Overview By The Controller And Auditor-General

This report is about the acquisition of two types of new vehicles for the New Zealand Army (Army):

- light armoured vehicles, which carry troops and provide fire support in battlefield situations; and

- light operational vehicles, which are all-wheel drive vehicles that fulfil roles such as transporting ammunition, equipment and supplies.

The Government signed a contract on 29 January 2001 to purchase 105 LAV III light armoured vehicles, and the first vehicles are planned to be delivered in September 2003. The current cost estimate is $677.464 million (GST inclusive).

The tender for the light operational vehicle was cancelled in May 2000 pending an inquiry into the conduct of the tender. The process was subsequently restarted and the re-tendering of the light operating vehicle is currently in progress.

In November 2000, the Secretary of Defence asked me to undertake a review of the processes for both acquisitions. I agreed to the request because the Audit Office had been intending for a number of years to examine major military acquisitions and this was a good opportunity to do so. I also thought it would be a relatively straightforward exercise.

Some 10 months later, however, I find myself reporting about a wider range of issues - some particular to the acquisitions we looked at, some symptomatic of more fundamental problems, and some a reflection of systemic problems in and between the Ministry of Defence (the MoD) and the New Zealand Defence Force (the NZDF). As always, the Audit Office has a real interest in looking beyond the problems at hand to what are the underlying issues and how they might be resolved for the future.

To carry out our review we:

- interviewed staff from the MoD, the NZDF, Army and the Treasury (including the New Zealand Debt Management Office);

- reviewed documents and files held by the MoD, the NZDF and Army relating to these acquisitions; and

- wrote to some of the tenderers for their perspective on the process followed by the MoD.

At the completion of our field work, we briefed the Secretary of Defence on our preliminary findings. Because of the conflicting views we had received on important matters, we agreed with the Secretary of Defence that we should re-interview key people to try and reconcile these different perspectives.

From our discussions with the Secretary of Defence, we also formed the view that there were other issues we needed to report on - in particular, that there had been a lack of documentation of important elements of the acquisitions. We therefore undertook further work to locate and examine additional papers where we were able to do so. A feature of this review has been that important issues continued to emerge throughout our examination, and we continued to source relevant documentation right up to publication.

Our review focused on these two acquisitions only - we did not examine other acquisitions for either Army or the other two Services. Nevertheless, these projects represent the largest Army re-equipment programme since World War II. The review was a very complex exercise - it involved all elements of our legislative audit mandate, including issues of performance, waste, probity, accountability, and authority.

We have compiled this Report from the markedly divergent views of the MoD, the NZDF and Army. Documentary evidence was often poor. Key decisions were often not recorded. Nevertheless, we feel that we have assembled a compelling picture that illustrates problems in the key areas of:

- governance;

- relationships;

- accountabilities; and

- defence planning.

The legislative and institutional arrangements surrounding the MoD and the NZDF have not helped in these acquisitions. The arrangements include:

- a Defence Planning System that translates the Government’s defence policies and priorities into the size, shape and composition of the NZDF, together with the capabilities (including equipment) required; and

- the MoD having statutory responsibility for acquisitions, in consultation with the NZDF.

A strategically robust and fully operational Defence Planning System is absolutely fundamental to the way in which the MoD and the NZDF go about their business. However, in practice we found that the Defence Planning System, despite having existed for nearly 10 years, has not actually produced a full set of outputs. In our Report to Parliament of December 2000: Central Government: Results of the 1999-2000 Audits we discussed the need for better information on capability, fiscal risks and funding needs for the NZDF. In the absence of a fully operational Defence Planning System, we do not believe that realistic and reliable forecasts can be made for the NZDF’s capital and operating funding in the future.

In theory, the bilateral approach between the MoD and the NZDF could have worked. Instead, we observed an acquisition process based around a tripartite relationship between the MoD, the NZDF and Army. This gave rise to an environment of poor communication, confusion over roles, and dysfunctional relationships. The acquisition projects have slowed, costs have increased, and relationships have been damaged. As a result, Army currently continues to manage with obsolete equipment that is well beyond its useful life - despite the fact that successive Governments have given priority to Army modernisation.

We believe that a number of things to need to happen:

- The Defence Planning System needs to be made operational and produce credible outputs. It underpins the future of the NZDF and the required capital and operational budgets. We are sceptical that the current System will provide the answers.

- A more pragmatic approach needs to be taken to the acquisition method - one model does not necessarily fit all purchase decisions.

- The dysfunctional relationships need to be made functional - and be underpinned by clear accountabilities, a more trusting environment, and more face-to-face communication. For example:

- there needs to be strong project governance to help resolve or avoid the type of disputes that have plagued both of these acquisitions; and

- there need to be open discussions and transparent decisions that are properly documented.

DJD Macdonald

Controller and Auditor-General

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