NZDF

Cost-Effectiveness of Interventions

Section 40 (d) of the Public Finance Act 1989 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 difficulties of the concept of cost-effectiveness in a defence context. It noted that without significant technical development the usefulness of the concept of cost-effectiveness as an analytical approach in a defence context is limited.

Like many other government departments, 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 in place under its Defence Planning Framework (DPF), such as the Defence Performance Management System (DPMS), the Operational Preparedness Reporting System (OPRES) and the Balanced Scorecard 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 following points are made regarding the NZDF and the cost-effectiveness of interventions:

  • The NZDF takes cost-effectiveness very seriously. Indeed, it is only through applying the principles of cost-effective management that we can afford to fund some otherwise non-funded areas, such as increases in remuneration. Further, the NZDF has seen fit to have “Resource Efficiency” (with the inherent connotations of cost-effectiveness) as one of its three core Strategic Themes (of Resource Efficiency, Agile Force, and Valued Partner).
  • There has always been an undercurrent culture of cost-effectiveness within the NZDF, and this has been and will continue to be encouraged in everything we do. Commanders at all levels are conscious of the need to train as cost-effectively as possible. The fact that in recent years the NZDF financial outturn has been on or under budget reinforces this culture.
  • It is also relevant to note here that, given the serious nature of employing military force on operations (combat and peace support 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.
  • The concept of maintaining force elements at the Directed Level of Operational Capability (DLOC) is, in itself, a major cost-effective measure; noting that maintaining forces at the Operational Level of Operational Capability (OLOC) would be cost-prohibitive (and wasteful).
  • 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.
  • A fair 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 - relative to the Government’s Defence Policy. 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, 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.
  • The Defence Transformation Programme (DTP), as described later in this Statement of Intent, will be a major driver in promoting a cost-effective NZDF. It is from the DTP that we expect to draw the standards and measures that are required under the Public Finance Act 1989 regarding cost-effectiveness. The following points are relevant:
    • The DTP was established in July 2007 to drive economic benefits (cost efficiency) out of five mega processes of Defence, namely Human Resource Management, Education and Training, Logistics, Information Systems, and Defence Estate.
    • The aim of the programme is to rationalise the costs of delivering the outputs of these processes without materially altering the delivery standards.
      Critical to this reform is the ability to measure the activities of the processes in order to track performance of the baseline status at the start of the programme with the performance achieved through the changes and into the future.
    • The establishment of robust and informative key performance measures across the mega processes of the NZDF will be the significant enabler of improvement in the cost-efficiency of the processes.
    • Central monitoring of the mega processes and the alignment of resources with performance indicators will create a culture of measurement and improvement.
    • The establishment of benchmark measures for similar mega processes outside of the NZDF will provide comparative targets for efficiency; the tracking of the costs of these processes over a period of time will form an internal benchmark.
    • 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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This page was last reviewed on 21 May 2009, and is current.