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Speech to Defence Industry Association annual conference

Hon Dr Jonathan Coleman

Minister of Defence

13 November 2013

Speech to Defence Industry Association annual conference

It’s great to be addressing the New Zealand Defence Industry Association today. Since we met back in March at your quarterly meeting, a lot has happened in defence in the last eight months.

The NZDF marked the successful closure of two of its largest overseas missions. It was a privilege for me to accompany the Governor-General, Lieutenant General The Rt Hon Sir Jerry Mateparae for the closedown ceremony of the NZPRT in Bamyan, Afghanistan. I also joined the Prime Minister in the Solomon Islands to mark the 10 year anniversary of RAMSI (the Regional Assistance Mission to Solomon Islands).

The NZDF has been focusing on regeneration, and it is keeping very busy with training. We’ve got Exercise Southern Katipo currently running at the moment in South Canterbury. It’s the largest international military exercise ever held in New Zealand. With over 2,200 personnel taking part from 10 nations, it is a valuable opportunity for the NZDF to test its interoperability with its international partners as well as improving how our Navy, Army and Air Force operate together, particularly in an amphibious environment.

There has been a considerable amount of defence international engagement this year. I’m not long back from a very successful trip to Washington where I met with Secretary of Defense Chuck Hagel. I must have done alright as John Minto said it made him feel sick. I’m next heading off to Viet Nam and China later this month.

In terms of capability, we’ve made good progress on the implementation of the Defence Capability Plan and are progressing a number of business cases, which I’ll update you on shortly. I have also pushed reform in the Ministry of Defence, which the Secretary will update you on later.

Before I go into defence issues, I want to reflect on the state of the economy and where the Government feels it is going. We have spent the last five years getting the books back in order, whilst dealing with the significant challenges from the GFC and the Christchurch earthquakes.

Through responsible economic and fiscal management, the Government has built a platform for sustainable growth. Interest rates are around 50-year lows and the cost of living is well under control. As the economy grows, we are seeing new jobs being created and unemployment falling. Business and consumer confidence are improving as New Zealand companies become more competitive.

Compared to many developed economies, New Zealand is well placed with a growing economy and government books that will be back in surplus next year and will enable us to reduce our borrowing and start paying off debt (with the goal of reducing net debt to 20% of GDP by 2020). The external indicators and feedback from international institutions reinforce that New Zealand is in a good position.

Despite the considerable progress, there is no room for complacency and we need to continue improving our competitiveness, financial stability and reduce debt.

The Government has achieved this economic turnaround without a slash and burn approach. Back in 2009, Government spending was 34.5% of GDP and under this Government it is forecast to decrease to 31.8% of GDP next year. Our focus has been on slowing that expenditure growth whilst improving the efficiency and effectiveness of our public services.

The public sector has had to up its game and drive forward reform, innovation, efficiency and savings. It’s also been about establishing a longer term strategy for departments with a clear focus on delivering results. We have found out what is good for communities though better public services is also good for the Government’s books.

The Government has given the public service the tools and strategy to drive these changes, and we have confidence in our public service to deliver on this. We’re seeing good progress in our 10 Better Public Services results areas, and the lives of families across New Zealand are improving. The latest Kiwis Count survey shows satisfaction with public services continues to rise, and trust in public servants is steadily increasing.

Turning now to defence, the NZDF has had to drive through significant reform with a focus on delivering back office savings and efficiencies whilst bolstering the front line. The NZDF has made significant achievements and progress on its Savings and Redistribution Programme with savings reinvested into frontline capabilities, such as new trucks for the Army, upgraded maritime helicopters for the Navy, and a significant pay rise of $45m in 2012 which meant that 90% of NZDF personnel received a pay rise, with the overall average being 5.8%.

As Minister during this period of reform, I have also put a lot of effort into focusing on how to improve morale and attrition. For example, I decided not to increase military rents as I knew it would have a negative impact. Things have turned around, and we are now back on track, with morale continuing to trend upwards since the start of 2012, and attrition rates falling dramatically back to historical ranges.

In terms of progress on the Defence Capability Plan, contract negotiations are well underway for the ANZAC Frigate Systems Upgrade project, which will upgrade HMNZS Te Mana and Te Kaha’s self-defence and sensor capabilities, keeping the ships up to date with current technology and allowing them to stay in service at the sharp end of our Navy until the end of the 2020s.

Contract negotiations are also underway for the Pilot Training Capability project, which will purchase new dedicated advanced pilot training aircraft for the RNZAF. These new aircraft, a flight simulator and ground-based training devices will deliver a safer and more effective pilot training system for the Air Force.

A $113m contract was signed with Rheinmetall-MAN in April for the purchase of 200 new trucks for the Army, and the first production batch has arrived in Auckland recently. These trucks represent a huge step forward in technology, safety and protection from the current fleet of old Unimog and Mercedes trucks. This contract is also a great example of cost-effective procurement, achieved by purchasing the trucks off the same production line as the UK.

A $242m contract was signed with Kaman Aerospace in May for the purchase of eight upgraded Seasprite naval helicopters, and two spare airframes. These helicopters will provide increased naval aviation availability, improve maritime surveillance and search capability. The first three aircraft are due to be transferred from the Kaman facility in Connecticut to New Zealand in early 2015, with the full complement of eight helicopters scheduled to be in RNZAF service during 2016.

Upgrades of our C-130 Hercules and P-3 Orion aircraft continue, with three upgraded C-130s and four upgraded P-3s being introduced into service. These upgrade programmes will allow both fleets to remain effective and in service into the 2020s.

All five of the AgustaWestland A109 training/light utility helicopters, and six of the eight NH90 medium utility helicopters have arrived in New Zealand and been accepted by the RNZAF. These helicopters are already delivering significant capability benefits - this will only increase as the aircraft are certified for more complex tasks as they are progressively introduced into service.

In terms of the strategic policy side, back in 2008 the Government conducted a comprehensive defence review. Our view was, and remains, that defence needed to be a far higher priority on the Government’s agenda than it had been in the 9 years before we came to office. There had not been a Defence White Paper in 13 years and the NZDF had been left in a void without clearly articulated Government expectations. Strategic direction from the politicians was lacking.

This Government’s view is that defence is an important lens through which our foreign policy is viewed. In line with that, the 2010 Defence White Paper set the strategic vision for the NZDF through to 2035. It identified the policy settings and the suite of military capabilities the NZDF would require to deliver on the Government’s expectations. It set out a framework for reform and efficiencies. At the same time, identifying that new funding injections would be needed if the strategy was to be delivered.

With a clear strategic vision in place the next big challenge was funding. The Government knew it had inherited a significant long term funding gap in defence and it now had to be quantified. That work identified a $537 million shortfall in operational funding by 2021 and a $4 billion shortfall in capital funding by the mid 2020s.

Even with the full delivery of the NZDF Savings and Redistribution programme, we always knew that new money would still be required to deliver on policy intent. As I outlined to the conference back in March, the government and NZDF needed to guard against a Rubicon moment where the money becomes so tight our defence strategy and capability are compromised. As I said then, there is no strategy without dollars.

The next step was to cost every element of defence capability required to deliver the desired outputs that the White Paper set out. That piece of work was the DMRR, or Defence Mid-point Rebalancing Review, and it made clear what the trade-offs between funding, defence capability and defence policy would be.

So in simple terms, after costing all the elements of defence capability that we have and that we are planning to add between now and 2029/30, we have now a clear picture of exactly what defence outputs can be delivered for a given level of future funding.

The Government is fully committed to investing in the NZDF, and the DMRR outcome has reaffirmed this commitment. As a first world nation a credible Defence Force is a non-negotiable.

The DMRR process was robust, analytically sound, and data-driven. It has been identified as an exemplar for other Government departments to follow. A combined effort by NZDF, MoD, Treasury and DPMC over almost a year has delivered exactly what the Government wants to see from defence - a clear and detailed long term vision on how to deliver on the Government’s expectations set out in the White Paper.

I can tell you today that this process is now complete, and the Government has committed to a sustainable long term funding approach for the NZDF out to 2030 which will enable the NZDF to deliver on the capability expectations set out in the White Paper. The details of the funding are still to be announced, and will be made at the next Budget.

So whilst I can’t go into any specifics, the outcome of the DMRR is that the Government is committing to funding a Defence Force that is able to deploy independently on sustained operations, and maintains credible combat capabilities, such as the Naval Combat Force and Special Operations Forces; that can contribute to coalition operations, and help maintain a rules-based international order. It signals to our overseas partners our commitment to contributing to international security.

It means that the capabilities inherent in the Joint Task Force envisioned for the NZDF in the 2011 Defence Capability Plan remain on track. This vision remains crucial to ensuring the NZDF can respond to a wide range of scenarios in the South Pacific, and contribute further afield.

The future funding track for DMRR keeps the NZDF on a path that will build personnel strength to enable the Army to be able to deploy an 800 man Combined Arms Task Group, as envisioned in the White Paper, and will over time increase the regular force size of our Army, Navy and Air Force to allow defence to get the most out of its new and upgraded fleets of ships, aircraft and other equipment.

The completion of the DMRR process does not however, signal the end of the need for defence to continue to plan and to focus on future savings and efficiencies. The next Defence White Paper currently scheduled for 2015, provides an opportunity to validate the policy settings established by the previous White Paper which of course was used as the basis for DMRR.

The continued focus on savings and efficiencies is still vital if our capability is to be sustained. The governance, planning and reporting of continuous improvement efforts, reform programme savings, and savings from any future organisational reform initiatives will be subsumed into the delivery of DMRR rather than managed separately.

I can also tell you today that a revised Defence Capability Plan will be developed for consideration by Cabinet. It will set out the existing mix of capability intentions outlined in the current Defence Capability Plan, illustrate the progress since the last plan, reflect any additional intentions signalled as part of DMRR, and provide a basis for industry expectations for capability projects over the medium term. Noting of course, all key acquisition decisions require a business case to be taken to Cabinet.

This is an important document for industry. While it signals the Government’s capability pathway, it also helps build on the effective relationship between Defence and industry.

And we do have a strong relationship. A good example of the strength of our relationship is the commercial partnership between local company Air Affairs Ltd and the Defence Technology Agency on the diver training system METRES, which has been sold to the US Navy. This cutting edge technology will return significant revenue to the NZDF, and is providing global interest for a Kiwi defence product.

Another positive development for the defence industry is the new Government sourcing rules that came into place on 1 October. The new rules promote a value for money approach to procurement, taking into account the total cost of ownership and other direct benefits, rather than just prioritising the cheapest price.

Businesses will receive more information about procurement opportunities, and will have longer timeframes for responding to tenders. Agencies have also been encouraged to engage with the market earlier to build relationships, and stimulate competition and innovation.

These changes will make it easier for the defence industry to do business with the Government, including for smaller Kiwi companies, as that is something that we welcome.

I want to ensure my Cabinet colleagues and I are well sighted on opportunities to involve local industry. I also want to encourage our international suppliers to look at ways to partner more closely with local industry.

Working within the framework of the new Government sourcing rules, my officials will ensure that options for local industry are provided to Ministers as part of major defence capability decisions.

While we should always look for the ‘lowest risk, low cost and high quality’ option, I am also keen to ensure that we have a more sophisticated understanding of how whole of life cost and effectiveness of our major acquisition projects can be enhanced by engagement with local industry. Plainly any local industry involvement will also have welcome positive flow-on effects through training, jobs and economic development.

So, defence has a busy few years ahead of it in the capability sphere. Work already underway will continue at a steady pace, and new projects will come on stream as the revised Defence Capability Plan takes shape. The DMRR, one of the most intensive and rigorous examinations of defence capabilities and costs ever undertaken in New Zealand, has delivered on its aims.

It means the capability objectives of the White Paper are now reinforced by a robust long term funding commitment, which achieves a balance with our policy and capability intent. This has provided Government real confidence in the NZDF’s future path. I believe defence industry can look forward to many more opportunities for us to work together collaboratively.

Thank you.


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