Section 40 (d) of the Public Finance Act 1989 (as amended by the Public Finance Amendment Act 2004) requires the provision of information on the cost-effectiveness of interventions; in the case of the NZDF, the delivery of outputs.
The Defence Capital Asset Management Practice (DCAMP) Review, the recommendations of which were taken by Cabinet on 13 December 2006, noted the following at paragraphs 2.6 and 2.7 - under the heading ‘Efficiency and Effectiveness in a Defence Context’:
- “The concept of cost-effectiveness has an appealing simplicity but, without significant technical development, its usefulness as an analytical approach in a defence context is limited. A number of almost insurmountable complications are encountered in practice, including the following:
- the difficulty in measuring costs and benefits,
- the difficulty in determining which costs and benefits should be included in the analysis,
- the difficulty of quantifying the time dimension, and
- the analytical treatment of uncertainty.
- For Defence investments, the complications can cause extreme analytical difficulties”.
Like many other government departments, including those under the Public Service, the NZDF has had some difficulty in articulating how it can “prove” that the delivery of NZDF Outputs is as cost-effective as it can be - without affecting the required quantity and quality expected by the Government to achieve its Defence Objectives. While the NZDF has excellent systems under its Defence Planning Framework (DPF), such as the Defence Performance Management System (DPMS), the Operational Preparedness Reporting System (OPRES) and the Balanced Score Card (BSC) to measure performance against the level of operational preparedness achieved and the achievement of strategic objectives, the difficulty arises in that there is currently no fixed benchmark/s against which the cost aspect - versus quantity and quality can be reliably measured. This is further compounded by the not infrequent changes in output structure. The cost of delivering an output in one year cannot be fairly compared with that of another year, given the vast array of influences on costs, without sometimes complex explanations. Fuel costs alone, especially for heavy fuel-user NZDF force elements will significantly distort multi-year comparisons.
Nonetheless, the NZDF is working to be able to responsibly provide multi-year cost comparisons that will take such distortions into account and, eventually, provide a more robust result in terms of the cost-effectiveness of interventions. This is being developed under the array of databases within the DPMS. In addition, and regardless of the difficulties identified by the DCAMP Review, the DCAMP Review Report recommends that the NZDF and MoD jointly develop a set of metrics for assessing asset efficiency and effectiveness around the following dimensions, which, while not directly related to output production, have a major influence on the ability of the NZDF to produce outputs in a cost-effective manner:
- utility and fitness for purpose (as assessed against Government Outcomes),
- life cycle cost,
- factors affecting asset availability, including maintenance, personnel, and logistic support, and
- estimated balance of useful life.
- Following receipt of the Government’s direction on DCAMP, the Review’s recommendations are expected to be implemented some time in 2007.
It is relevant to note here that, given the serious nature of employing military force on combat operations, the NZDF cannot afford to compromise the safety of its personnel by lowering prescribed standards in training (the quality of the output product) in order to achieve a lower cost; to do so would be irresponsible. The aim is to achieve greatest utility in outputs for least cost without compromising safety standards.
An indicator that the past and current delivery of NZDF Outputs is cost-effective comes from two major Government-led external reviews of the NZDF; the Defence Capability and Resourcing Review (DCARR) and the Defence Sustainability Initiative (DSI). Both studies commented that the “current NZDF output structure is appropriate”. This has been taken to mean that any alternative output structures identified would not have been as effective in delivering the outputs in support of achieving the Governments Defence Objectives. DCARR also identified significant funding gaps (funding shortfalls) in the delivery of most NZDF Outputs. To be able to identify these funding gaps the DCARR independently costed the NZDF Outputs. If, in the opinion of the DCARR, there was evidence of the NZDF Outputs being not cost-effective, that would have been made clear in the final report; and it was not. The final report of the DCARR (at Chapter 8 under “Opportunities for Further Efficiencies”) states that all the obvious major opportunities for improving efficiencies within the NZDF have been seized, and recommended that further initiatives be pursued as resources allowed. These include the Joint Logistics Support Organisation (established in 2006), and, under the DSI, the development of an NZDF Strategic Plan including a corporate Strategic HR Plan and Defence Estate Strategic Plan; a Defence Performance Management System, Housing and Accommodation Assistance policy, a revised Capability Management Framework, and an Information Management project.
Further evidence of cost-effectiveness in the delivery of NZDF outputs is found in the concept of training to a level of operational capability that is short of the requirement for actual operations; that is the concept of training to a Directed Level of Operational Capability (DLOC), as opposed to maintaining forces at a continuously high level of preparedness, the Operational Level of Capability (OLOC). To maintain forces at OLOC would be expensive and, thus, less cost-effective. (DLOC and OLOC are explained in more detail elsewhere in this Statement of Intent).
The intense internal and external scrutiny that all the Defence LTDP projects are subject to, so as to ensure best value for purpose, is also an indicator of a cost-effective culture within Defence. The fact that in recent years the NZDF financial outturn has been on or under budget reinforces this culture.
On a more practical note, everything the NZDF does, in the delivery of NZDF Outputs, takes cost-effectiveness into account. This is not only at the corporate level, but perhaps more importantly, at the workface level where the costs are finally realised. The military, traditionally a conservative organisation but still being agile and flexible, throughout its chain of command, scrutinises activities at subordinate levels and is generally intolerant to waste and unnecessary costs.
Independent from the foregoing, a formal NZDF Efficiency and Innovation programme is also being developed to coordinate the management of on-going significant efficiency projects and to oversee the implementation of a continuous improvement and waste elimination programme across the NZDF. This programme will be launched in 2007.
Finally, the establishment of the Executive Leadership Team (ELT), which has a responsibility to closely monitor and decide on resources and priorities, together with the new Planning Branch, which has and continues to “align” the organisation behind a robust strategic planning process, will significantly assist in maintaining the cost-effectiveness culture within the NZDF.
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