Annual Report for the year ended 30 June 2009
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, Chile 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.
| Performance Measure | 2008/09 Budget |
2008/09 Actual |
|---|---|---|
| New equipment procurement or refurbishment projects will be managed within the approved budget, to the agreed delivery schedule and to the quality standards negotiated for each project. | Achieved | Within budget and agreed standard but with some time delays |
Confirmation by the Defence Industry Committee of New Zealand that the Ministry of Defence and its agent, the Industry Capability Network have adequately promoted domestic suppliers capabilities to overseas based prime contractors. |
Confirmation received | Confirmation received |
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 New Zealand International Accounting Standard (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 2009.
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 2009 have been translated to New Zealand dollars using Treasury fiscal reporting rates at balance date. The rates were:
AUD = 0.80540, CAD = 0.75510, EUR = 0.46280, GBP = 0.39265
JPY = 62.6900, NOK = 4.17835, SEK = 5.00095, USD = 0.65370
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 six sets of rapid bridge crossing systems to support the mobility of the motorised land force.
Objective
In 2008/2009 it was planned to:
- complete the tender process
- evaluate responses
- award a contract to the successful tenderer.
Performance
- Tender responses have been evaluated however a decision on the affordability of this project is under review by the NZDF.
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 2008/2009 it was planned to:
- conduct the Preliminary Design Review
- conduct the Critical Design Review.
Performance
The Preliminary Design review was held in February 2009.
The Critical Design Review was held in May 2009. Several documents will not be presented until November 2009 and part payment of the attendant milestone payment has been withheld.
| [A] Project expenditure in 2008/09 | Actual $ |
|---|---|
| Prime contract | 45,085,486 |
| Ancillary contracts | 255,395 |
| Project management | 1,146,012 |
| Total net expenditure | 46,486,893 |
| GST payments | 597 |
| Total project expenditure in 2008/09 | 46,487,490 |
| [B] Total project cost summary as at 30 June 2009 | Actual costs to
30 Jun 09 $ |
Future commitments & forecasts ** $ |
Estimated outturn
30 Jun 09 $ |
|---|---|---|---|
| Prime contract | 80,202,164 | 44,507,000 | 124,709,164 |
| Ancillary contracts | 255,395 | 5,418,364 | 5,673,759 |
| Project management | 1,430,188 | 5,045,846 | 6,476,034 |
| Contingency | - | 7,850,738 | 7,850,738 |
| Project net expenditure | 81,887,747 | 62,821,948 | 144,709,695 |
| GST | 15,986 | 17,392,264 | 17,408,250 |
| Estimated project outturn | 81,903,733 | 80,214,212 | 162,117,945 |
| Effect of foreign exchange movements against the foreign exchange rates used for the Cabinet approval | (5,443,695) | ||
| 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 |
** All future prime and ancillary contracts costs are considered commitments.
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 2008/2009 it was planned to:
- to complete the delivery of the 1st system to the USA
- monitor system during upgrade
- return the system to New Zealand over the period November 2009 – February 2010.
Performance
- The 1st system was shipped to the USA in August 2008.
- Monitoring activity is continuing.
- The Contractor is currently forecasting to ship the 1st system back to New Zealand in December 2009.
| [A] Project expenditure in 2008/09 | Actual $ |
|---|---|
| Prime contract | 5,257,424 |
| Ancillary contracts | 41,024 |
| Project management | 84,346 |
| Total net expenditure | 5,382,794 |
| GST payments | 4,866 |
| Total project expenditure in 2008/09 | 5,387,660 |
| [B] Total project cost summary as at 30 June 2009 | Actual costs to
30 Jun 09 $ |
Future commitments & forecasts ** $ |
Estimated outturn
30 Jun 09 $ |
|---|---|---|---|
| Prime contract | 15,001,218 | 6,047,200 | 21,048,418 |
| Ancillary contracts | 41,024 | 1,717,149 | 1,758,173 |
| Project management | 137,988 | 1,454,717 | 1,592,705 |
| Contingency | - | 1,010,183 | 1,010,183 |
| Project net expenditure | 15,180,230 | 10,229,249 | 25,409,479 |
| GST | 11,228 | 3,113,147 | 3,124,375 |
| Estimated project outturn | 15,191,458 | 13,342,396 | 28,533,854 |
| Effect of foreign exchange movements against the foreign exchange rates used for the Cabinet approval | (414,479) | ||
| 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 |
** All future prime and ancillary contracts costs are considered commitments.
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 2008/2009 it was planned to:
- contract a Design Authority
- undertake a Preliminary Design Study
- procure long lead items
- issue a tender to undertake the Heating, Ventilation and Air Conditioning upgrade and the Integrated Platform Management System.
Performance
- Contract awarded July 2008.
- Contract awarded July 2008.
- Contract awarded August 2008.
- Tender has yet to be issued.
| [A] Project expenditure in 2008/09 | Actual $ |
|---|---|
| Prime contract | 2,502,574 |
| Ancillary contracts | 2,511,602 |
| Project management | 304,851 |
| Total net expenditure | 5,319,027 |
| GST payments | 16,138 |
| Total project expenditure in 2008/09 | 5,335,165 |
| [B] Total project cost summary as at 30 June 2009 | Actual costs to 30 Jun 09 $ |
Future commitments & forecasts ** $ |
Estimated outturn 30 Jun 09 $ |
|---|---|---|---|
| Prime contract | 2,502,574 | 18,080,212 | 20,582,786 |
| Ancillary contracts | 2,511,602 | - | 2,511,602 |
| Project management | 333,040 | 822,572 | 1,155,612 |
| Contingency | - | - | - |
| Project net expenditure | 5,347,216 | 18,902,784 | 24,250,000 |
| GST | 19,661 | 3,011,589 | 3,031,250 |
| Estimated project outturn | 5,366,877 | 21,914,373 | 27,281,250 |
| Effect of foreign exchange movements against the foreign exchange rates used for the Cabinet approval | - | ||
| 27,281,250 | |||
| Project costs approved by Cabinet (net expenditure) | 24,250,000 | ||
| GST costs approved by Cabinet | 3,031,250 | ||
| Total costs approved by Cabinet | 27,281,250 |
** All future prime and ancillary contracts costs are considered commitments.
