Reports and Publications

• Defence Long-Term Development Plan (LTDP)
  May 2002
  • Contents
  • Introduction
  • The Long-Term Development Plan and Defence Policy
  • Funding
  • Managing the LTDP
  • Projects Approved in Principle by Government
  • Projects Necessary to Avoid the Failure of Policy
  • Projects Necessary to Provide a Well-Equipped Land Force
  • Projects Necessary to Avoid Significant Risks to Policy
  • Projects that have Benefit but are Less Critical to Achieving Policy Objectives

Within this section

• Funding Guidelines
• Affordability, Options and Trade-Offs
• Financial Risks
• Projects Currently ‘Below the Funding Line'

Defence Long-Term Development Plan (LTDP)
(11 June 2002)

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Funding

Funding Guidelines

1. The Government directed financial parameters are:
   1. up to $1 billion, in nominal terms, in capital injections over the next 10 years;
   2. current operating baselines set to 2005/06 with adjustments for unfunded depreciation thereafter;
   3. any inflationary pressure to be managed within these constraints until 2005/06; and
   4. leasing options may be considered where there is a neutral trade-off between capital and operating expenditure.

Affordability, Options and Trade-Offs

2. Funding constraints, cash flow management (both from depreciation and new capital) and defence industry considerations will also affect priorities, timing and the overall affordability of the LTDP. Trade-offs within and between projects are necessary. The projects presented in the LTDP take into account the Government's existing funding parameters. Solutions have been developed to provide capabilities within the financial parameters that are appropriate for New Zealand's circumstances and will deliver the Government's policy. For most projects, however, accurate costing information cannot be determined until tender responses are received. It is acknowledged that in order to determine the affordability of the LTDP, Defence needs to improve the individual costing data on which the plan is based, on a project-by-project basis.
3. In order to provide more robust decision-making information the process by which costing for acquisition projects is developed is being reviewed. A revised costing review process will consider all elements of defence capital expenditure, including acquisition costs, through-life costs and cost/risk mitigation. Deflators will also be developed to reflect how military-related inflation impacts on defence capital expenditure and planning.
4. By changing levels of capability, cost and policy compliance it is possible to identify options within projects. These options, which will be investigated for each project, could include phasing projects to spread the cash flow or reducing the size and/or scope of a project. Reducing the level of capability acquired could affect the NZDF's ability to deliver outputs designed to achieve the Government's policy objectives.

Financial Risks

5. There are several financial risks associated with the LTDP that will have to be managed to ensure the plan remains affordable.
   1. Inflation. Estimated costs need to reflect inflation.
   2. Foreign Exchange Movements. The majority of the project costs included in the revised LTDP have been converted from USD into NZD using exchange rate projections advised by Treasury (below). Any change to these projections will result in changes to project costs.

      Foreign Exchange Movements

      FY 02/03	FY 03/04	FY 04/05 Onwards
      0.44	0.49	0.51

   3. Upgrades. Military equipment requires regular upgrades to ensure that it is able to provide the required capability. Upgrades are also important to keep pace with technological changes and to maintain interoperability with other defence forces. Known upgrades have been included in the LTDP. Other unpredicted upgrades may be required during the life of the equipment.
   4. Personnel and Operating Costs. Operating baseline changes will need to be managed to take account of pay increases and changes in NZDF personnel numbers, training requirements, maintenance and operating resulting from new equipment.

Projects Currently ‘Below the Funding Line'

6. The LTDP contains those projects currently deemed necessary to deliver the capability required by the Government, and which are being processed by the NZDF. Given the current financial parameters, however, projects in the category of those that have benefit but are less critical to achieving policy objectives are unlikely to be funded. This underlines the importance of reviewing projects that are ‘above the line' in order to realise potential savings. These projects will still require work to clarify their scope, utility across the policy objectives and cost, and will be included in future reviews of the LTDP. Changing strategic circumstances could result in reprioritisation of projects.

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