the cost modelling on which the ministry based its funding request. The secretary said the ministry has changed its practice fundamentally. Its contracting approach for platform upgrades now involves seeking funding to undertake design work before committing to the full project cost of acquiring and installing the systems. Replacement projects now include a cost benefit analysis of options that provide for incremental upgrades to systems rather than the historic practice of large-scale mid-life upgrades. We heard that the Frigate Systems Upgrade project team, led by a commercially experienced project manager, has increased from 8 to 27 people. The project is expected to be completed by May How the ministry is reallocating funding We heard that the additional cost of the upgrade project is being met by reprioritising defence funding so that the retiring diving ship, HMNZS Manawanui, will now be replaced with a commercial off-the-shelf diving and hydrographic ship, rather than a military ship. 5

6 The secretary said the new ship will enhance the existing capability to support diving, underwater mapping, and other activities on behalf of government agencies in New Zealand and the South Pacific. It will also support humanitarian assistance and disaster relief. We heard that the ship will not be built to military specifications and it will not be able to transport large numbers of people or equipment. We discussed the decision to move away from a military vessel that could support ship-toshore operations. The Secretary of Defence said that having a vessel that can operate from ship to shore is important for New Zealand and its maritime environment. The need to provide this capability can still be considered as part of the review of the Defence Capability Plan. In the meantime, the plans to replace the Manawanui with a commercial ship can proceed. Possible purchase of maritime patrol planes We asked about the Government s consideration of buying up to four Boeing P-8A Poseidon maritime patrol planes from the United States of America to replace the P-3 Orion fleet. We heard that the ministry is briefing the Minister of Defence on the options available, and will submit formal advice to the Government early in Part B: New Zealand Defence Force The New Zealand Defence Force (NZDF) provides armed forces to defend New Zealand and its national interests, and to support United Nations and other multi-national operations. This includes helping with humanitarian and disaster relief work in New Zealand and across the Pacific. Financial overview and audit results In 2016/17 the NZDF s total income was $2.519 billion, 1.4 percent higher than in 2015/16. Its total expenses were $2.513 billion, an increase of 1.8 percent on the previous year. In 2016/17 the NZDF returned a net surplus of $5.081 million. The Auditor-General s rating of the NZDF s management control environment, financial information systems and controls, and its performance information and associated systems and controls remained good. We would like to congratulate the NZDF on its response to the February 2014 report about women in the defence force, Maximising opportunities for military women in the New Zealand Defence Force. We understand that this resulted in Operation Respect, launched in March 2016, to stop harmful and inappropriate sexual behaviour and provide better support to affected personnel. New Zealand s interest in the Invictus Games We asked whether New Zealand would consider seeking to host the Invictus Games. The games are a multi-sport event, initiated by Prince Harry, in which wounded, injured, or sick armed services personnel take part in sports events. In 2018 Sydney will be hosting the games. 6

7 We heard that the NZDF considers the games to be a great initiative for those who have served New Zealand. However, the scale of the games is greater than New Zealand s capability to host, involving tens of millions of dollars. That said, the NZDF is considering creating a New Zealand event of this kind. Largest deployment in the Middle East The Chief of Defence Force told us that the NZDF s largest deployment in 2016/17 was to the Middle East to train Iraqi defence force personnel. We heard that the sixth rotation of around 100 New Zealanders left in October 2017 for camp Taji in Iraq to take part in what has been a successful mission. Together with the Australian Defence Force, New Zealand servicemen and women have trained around 28,000 Iraqi defence force personnel in military skills. We heard that New Zealand s contribution has been valued by the Iraqis and the international community, and we commend the NZDF for their outstanding achievement. New Zealand s efforts have contributed to the defeat of ISIS in Iraq, where its influence has substantially dissipated. However, we heard that ISIS still exists in the world as a perverse ideology that challenges this country s values. Sophisticated methods involving social media mean that even New Zealand s geographical isolation offers no guarantee of protection. We suggested that the focus in Iraq is now on how Sunnis and Shiites can work together, and we asked whether the NZDF would have a role in this. The Chief of Defence Force said that this would be a political decision. He said the threat of violent extremism has not gone away, and relations between Sunni and Shia affect the situation in the Middle East. He sees a need to address social, economic, and environmental issues. Proposal for Singaporean fighter pilots to train at Ohakea We discussed the possibility of Singaporean air force pilots using Ohakea Air Base as a training base. We heard that there is wide support for the idea and the opportunities it would create, but that Singapore needs to consider the return on its investment. Beca is currently undertaking a social, economic, and environmental impact study of the idea. We understand that the NZDF and the Ministry of Defence will present the detailed findings of the study to Cabinet in May We heard that the NZDF is open to possibilities for forming smart partnerships over infrastructure, rather than being the sole proprietor. It is reaching out to social and emergency agencies, and commercial partners like Auckland Airport, to develop infrastructure that maximises the return for taxpayers. Centenary of Armistice Day in 2018 The centenary of Armistice Day will take place on 11 November 2018, and we asked whether New Zealand will be doing anything special to commemorate it. We heard that the Ministry for Culture and Heritage is the lead agency on this, and will provide advice to the Government. The Chief of Defence Force said that New Zealand needs to reflect carefully on the huge sacrifice of World War I. 7

8 Appendix Committee procedure We met on 14 December 2017 and 1 March 2018 to consider the annual review of the Ministry of Defence and of the New Zealand Defence Force. We heard evidence from both organisations and received advice from the Office of the Auditor-General. Committee members Simon O Connor (Chairperson) Hon Gerry Brownlee Golriz Ghahraman Hon Willie Jackson Hon Todd McClay Hon Mark Mitchell Louisa Wall Dr Duncan Webb Advice and evidence received We received the following documents as advice and evidence for this annual review. They are available on the Parliament website, Office of the Auditor-General, Briefing on the Ministry of Defence and the New Zealand Defence Force, dated 14 December Office of the Clerk, 2016/17 Annual review briefing paper, dated 14 December Ministry of Defence, Responses to committee questions, received 29 January New Zealand Defence Force, Responses to committee questions, received 29 January Ministry of Defence, Responses to post-hearing questions, received 26 February New Zealand Defence Force, Responses to post-hearing questions, received 26 February