Vote Defence and Vote Defence Force

 
 
Office of the Auditor-General
                                   Vote Defence
Briefing to the Foreign Affairs,   and Vote
Defence and Trade
Committee
                                   Defence Force


2018/19 Year


14 June 2018
Assistance to the Committee
The Foreign Affairs, Defence and Trade Committee is conducting an Estimates examination of
Vote Defence and Vote Defence Force for the 2018/19 financial year in accordance with Standing
Order 338.

The Controller and Auditor-General provides Parliament with assurance on the performance and
accountability of public entities. The Office of the Auditor-General’s assistance to select committees
with their Estimates examinations is guided by the Code of Practice for the Provision of Assistance by
the Auditor-General to Select Committees and Members of Parliament.

To identify lines of enquiry in this briefing we have reviewed the following documents:

   the 2018/19 Estimates of Appropriations (Estimates);
   the current Statement of Intent for the administering departments (Ministry of Defence
    (the Ministry) and the New Zealand Defence Force (NZDF));
   the 2016/17 Annual Report of the administering departments (the Ministry and NZDF); and
   the Minister’s response to the Standard Estimates Questionnaire (SEQ) for both Votes.

We have also drawn from other sources, including information we have received as the statutory
auditor of the administering department and of other entities in the sector.

In some cases, we checked factual information with the department or other entities to ensure that
our advice to the committee is accurate. We did not give the entities any contemplated or actual
advice in this briefing.

Contact for further explanation

If the Committee would like further explanation or elaboration of any aspect of this report, please
contact Helen Colebrook, Sector Manager, on (04) 917-1500 or email on
Helen.Colebrook@oag.govt.nz at the Office of the Auditor-General.




                                                   2
The key issues
Key issues on which the Committee may wish to focus for Vote Defence and Vote Defence Force are
listed below. We have suggested lines of enquiry around these in the following pages:


Vote Defence

   Defence White Paper and Defence Capability Plan.

   Review of Defence capability investment.

   Defence Capability Plan review.

   Major capability projects.


   Office move.


Vote Defence Force

   Overview of Vote Defence Force.

   Estate Regeneration.

   Veterans.

   Environmental contamination.

   Office move.

   Information technology.




                                               3
Overview of Vote Defence
1.1   The Minister of Defence, Hon Ron Mark, is responsible for the appropriations in the Vote. The
      total amount of appropriations allocated to Vote Defence for 2018/19 ($314.564 million) is 20%
      higher than the original budget for 2017/18 ($261.433 million) and 25% higher than the
      estimated actual expenditure for 2017/18 ($251.688 million).1

1.2   An analysis and explanation for the significant trends and changes in Vote Defence is provided
      in Part 1.3 of the Estimates (page 35).2 Explanations for significant increases and decreases in
      appropriations are provided in the answer to Question 10 of the Standard Estimates
      Questionnaire (SEQ).

1.3   The fluctuations are mostly due to the volume and timing of payments on non-departmental
      capital expenditure (i.e. specialist military equipment).3

1.4   Vote Defence includes a 28% increase in the Defence Equipment appropriation for
      procurement of major military equipment ($294.121 million compared with $230.415 million
      estimated actual expenditure in 2017/18).4 This is mainly due to several projects (including the
      Frigate Systems Upgrade and Maritime Sustainment Capability) entering production phase. 5

1.5   The Ministry was allocated a 106% increase in capital expenditure, from $170 million estimated
      actual expenditure in 2017/18 to $350 million for 2018/19.6

1.6   There is a reduction in departmental output expenses for managing military equipment
      procurement processes. The Minister obtained $11.018 million through Budget 2017 and the
      Supplementary Estimates for the growth of the Ministry’s Capability Delivery Division. 7 The
      Ministry has $9.628 million in 2018/19 for this purpose.8 The $1.021 million decrease in the
      appropriation is due to the Ministry not having any capability projects budgeted in the pre-
      acquisition phase. A further $369,000 reduction in the appropriation is described as a return to
      baseline levels of activity associated with capability projects. 9




1
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 31.
2
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 35.
3
      Estimates of Appropriations 2018/19 – External Sector, B.5 Vol. 4, page 35.
4
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 41.
5
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 42.
6
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 39.
7
      $11.008 million from Budget 2017 and a further $10,000 through the Supplementary Estimates.
8
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 38.
9
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 39.


                                                          4
1.7   Vote Defence 2018 includes the following appropriations:10

          $2.294 million for audits and assessments of the Ministry of Defence, and New Zealand
           Defence Force.
          $9.628 million for managing procurement, or refurbishment of equipment contributing to a
           capability of the NZDF.
          $8.171 million for policy advice, management of international defence relations, and
           services to the Minister.
          $350,000 for purchasing, or developing assets for the Ministry.
          $294.121 for the purchase, modification, or refurbishment of major items of defence
           equipment for the NZDF.

      Trend in the Vote

      Figure 1: Trend in Vote Defence ($million) 2013/14 to 2021/22

1.8   Figure 1 shows the trend in appropriations in Vote Defence from 2013/14 to 2017/18 and the
      forecast for out-years.


                      $450
                                          399
                      $400

                      $350                                                                    328
                                                                                      315
                                                                 300
                               287
                      $300
                                                                           252
                      $250                           227
           Millions




                      $200

                      $150
                                                                                                                  102
                      $100
                                                                                                        38
                       $50

                        $0
                             2013/14   2014/15    2015/16       2016/17 2017/18 2018/19     2019/20   2020/21   2021/22
                              Actual    Actual     Actual        Actual Est Actual Vote       Est       Est       Est




10
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 30.


                                                            5
1.9   The funding sought in Budget 2018 for the Vote is allocated across the appropriation classes
      depicted in Figure 2.

      Figure 2: Vote Defence 2017/18 – Total appropriations by type ($000s)


                       $450
                                                                                            MCA Capital Expenditure
                       $400

                       $350                                                                 MCA Other Expenses

                       $300
                                                                                            MCA Output Expenses
                       $250
          Millions




                       $200                                                                 Output Expenses

                       $150
                                                                                            Other Expenses
                       $100
                                                                                            Intelligence and Security
                        $50
                                                                                            Department Expenses and
                                                                                            Capital Expenditure
                         $0                                                                 Capital Expenditure




                    Departmental output expense MCA: Policy advice and related outputs (2% of the Vote).
                    Departmental output expense: Management of equipment procurement (4% of the Vote).
                    Non-departmental capital expenditure: Defence equipment (94% of the Vote).
                    Departmental capital expenditure: Purchase and development of assets for the use of
                     the Department (0.12% of the Vote).


2     Defence White Paper and Defence Capability Plan
2.1   The nature of the Defence sector’s long-term investments poses obvious challenges for
      forecasting and planning.

2.2   The Defence White Paper 2016 (White Paper) was released on 8 June 2016 and signalled the
      previous Government’s commitment to invest “close to $20 billion over the next 15 years” on
      Defence Force capability.11 In this plan, the Defence Force forecast a replacement of all of its
      current major military platforms by 2030.




11
      NZ Government, Defence White Paper 2016, page 7.
      (https://www.defence.govt.nz/publications/publication/defence-white-paper-2016).


                                                            6
2.3   The accompanying Defence Capability Plan (Capability Plan) was released in November 2016
      and provides further detail on the initiatives signalled in the White Paper.12 Of the Capability
      Plan it was said that, “for the first time, the Capability Plan includes the indicative capital cost
      and schedule bands for major projects, to demonstrate the relative scale and timing of the
      investments”.13 The Capability Plan acknowledged that operating costs have historically proved
      more difficult to estimate and are often larger than the capital cost across the whole of life
      capability.14

2.4   The aim of the current Capability Plan and the funding profile was to provide the Defence Force
      with a degree of funding certainty so that it can plan with confidence out to 2030 and beyond.
      The Capability Plan outlines capability investments that have long planning and acquisition
      time frames and significant associated operating costs.

2.5   The Government has agreed to several reviews in the Defence sector. A strategic Defence
      policy review has been carried out and a policy statement has been developed. A refreshed
      policy statement may mean that adjustments need to be made to Defence’s capability
      investment plans.


3     Review of Defence capability investment
3.1   The Ministers of Finance and Defence initiated a review of Defence’s procurement policies and
      practices, conducted by Sir Brian Roche. This review focused on assessing how effective
      Defence is at delivering capability investments, and compared Defence’s investment
      management and asset performance with that of other government agencies. The aim of this
      review, and the others mentioned below, is to provide the Government with confidence that the
      Ministry of Defence and NZDF can manage and deliver on Government investment in Defence
      capability.

3.2   The Treasury Investor Confidence Rating review is also currently underway.




12
      http://www.defence.govt.nz/publications/publication/2016-Defence-Capability-Plan.
13
      Hon Gerry Brownlee, New Defence Capability Plan released, 16 November 2016,
      https://www.beehive.govt.nz/release/new-defence-capability-plan-released.
14
      NZ Government, Defence Capability Plan 2016, page 80, http://www.defence.govt.nz/publications/publication/2016-
      Defence-Capability-Plan.


                                                          7
3.3   The Committee may wish to ask:

          The Committee notes the review of capability investment carried out by
           Sir Brian Roche.
          What are the key findings of the review?
          Which observations from the review will Defence progress and what are the
           timeframes for this?
          Does implementing the findings have funding implications and, if so, what are
           they?
          What learnings from the review are transferable and could be shared with other
           government agencies?

      Defence Capability Plan review

3.4   The policy statement and procurement review will, in turn, inform a comprehensive review of
      the Capability Plan in late 2018. At that point, the new Government will articulate its ongoing
      Defence investment priorities.

3.5    The scope of the revised Capability Plan will be affected by the pending decision on whether
      or not the Government wishes to proceed with the Future Air Surveillance Capability project
      (the proposed purchase from the US Government of P8 aircraft to replace the Orion P-3K2
      aircraft).

3.6   It is likely that the revised plan will extend the planning horizon from 2030 to 2035 to provide a
      comprehensive view of future capability needs. This may mean that capabilities not currently
      covered in the 2016 Capability Plan (which has a planning horizon out to 2030) become visible.
      In parallel with the Capability Plan review, the Defence Estate Regeneration Programme will be
      revised.

3.7   Following review of the Capability Plan, and revision of the Defence Estate Regeneration
      Programme, Defence will update the Defence Capital Plan

3.8   The Committee may wish to ask:

       The Committee notes that the Capability Plan will be updated in late 2018.
          Please describe how the Capability Plan might address affordability issues?
          How will the Capability Plan link to the budget process?
          How will the Capability Plan link to the Estate Regeneration Plan?




                                                   8
4     Major capability projects
4.1   The following projects were completed in 2017/18:

             C-130 Hercules Life Extension Project.
             P-3K Orion Mission Systems Upgrade.
             NH90 Medium Utility Helicopter.
             A109 Training/Light Utility Helicopter.
             Pilot Training Capability.
             Maritime Helicopter Capability.
             Project Protector Remediation.
             Defence Command and Control System.

4.2   The Committee may wish to ask:

          The Committee notes that the C-130 life extension, P-3K Orion Mission Systems
          Upgrade, NH90 and maritime helicopter capability, pilot training capability, and Project
          Protector remediation, and Defence command and control systems projects were all
          scheduled to be completed during 2017/18.
              Did any of these projects run over time, or over budget, and if so, what were the
               reasons for that?


4.3   A timeline for major current and future projects is provided on pages 30-31 of the Capability
      Plan.15 Significant capital projects for 2018/19 are listed the SEQ for Vote Defence Force.16 We
      suggest questions on some of those projects below.

      Projects Underway

4.4   The Medium and Heavy Operational Vehicles project will be completed in 2018/19.

4.5   The following projects are in delivery phase, meaning that they are either in acquisition,
      tendering processes have begun, negotiations are underway with suppliers, or the capability is
      being delivered.

             ANZAC Frigate Systems Upgrade.
             81 mm Mortar Replacement.
             Strategic Bearer Network: Wideband Global Satellite.
             Counter Explosive Hazards: Tranche 1.


15
      NZ Government, Defence Capability Plan 2016, pages 74 and 80,
      http://www.defence.govt.nz/publications/publication/2016-Defence-Capability-Plan.
16
      Vote Defence Force SEQ, answer to Question 1.6.


                                                           9
       Network Enabled Army Tranche 1.
             Maritime Sustainment Capability.
             Dive/Hydrographic Vessel.
             NH90 Flight Training Device.
             Underwater intelligence, surveillance and reconnaissance.
             Special Operations Vehicles.
             Individual Weapons.

4.6   The following new projects are in the capability definition phase:

             Future Air Mobility.
             Future Air Surveillance Capability.
             ANZAC communications upgrade.
             HMNZS Canterbury and Offshore Patrol Vessels Communications.
             Land Force Protection: Electronic Counter Measures.
             Fixed High Frequency Radio Refresh.
             Network Enabled Army Tranche 2.

4.7   The Committee may wish to ask:

          The Committee notes that several capability projects are underway in 2018/19.
              Please provide a brief update on anticipated completion dates for these projects
               including details of any projects running over time or over budget?


      Frigate systems upgrade

4.8   The Treasury’s most recent publicly available Major Projects Performance Report graded
      delivery confidence for this project as red. 17 At the annual review hearing for Defence in
      December 2017, the Secretary for Defence provided the Foreign Affairs, Defence and Trade
      Committee with an update on the reasons for the project costs increasing from $491 million to
      $639 million. 18 The Government agreed to meet the additional cost by reprioritising Defence
      funding, including some of the funding that had been allocated to acquire a littoral operations
      vessel to replace the HMNZS Manawanui (which has been decommissioned).


17
      The Treasury, Interim Major Projects Performance Report, April 2017, page 6. https://treasury.govt.nz/information-and-
      services/state-sector-leadership/collaboration-initiatives/investment-management-system/review-investment-
      reviews/major-projects-performance-reports. A red rating means that successful delivery of the project requires
      changes to budget, schedule, scope or benefits. There are major issues with project definition, schedule, budget,
      quality and/or benefits delivery, which don't appear to be manageable or resolvable without such changes being made.
18
      2016/17 Annual Review of the Ministry of Defence and New Zealand Defence Force, page 4.
      https://www.parliament.nz/en/pb/sc/reports/document/SCR_76493/201617-annual-review-of-the-new-zealand-defence-
      force



                                                           10
4.9   Cabinet approved additional funding for the Frigate Systems Upgrade (FSU) in December
      2017, which resulted in the project schedule and costs being re-baselined. Non-departmental
      capital expenditure of $85.655 million is provided for the FSU for 2018/19.19 The current,
      approved total budget for the FSU project is $639 million.20

4.10 We suggest the Committee request an update on the frigate systems upgrade project. The
     Committee may wish to ask:

          The Committee notes the re-baselining of the ANZAC Frigate Systems Upgrade.
              How is the frigate systems upgrade progressing and when is the project due for
               completion?


      Future naval capability

4.11 The White Paper signalled the Government’s commitment to procure new naval vessels, which
     include:21

             A replacement for the naval tanker HMNZS Endeavour, which will be ice-strengthened.
             A replacement littoral operations support vessel.
             A third offshore patrol vessel (OPV).

4.12 The project to procure a logistics support ship to replace HMNZS Endeavour, referred to as
     “maritime sustainment capability”, has been progressing to schedule. The vessel will
     incorporate ice-strengthening and winterisation features to enable it to support logistics
     operations in Antarctica.

4.13 The prime contractor for the project is Hyundai Heavy Industries, Republic of Korea. The
     vessel, HMNZS Aotearoa, is scheduled for delivery in 2020.22 Capital expenditure of
     $168.422 million is provided for in Budget 2018, with a further $82.68 million allocated for
     2019/20 and $6.2 million allocated in 2020/21.23




19
      $63.358 million is proposed in the Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 42. The
      remainder is made up of funding transferred forward from 2017/18 to align with the timing of expenditure.
20
      2016/17 Annual Review of the Ministry of Defence and New Zealand Defence Force, page 4.
      https://www.parliament.nz/en/pb/sc/reports/document/SCR_76493/201617-annual-review-of-the-new-zealand-defence-
      force
21
      NZ Government, Defence White Paper 2016, page 7;
      http://www.defence.govt.nz/publications/publication/defence-white-paper-2016
22
      ‘Aotearoa’ the name chosen for Navy’s Largest Ship.
      http://navy.mil.nz/nap/news/media-release.htm@guid=%7B3fbb829b-cf9c-470c-9ccb-eda92b1ae7a7%7D.htm
23
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 42.


                                                          11
4.14 Dive/Hydrographic Vessel: $320,000 was allocated in Budget 2017 for a littoral
     operations support/dive hydrographic vessel.24 The HMNZS Manawanui was decommissioned
     in February 2018, and the Ministry is looking at commercial off-the-shelf options to replace the
     Navy dive ship.25 This will be the subject of a business case in June/July 2018.

4.15 The Committee may wish to ask:


              Please update the Committee on the projects for the replacement of maritime
               sustainment capability and diving and hydrographic support capability.
              What capabilities have been traded off as a result of the plan to proceed with a
               dive hydrographic vessel rather than a littoral support vessel, and how any risks
               will be mitigated?
              What are the major milestones for these projects in 2018/19?


      Future air capability

4.16 There are two significant projects to replace fixed-wing aircraft:

             Replacement of the C-130 Hercules (Future Air Mobility Capability project ‘FAMC’); and
             Replacement of the P-3K2 Orions (Future Air Surveillance Capability project ‘FASC’).26

4.17 We understand that the life extension programme for the Hercules means that they are able to
     continue to operate until the mid-2020s. Defence has recently upgraded systems in the P-3K2
     Orion (which date from 1966), but we understand that they too are approaching the end of their
     viable lifespans. 27 We understand that an implementation business case to replace the Orions
     is due in late June 2018.

4.18 In April 2017, the United States' Department of Defence Security Cooperation Agency (DSCA)
     notified the US Congress of the possible sale of four P-8A Poseidon aircraft to the New
     Zealand Government. The DSCA reports that the potential sale will allow New Zealand to
     continue its maritime surveillance operations after retiring the fleet of P-3K2 Orions.




24
      Vote Defence Standard Estimates Questionnaire, page 5.
25
      Ministry of Defence/NZDF “Frigate Systems Upgrade” Briefing to Foreign Affairs, Defence and Trade Select
      Committee, 14 December 2017, page 5.
26
      NZ Government, Defence Capability Plan 2016, pages 51-52.
27
      NZ Government, Defence Capability Plan 2016, page 52.


                                                          12
4.19 According to media reports the Defence Security Cooperation Agency, the estimated cost is
     US$1.4 billion.28 This estimated cost does not take into account other likely costs, such as
     infrastructure costs associated with implementing the capability, training costs, ongoing
     operational costs and ongoing capital costs relating to upgrades to ensure aligned capability
     baseline with the US and other Five Eyes partners.29

4.20 The Committee may wish to ask:


           Please update the Committee on plans to replace the P-3K2 Orions and the
            Hercules.
           What are the indicative costs of acquiring and implementing these air capabilities?
           What are the major milestones for both the Future Air Mobility Capability and
            Future Air Surveillance capability projects in 2018/19?
           What additional operational capability would the P-8As provide over and above
            that provided by the existing Orions?
           If a decision were made not to proceed with the purchase of the P-8As for the
            production cycle, what risks, and/or capability gaps would arise?
           What are the financial implications of bringing forward the P-8A decision?



5     Office move
5.1   The November 2016 Kaikōura earthquake caused irremediable damage to Defence House,
      which has subsequently been demolished. The Ministry of Defence and NZDF relocated to
      temporary premises. The Ministry has indicated in the SEQ that it will need some minimal
      capital investment towards a new headquarters. 30

5.2   The Committee may wish to ask:

       The Committee notes the demolition of Defence House and that the Defence Force is
       signalling that it will require a capital investment towards a new headquarters.
           When is Defence Force planning to relocate?
           What are the estimated costs of relocating and what are the ongoing operational
            costs going to be compared with Defence House?



28
      New Zealand considers purchasing new Boeing military aircraft from US, 29 April 2017,
      http://www.stuff.co.nz/national/92045512/new-zealand-considers-purchasing-new-boeing-military-aircraft-from-us
29
      One advantage of acquiring the P-8As through the Foreign Military Sales process is that costs are reduced due to
      New Zealand being eligible to have research and development costs waived. US Department of Defence Security
      Cooperation Agency dated 26 April 2018.
      (http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0ahUKEwi0qqjguqLbAhXBJJQKHaO-
      CkQQFggtMAE&url=http%3A%2F%2Fdsca.mil%2Fsites%2Fdefault%2Ffiles%2Fnc_waiver_fact_sheet_-
      _final.pdf&usg=AOvVaw2zm_CeXhLgV3uvMLydsAGs).
30
      Vote Defence Standard Estimates Questionnaire 2018/19, page 2.


                                                          13
Overview of Vote Defence Force
6     Overview
6.1   The Minister of Defence, Hon Ron Mark is responsible for the appropriations in the Vote.

6.2   Vote Defence Force funds NZDF outputs and purchase of property, plant and equipment,
      including specialist military equipment. The Vote also funds Veterans’ Affairs.

6.3   Nine new policy initiatives are included in Vote Defence Force:

          Additional funding for the Frigate System Upgrade (capital injection of $137.791 million
           over three years)31
          Defence White Paper 2016 Operating Funding ($324.118 million over four years, including
           $17.680 million in 2018/19).32 The Defence Force indicates in the SEQ that this funding will
           contribute to re-developing military capability, and indicates that its headcount will increase
           by a further 376 over the next three years.33
          Defence Estate Regeneration Programme Tranche 1 funding ($41.311 million capital
           injection over 4 years).34
          Expanding the Limited Service Volunteer Programme ($7.625 million over 4 years and
           $1 million capital injection).35
          Repatriation of the remains of service personnel and dependents ($6.250 million).36
          Deployments to United Nations Operations ($600,000 in 2018/19).37
          Deployments to United Nations and Middle East operations ($4.283 million in 2018/19).38
          Grant payments for non-Governmental organisations ($275,000 per year over four years).39
          Deployment off an offshore vessel to Fiji ($926,000 in 2018/19).40




31
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 53.
32
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 53.
33
      Vote Defence Force Standard Estimates Questionnaire 2018/19, page 7.
34
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 54.
35
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 53.
36
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 53.
37
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 53.
38
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 54.
39
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 53.
40
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 53.


                                                           14
Trend in the Vote

      Figure 3: Vote Defence Force 2018/19 – Trend in appropriations ($millions)


                                      Total Appropriations - Vote Defence Force 2013/14 to 2021/22
                   $4,000                                                                   3,648
                                                                                  3,440               3,524     3,416
                   $3,500                                              3,149
                                        2,983                3,011
                             2,802                 2,876
                   $3,000

                   $2,500
        Millions




                   $2,000

                   $1,500

                   $1,000

                    $500

                      $0
                            2013/14    2014/15   2015/16   2016/17 2017/18 2018/19         2019/20   2020/21   2021/22
                             Actual     Actual    Actual    Actual Est Actual Vote           Est       Est       Est



6.4   Part 1.1 on the Estimates (page 53) describes new policy initiatives for 2019 and beyond.
      Pages 55-57 show trends in the Vote and overall changes in Vote Defence Force. The
      Standard Estimates Questionnaire explains the significant increases and decreases in the
      appropriation.

6.5   Figure 3 shows the trend in appropriations in Vote Defence Force from 2013/14 to 2018/19 and
      the forecast for out-years. The total appropriations allocated to Vote Defence Force
      ($3.4 billion) are 8% higher than the estimated actual expenditure for 2017/18 ($3.1 billion).41

6.6   Defence Force’s main activities as outlined in the Vote broadly encompass capabilities,
      operations, and protection. Funding for operational readiness of the armed forces is provided
      through three departmental output expense appropriations for capabilities (Army/Navy/Air
      Force capabilities prepared for joint operations and other tasks).

6.7   Capability is also funded through the MCA “Operations contributing to New Zealand’s security,
      stability and interests”. There are two departmental output expense categories within this
      appropriation: military operations in support of a rules-based international order and military
      operations that contribute to regional security. The military operations in support of a rules-
      based international order appropriation has decreased by 25% from $52.115 million
      estimated actual expenditure in 2017/18 to $38.078 million in 2018/19 due to the completion
      of New Zealand contributions to United Nations and multi-national force operations in Iraq,
      Afghanistan, and across the Middle East.



41
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 55.



                                                               15
6.8   The multi-category appropriation, Protection and Protection of New Zealanders
      ($454.032 million) contains five departmental output expense categories encompassing
      assistance to the civil power and provision of public service in emergency situations,
      international engagement, support to community, military assistance in non-emergency
      situations and resource and border protection operations.

6.9   Further appropriations relate to policy advice and services for veterans (a multi-category
      appropriation, which has increased by 57% from an estimated actual expenditure of
      $10.054 million in 2017/18 to $15.802 million in 2018/19), non-departmental output expenses
      relating to veterans’ benefits, and entitlements.42

6.10 The MCA “Advice to the Government” is proposed to increase from $10.641 million actual
     estimated expenditure in 2017/18 to $13.645 million (a 28% increase). Within that MCA, the
     departmental output expense “Situational Awareness” is proposed to rise from $4.993 million
     actual estimated expenditure in 2017/18 to $7.805 million, a 56% increase.

6.11 Most of the funding sought in Vote Defence Force relates to preparing for, and deploying forces
     (62.9%, $2,163.786 million), and protection of New Zealand and New Zealanders, (13%,
     $454.023 million).43

      Capital expenditure

6.12 The capital expenditure funding sought for the purchase of assets is $641.490 million,
     compared with estimated actual expenditure of $460 million in 2017/18. 44 This reflects the
     anticipated expenditure for the refurbishment and replacement of air and maritime platforms.
     The capital injections proposed in Budget 2018 are for the Frigate System Upgrade
     ($63.358 million), Defence Force Logistics ($47.656 million), Tranche 1 of the Defence
     Estate Regeneration Plan ($42.719 million), and $1 million to expand the Limited Service
     Volunteer Programme. 45




42
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 51
43
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, pages 51-52, 86-92.
44
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 65.
45
      Estimates of the Appropriations 2018/19 – External Sector B.5 Vol 4, page 66.


                                                           16
Figure 4: Capital expenditure ($ millions)


                                                            Capital Expenditure

                      $900
                                                                                                773
                      $800
                      $700                                                            641                 634

                      $600                  533                                                                     531
           Millions




                                                                             460
                      $500     429                                 412
                      $400                            337

                      $300
                      $200
                      $100
                        $0
                             2013/14      2014/15   2015/16     2016/17   2017/18   2018/19   2019/20   2020/21   2021/22




7     Estate Regeneration
7.1   The Defence Force is continuing to progress regeneration of the Defence Estate in light of both
      the Capability Plan and Defence Estate Regeneration Programme Plan (DERP). The DERP
      aims to consolidate and modernise Defence Force training areas, facilities, and infrastructure.46

7.2   A number of the initiatives in the Capability Plan, such as the potential acquisition of the P-8A
      aircraft, have implications for Defence Estate and infrastructure that need to be considered and
      planned for across the Capability Plan and DERP.

7.3   Other work underway that could affect the future Estate includes consideration of the optimal
      footprint of army bases, the optimal location of the headquarters for joint forces, and whether
      training programmes spread across several locations could be consolidated to a single site,
      creating a Defence Academy.

7.4   The Defence Force has begun work scoping the state of, and requirements for, modernising
      the accommodation, messing, and dining (AMDM) facilities across the Estate.

7.5   Defence Force is also considering rationalising its housing stock across the nine camps and
      bases. Most of the housing is owned by the Defence Force, supplemented by some rental
      housing.

7.6   The housing pool will reduce by around 400 over the next few years as a result of Treaty of
      Waitangi settlement decisions.




46
      http://campsandbases.nzdf.mil.nz/



                                                              17
7.7   At times there is poor alignment of housing supply and demand across locations. The existing
      housing stock is variable in quality; some of it is unlikely to meet the new requirements for
      under the Healthy Homes Guarantee Act 2017.

7.8   The Defence Force is currently assessing how best to re-align housing stock to current
      demand and needs.

7.9   The Committee may wish to ask:

       The Committee notes the Defence Estate Regeneration Plan and work underway to
       modernise accommodation, messing, and dining arrangements.
          Please outline the governance arrangements in place over Defence Estate
           Regeneration
          Please outline NZDF’s housing policy and provide an update on the programmes
           of work.
          How many enlisted personnel are eligible to be accommodated in Defence
           housing?
          How many houses are owned or leased by NZDF to supply housing to enlisted
           personnel?
          Which camps and bases are subject to Treaty of Waitangi claims and what are
           the anticipated timeframes for settlements?
          Please provide an update on areas where there are housing shortages and
           housing over supply. What is the effect of this on operational readiness?
          What are the timeframes for refreshing the accommodation, messing, and dining
           estate and what are the anticipated capital and operating expenditure implications
           of these programmes of work?
       The Committee notes that Cabinet will shortly consider whether to place an order to
       acquire P-8A aircraft.
          If a decision is made to purchase the P-8As, what are the physical and financial
           implications for the Defence Estate?



8     Veterans
8.1   The proposed appropriation for policy advice and other services for veterans has increased
      from actual estimated expenditure of $10.054 million in 2017/18 to $15.802 million (a 57%
      increase). Funding for the repatriation of veterans who were interred overseas has increased
      from $550,000 in 2017/18 to $6.25 million in 2018/19.




                                                 18
8.2   A recent review of the Veteran’s Support Act conducted by Professor Ron Paterson,
      University of Auckland, made 64 recommendations to amend the Act, some of which relate
      to who can be classed as a veteran. The Minister of Defence has said that he accepts all of the
      recommendations and would like to see the scope of the Act expanded to include anyone
      from the day they signed up with Defence, and would put the case to Cabinet for additional
      funding in the next Budget.

8.3   The Committee may wish to ask:

       The Committee notes report by Professor Ron Paterson on the Veteran’s Support Act.
           Has the financial impact of expanding the scope of the Act, as recommended in
            the report, been assessed and, if so, what is the impact?



9     Environmental contamination
9.1   A number of camps, bases, and surrounding properties have been identified as having been
      contaminated by per-and poly-fluoroalkyl substances (PFAS) as a result of the historical use of
      firefighting foam containing the substance. The Defence Force is one of several Government
      agencies investigating this issue, and has identified in the Standard Estimates Questionnaire
      that there is a risk that the Crown may incur significant costs associated with remediating sites
      contaminated with PFAS.47

9.2   The Committee may wish to ask:

       The Committee notes that Defence Force sites and sites adjacent to Defence Force
       land have been identified as being contaminated by PFAS.
           How many sites has the Defence Force identified as being contaminated by PFAS
            emanating from Defence Force land?
           Is the recent change in the US Environmental Protection Agency standards for
            PFAS likely to result in re-assessment of site contamination and exposure levels?
           Has the Defence Force obtained any costings for remediating any affected land or
            marine area?




47
      Vote Defence Force Standard Estimates Questionnaire 2018/19, page 4.


                                                        19
10 Office move
10.1 The November 2016 Kaikōura earthquake caused irremediable damage to Defence House,
     which has subsequently been demolished. The Ministry of Defence and NZDF relocated to
     temporary premises. The Defence Force has indicated in the SEQ that it will need capital
     investment towards a new headquarters.48

10.2 The Committee may wish to ask:

       The Committee notes the demolition of Defence House and that the Defence Force is
       signalling that it will require a capital investment towards a new headquarters.
           When is Defence Force planning to relocate?
           What are the estimated costs of relocating and what are the ongoing operational
            costs going to be compared with Defence House?



11 Information technology
11.1 The Defence Force Communications and Information Systems Branch is working on a
     comprehensive programme to modernise its IT system, including hardware, software, cloud
     computing, and capability development.49

11.2 This year the all-of-government contract for Microsoft products is due for renewal, and early
     indications are that costs for software licensing are likely to increase.

11.3 The Committee may wish to ask:

       The Committee notes that the Defence Force is working to modernise its
       communication and information technology.
           Please provide the Committee with an update on this work.
           What are the next steps in the project, and when will it be delivered?
           What operational and strategic risks are associated with the project?
           What funding has been identified for this work?
           Has the Defence Force assessed the financial effect of a change to the all-of-
            government costs for Microsoft products?




48
      Vote Defence Force Standard Estimates Questionnaire 2018/19, page 3.
49
      New Zealand Defence Force Statement of Intent 2015-2018, page 36.


                                                        20
Glossary
The following information is sourced from the Estimates, and A Guide to Appropriations50.

                             A parliamentary authorisation for the Crown or an Office of Parliament to
                             incur expenses and capital expenditure, for a specified purpose.
                             Appropriations are limited by their scope (limits on what the appropriation can
 Appropriation
                             be used for), amount (the maximum amount of expenditure allowed), and
                             period (the timeframe over which the appropriation applies – usually annual
                             but in some cases multi-year or permanent).

                             Non-departmental:

                             Authorises expenses to be incurred by the Crown (excluding departments) in
 Benefits or related
                             transferring resources (generally to individuals for their personal benefit) for
 expenses
                             which the Crown receives nothing directly in return.
 appropriations
                             Examples include Jobseeker Support and Emergency Benefit, Student
                             Allowances and various scholarships and awards.

                             Departmental:

                             Authorises capital expenditure to be incurred by a department to acquire or
                             develop assets for use by the department. Departmental capital expenditure
                             funded from a department’s balance sheet (proceeds of the sale or disposal
                             of any of its assets together with any working capital held) is authorised by a
                             permanent legislative authority (PLA), under the PFA. The department can
                             seek additional funding for capital expenditure (shown as capital injections in
                             the Capital Injections Authorisations table in the Estimates for a Vote, and
 Capital expenditure         also in the Capital Injections and Movements in Departmental Net Assets
 appropriations              table in the supporting information to the Estimates for a Vote). Capital
                             injections to departments need to be authorised by Parliament in an
                             Appropriation Act.

                             Non-departmental:

                             Authorises capital expenditure to be incurred by the Crown (excluding
                             departments) to acquire or develop Crown assets, including the purchase of
                             equity or making a loan to a person or organisation that is not a department.
                             Examples include equity injections for Crown entities, and Residential Care
                             Loans to older people.




50
      Published by the Treasury in November 2013.


                                                     21
A schedule showing the opening balance, projected movements, and closing
Capital Injections
                       balance of a department’s net assets. Specifically, it includes the details of
and Movements in
                       any retained surplus, capital injections, or withdrawals.
Departmental Net
                       The primary purpose is to show how capital injections relate to movements in
Assets
                       departmental net assets.

                       The Minister responsible for specific appropriations within a Vote. As several
Appropriation          Ministers may be responsible for different appropriations within a single Vote,
Minister               each appropriation has a tag (M1, M2… etc) identifying the Minister
                       responsible for that line item.

                       The Minister responsible for the financial performance of a department or
Responsible Minister   Crown entity. The Speaker is the responsible Minister for an Office of
                       Parliament, the Office of the Clerk and Parliamentary Service.

                       An appropriation that allows expenses or capital expenditure to be incurred
                       during a specified period that spans the whole or parts of more than one
                       financial year, but no more than five financial years. The MYA component
Multi-year             estimated for the relevant year is not in the annual and permanent
appropriation (MYA)    appropriations table, but is shown in a separate table for total annual,
                       permanent and multi-year appropriations. The total amounts shown in that
                       table are consistent with the amounts shown in the summary of financial
                       activity table [Table 1.2] for the Vote.

                       Departmental:

                       Authorise expenses to be incurred by a department in providing a class or
                       type of outputs (goods and services).
Output Expense
appropriations         Non-departmental:

                       Authorises expenses to be incurred by the Crown (excluding departments) in
                       purchasing a class or type of outputs (goods and services) from Crown
                       entities or other third parties.

                       Departmental:

                       Authorises expenses to be incurred by a department not related to producing
                       outputs. An example is expenses incurred in writing off assets damaged or
Other Expense          destroyed in earthquakes.
appropriations         Non-departmental:

                       Authorises expenses to be incurred by the Crown (excluding departments)
                       that are not output expenses, benefits, or borrowing expenses. An example is
                       the cost of providing international development assistance.




                                              22
Authorises expenses or capital expenditure to be incurred on two or more
Multi-category        categories of output expenses, other expenses or non-departmental capital
appropriation (MCA)   expenditure, all of which must contribute to the same single overarching
                      purpose.

                      A grouping of one or more appropriations that are the responsibility of one or
Vote
                      more Ministers and are administered by one department.




                                             23
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