Reports and Publications

• Defence Capability and Resourcing Review (DCARR)
  • Contents
  • Executive Summary
  • PART 1 - Background
  • PART 2 - The Operating Environment
  • PART 3 - The Condition of the NZDF and Ministry of Defence
  • PART 4 - Capability Gaps, Funding Options and Implementation
  • PART 5 - Conclusions and Recommendations
  • Appendix 2: Distribution of Increased Appropriation in First Five Years

Within this section

• Capability Gaps
• Funding Options
• Implementation

Final Report
Defence Capability and Resourcing Review (DCARR)

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PART 4 – Capability Gaps, Funding Options and Implementation

Capability Gaps

1. Capability is measured both by the availability of force elements, and their preparedness for the required tasks. Maintaining high levels of preparedness is costly, in terms of personnel and equipment, reducing opportunities for reconstitution and training, and increasing the use of materiel. The NZDF therefore seeks to hold the majority of its forces at an intermediate stage of preparedness, the Directed Level of Capability (DLOC), which enable it to deliver an Operational Level of Capability (OLOC) within agreed timeframes when required. Operationally deployed forces, and those required for short notice deployments in New Zealand and the South Pacific, are held at OLOC.
2. As identified in Part 3 of this report, the DCARR concluded that there is a gap between government policy intentions for capability, and the current state of the NZDF.
   1. Personnel numbers in the three services, Headquarters NZDF, and Headquarters Joint Forces New Zealand are below the levels required, and cannot be rapidly increased to the required levels;
   2. In some trades the number of personnel and their trained state is deficient;
   3. Some major weapons platforms require upgrading or replacement, although the LTDP will address this;
   4. Some military equipment (other than major weapons platforms) no longer meets the required standard;
   5. Contingency reserve stocks (ammunition, fuel, and spares) are depleted;
   6. There is a backlog of maintenance and capital expenditure in the Defence Estate, which cannot be addressed fully in the short term; and
   7. Aspects of corporate management capability are depleted.
3. The DCARR was required to determine an appropriate level of operational tempo (the combination of what capability is delivered, and how much) which would enable the NZDF to recover capability to the levels required by the government, within the constraints of the pace at which capability can practically be regenerated, future planned equipment upgrades, and the likely available future funding. In doing so, the DCARR took account of the likely future operating environment, which is set out in Part 2 above, and specifically the required capabilities set out in paragraphs 2.1 and 2.2.
4. Table 1 attached [Appendix 1] to this report sets out the DCARR’s formulation of an operating tempo which will allow the NZDF to continue to deliver the outputs required by government policy while also building its personnel numbers and trained state, restoring the Defence Estate, and accommodating the introduction to service of significant new weapons platforms and equipment. The table is adjusted over time to reflect the availability of major platforms and the expected increases in the capability of the NZDF.
   
   (NB: Table 1 attached [Appendix 1] is a classified document and has been withheld from public release).
5. As a key element of the process of capability-building, the NZDF will need to invest in corporate management, so that it has the ability to oversee the implementation of the initiatives needed to achieve it. At the same time, and in recognition of its key role in defence policy, the Ministry of Defence will need to develop its policy capability.

Funding Options

6. The DCARR was required to consider a range of funding options, and to provide proposals which could be included in the strategic phase of the 2005/06 budget round. In September 2004, following preliminary advice on the DCARR findings, the Ministers of Defence, Finance and State Services gave additional guidance for developing those options. In broad terms, they indicated that the DCARR should examine the implications of a range of funding options, between the current baseline and a funding track involving compounding increases of 5% of baseline annually for the next ten years.
7. The DCARR considers that NZDF capability in some areas is below the requirements of government policy, and that the NZDF can not satisfy all government output and capability policy requirements within its current baseline. This is true not only because the current baseline is insufficient to meet the full costs of current outputs, but also because past budgets over the last 15 years have been insufficient to meet the costs of past outputs.
8. The funding package should therefore be enough to do three things:
   1. fully fund current output;
   2. build capability to the level required by government policy; and
   3. eliminate the backlog of deferred expenditure and restore depleted reserves.

9. In considering funding options, the DCARR had regard to some basic realities relating to defence expenditure:
   1. a substantial proportion (90%) of defence costs are fixed in the medium to long-term, and the marginal cost of changing operational tempo is small in the overall budget – but, in consequence, a small change in overall funding will impact most strongly on the ability to carry out marginal activities;
   2. the NZDF is already facing expenditure increases (“pipeline increases”) which are unavoidable for legal, contractual or operational reasons;
   3. the NZDF is subject to military inflation – that is the increasing cost of defence personnel, equipment and technology globally – which is generally higher to underlying price inflation in the New Zealand economy; and
   4. any significant operational deployment will require additional funding for materiel and personnel, to move force elements from DLOC to OLOC, and to sustain the deployment over time.
10. In line with Ministerial guidance, senior NZDF, Ministry of Defence and Treasury officials worked with the DCARR to develop a ten year Defence Funding Package (DFP) that DCARR considers will enable the NZDF and Ministry of Defence to build capability over time to the level required.
11. Table 2 attached [Appendix 2] to this report identifies the expenditure categories for which additional funding would be made available under the DFP.

Implementation

12. A significant work programme will be required by the NZDF and Ministry of Defence in order to build both military and organisational capability to the level required by government policy. The DFP is intended to provide the financial resources to support that work programme.
13. The staged development of military capability will occur over a ten year timeframe. Early priorities include:
    1. increasing personnel recruitment and improved retention;
    2. implementing capability acquisition decisions already made by government;
    3. reviewing the optimal configuration of the Army;
    4. developing the capability of HQ NZDF; and
    5. developing a real estate strategy and policies for housing and accommodation assistance.
14. While rebuilding military capability is recognised as the key outcome of the work programme, the success of the DFP is contingent on the development by the NZDF and Ministry of Defence of improved corporate management systems and processes. These systems would oversee the application of resources against policy directions, and should ensure the sustainability of the funding package over its ten year timeframe. They would also support the development of comprehensive reporting by the NZDF and Treasury against the targets contained in the DFP.
15. A three phased approach has been developed by the DCARR, and senior NZDF and Ministry of Defence management to support the proposals contained in the DFP. This approach recognises the importance of first improving corporate capability, as recommended by the DCARR (see Para 3.23).

    Stage 1 March to June 2005	Stage 2 July 2005 to June 2006	Stage 3 July 2006 and beyond
    Initial scoping work by an ‘Establishment Team’ to determine the systems and processes required to implement the recommendations of the DCARR;	Based on the results of the initial scoping work, the roll out of enhancements to the NZDF corporate capability including performance management and strategic planning capabilities;	Corporate enhancements become business as usual and support strategic planning cycles;
    Oversight of progress by NZDF, the Ministry of Defence and Central Agencies (DCARR Steering Group);	Roll out of the enhanced Ministry of Defence role to participate in strategic and purchase advice;	The Ministry of Defence participates in strategic planning cycles;
    Report back to Joint Ministers on recommendations in June 2005.	Key Processes to support Budget Initiative for FY 2006/07 in place by November 05	If satisfied with progress, DCARR Steering will sign-off on changes and disband;
    	New corporate systems manage the recovery phase of military capabilities;	Annual reporting on progress to Joint Ministers;
    	Continued oversight by DCARR Steering Group.	Mid point review at 2009/10 to include a post implementation review of corporate capability enhancements of NZDF and MOD.

16. Initially, the NZDF will create a high level establishment team to scope the changes required to implement the DCARR recommendations. This team will include representatives from the Ministry of Defence and central agencies, and will draw upon external advice as required; it will be guided by the current DCARR Steering Group. The NZDF and Ministry of Defence will report back to Ministers by June 2005 on the key planning and performance management requirements, and on the implementation strategy.
17. Thereafter, the NZDF and Ministry of Defence will jointly implement the planning and performance management frameworks, with key processes in place to support the Budget Initiative process for 2006/07. The full implementation of these systems will be complete by June 2006, with the Defence Planning Framework, the NZDF Programme Management Office and the NZDF Corporate Performance Management framework all in place as integral parts of mainstream management processes. These systems will collectively enable the NZDF to demonstrate its performance against operational and organisational capability objectives, as part of the annual strategic planning and budget round.
18. The final proposed stage of implementation is a formal review at Year 5 of the DFP (2009/10) which will document the adequacy of changes made, and will report to joint Ministers on the effectiveness of the DFP in support of building the NZDF’s military and corporate capability.

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