Annual Report for the year ended 30 June 2008
Part 3: Statement of service performance (continued)
Output Class - Management of equipment procurement
Description
The Ministry will acquire significant military equipment in a transparent and fair way, and in accordance with government procurement policies. ‘Significant' means equipment that will cost more than NZ$7 million. The Ministry of Defence is committed to providing competitive local (Australian, New Zealand and Singaporean) industries with the opportunity to support defence, and to ensuring that the Government and the taxpayer get value for money.
This output class involves:
- management of military equipment procurement functions on behalf of the Crown once equipment needs are determined and accepted by Government. The acquisition process involves acquisition investigation, risk assessment, quality assurance, equipment selection, negotiation and execution of the contract arrangements, up to the point when the equipment, initial training and spares are delivered to the NZDF
- management of any warranty provisions beyond date of delivery
- management of financing commitments
- arrangement of on-sale for the NZDF
- maintenance of an information base on industrial capability, and the provision of advice to industry on defence requirements.
Explanatory note on the project cost summaries included in this output class report
Foreign exchange variances
The Ministry's foreign exchange policy requires the Ministry to manage currency risk arising from future transactions, and recognised liabilities, by entering into foreign exchange forward contracts to hedge 100% of the foreign exchange exposure.
The approval by Cabinet to commit to total project costs uses foreign exchange rates prevailing at the time of seeking Cabinet approval. The subsequent recording of project expenditure in ledgers uses exchange rates prevailing at the date of the transaction (as required by NZ IAS 21 – the effects of changes in foreign exchange rates) and creates a difference between the estimated costs included in the Cabinet approval and the amounts recorded in ledgers as project expenditure.
The project cost summaries that follow include a line to show the total foreign exchange variance between Cabinet approval and recorded expenditure as at 30 June 2008.
Definitions
The following definitions apply to words used in the project cost summary tables:
Prime contract
Payments made by the Ministry to a contractor(s) manufacturing or supplying the major equipments.
Ancillary contracts
Payments made by the Ministry to suppliers of all other items not the responsibility of the prime contractor(s).
Project management
Costs incurred to support the management of the project. Includes travel, legal advice, risk assessment fees, consultants, costs of project staff located overseas (housing, utilities, allowances etc).
Contingency
A provision in a project costing to meet uncertain events that may arise.
The project cost summary tables show the balance remaining of the contingency provision. Amounts spent to date from the contingency provision are recorded against prime contract, ancillary contracts, project management, as appropriate.
Commitments
Contractual obligations to purchase goods and services that are unpaid at balance date.
Forecasts
Expenditure likely to be incurred, but not committed at balance date.
Commitments and forecasts denominated in foreign currency at 30 June 2008 have been translated to New Zealand dollars using Treasury fiscal reporting rates at balance date. The rates were:
AUD = 0.79240, CAD = 0.76955, EUR = 0.48285, GBP = 0.3824,
JPY = 81.01, NOK = 3.85435, SEK = 4.54845, USD = 0.76220
GST
GST is an element of cost in the calculation of a project costing and an amount is included in Cabinet approvals for such payments to be made. The project cost summaries included in this Annual Report identify separately the GST component from net expenditure amounts.
1. The Ministry has progressed the following projects, which have received Government approval:
1.1 Army Engineering Equipment
This project has been split into three components; two will be undertaken by the NZDF and one (Gap Crossing System) by the Ministry of Defence.
1.2 Gap Crossing System
This project is to acquire up to 6 sets of rapid bridge crossing systems to support the mobility of the motorised land force.
Objective
In 2007/2008 it was planned to:
- complete the tender process.
Performance
- A Request for Proposal has been issued and five companies responded with one company providing two options.
- All responses have been evaluated and a short list of two has been established.
- Tender evaluation took longer than expected in part because of the innovative character of the proposed technical solutions involving the light armoured vehicles.
- A tender document is now being prepared and will be issued to the short listed companies in the fourth quarter of 2008.
1.3 Replacement Helicopter Capability: Training Light Utility Helicopter
This project is to acquire up to six training/light utility helicopters. This project proposes the replacement of the Sioux training helicopter with a capability that meets the NZDF's contemporary needs.
Objective
In 2007/2008 it was planned to:
- complete the tender process initiated in 2006
- further project milestones will be determined subject to Government approvals being provided
- manufacturing and delivery milestones will be established once a contract is awarded.
Performance
- Joint Ministers approved signing of the Contract on 30 April 2008.
- Contract signed 8 May 2008.
- Contracted delivery milestone have been delayed. For the first helicopter this is September 2010. The final delivery is scheduled for July 2011.
| [A] Project expenditure in 2007/08 | Actual $ |
|---|---|
| Prime contract | 35,116,677 |
| Ancillary contracts | - |
| Project management | 284,177 |
| Total net expenditure | 35,400,854 |
| GST payments | 15,389 |
| Total project expenditure in 2007/08 | 35,416,243 |
| [B] Project cost summary as at 30 June 2008 | Actual costs to 30 Jun 08 $ |
Future commitments & forecasts $ |
Estimated outturn 30 Jun 08 $ |
|---|---|---|---|
| Prime contract | 35,116,677 | 82,829,831 | 117,946,508 |
| Ancillary contracts | - | 6,117,772 | 6,117,772 |
| Project management | 284,177 | 6,346,403 | 6,630,580 |
| Contingency | - | 7,913,110 | 7,913,110 |
| Project net expenditure | 35,400,854 | 103,207,116 | 138,607,970 |
| GST | 15,389 | 17,392,861 | 17,408,250 |
| Estimated project outturn | 156,016,220 | ||
| Effect of foreign exchange movements against the foreign exchange rates used for the Cabinet approval | 658,030 | ||
| 156,674,250 | |||
| Project costs approved by Cabinet (net expenditure) | 139,266,000 | ||
| GST costs approved by Cabinet | 17,408,250 | ||
| Total costs approved by Cabinet | 156,674,250 |
1.4 Upgrade of ANZAC Ships Close in Weapon Systems
This project will upgrade the Phalanx Close in Weapon System that provides a last line of defence and protection from Anti Ship Missiles and Strike Aircraft and provides an inner layer of defence against threats which have defeated the outer layer of defence.
Objective
In 2007/2008 it was planned to:
- complete contract negotiations with the supplier
- deliver the first unit to the supplier to initiate work.
Performance
- The contract negotiations were completed prior to the end of 2007 and the first unit prepared for shipment at the end of January 2008.
- The import licence arrived in July 2008 and the system was shipped in August 2008.
| [A] Project expenditure in 2007/08 | Actual $ |
|---|---|
| Prime contract | 9,743,793 |
| Ancillary contracts | - |
| Project management | 53,642 |
| Total net expenditure | 9,797,435 |
| GST payments | 6,362 |
| Total project expenditure in 2007/08 | 9,803,797 |
| [B] Project cost summary as at 30 June 2008 | Actual costs to 30 Jun 08 $ |
Future commitments & forecasts $ |
Estimated outturn 30 Jun 08 $ |
|---|---|---|---|
| Prime contract | 9,743,793 | 10,372,753 | 20,116,546 |
| Ancillary contracts | - | 1,472,711 | 1,472,711 |
| Project management | 53,642 | 1,572,149 | 1,625,791 |
| Contingency | - | 1,010,183 | 1,010,183 |
| Project net expenditure | 9,797,435 | 14,427,796 | 24,225,231 |
| GST | 6,362 | 3,118,013 | 3,124,375 |
| Estimated project outturn | 27,439,606 | ||
| Effect of foreign exchange movements against the foreign exchange rates used for the Cabinet approval | 769,769 | ||
| 28,119,375 | |||
| Project costs approved by Cabinet (net expenditure) | 24,995,000 | ||
| GST costs approved by Cabinet | 3,124,375 | ||
| Total costs approved by Cabinet | 28,119,375 |
1.5 ANZAC Frigate Platform Systems Upgrade
The platform systems upgrade involves work on the ANZAC frigates' hull propulsion system, heating, ventilation and air conditioning systems, and control and monitoring system.
Financial approval of $9.250 million has been given to an initial phase of work, being $4.500 million for the purchase of long lead items and $4.750 million for project start up costs.
Objective
In 2007/2008 it was planned to:
- obtain financial approval to commence project.
Performance
- Joint Ministers approved commencement 29 May 2008.
| [A] Project expenditure in 2007/08 | Actual $ |
|---|---|
| Prime contract | - |
| Ancillary contracts | - |
| Project management | 28,189 |
| Total net expenditure | 28,189 |
| GST payments | 3,524 |
| Total project expenditure in 2007/08 | 31,713 |
