Dissension in defence ranks ...

A scathing report outlines how a $212 million defence project blew out to $677 million because officials didn't talk to one another. ANDREW LAXON explains.

When Auditor-General David Macdonald was called in to examine how the Army tried to buy new vehicles, he thought it would be relatively straightforward.

Ten months later, he found himself reporting back on a saga of bickering and professional jealousy in the Defence Force which undermined the biggest Army re-equipment programme since the Second World War.

He found mistrust and poor communication between the Ministry of Defence, the Defence Force and the Army.

His report outlines how the system of defence purchasing works, what went wrong during the search for new vehicles, and what should be done to ensure there is no repeat.

How the system works

The Government makes the final decisions on big equipment purchases. The politician responsible is the Minister of Defence - National's Max Bradford until November 1999, since then Labour's Mark Burton.

The Ministry of Defence, headed by the Secretary of Defence is the Government's main civilian adviser. Graham Fortune took over from Gerald Hensley in this job in 1999.

The Chief of the Defence Force, Air Marshal Carey Adamson, is the Government's main military adviser. He also commands the Defence Force, made up of the Army, Navy and Air Force.

Each service has its own head. The Army chief, confusingly known as the Chief of General Staff, is Major-General Maurice Dodson. The report says his role is to identify what the Army needs - in this case new vehicles - and recommend to the Defence Force how to provide it.

The Defence Force is supposed to evaluate the Army's case and ensure the request meets the country's overall needs. The ministry advises the Government on what equipment would best serve New Zealand's defence policy.

In practice, the report says, the system is not working because of confusion about everyone's role. In particular, the Army feels left out of the loop.

These factors were at work in the fiasco which led to the report - the purchase of new light armoured vehicles for the Army.

How it went wrong

May 1997: Based on a defence assessment which said it needed light armoured vehicles rather than tanks, the Army asked the Defence Force for an upgrade of its M113 armoured personnel carriers, which dated from the late 1960s.

The Army also had 26 obsolete Scorpion light tanks, which were withdrawn from service that year.

The new fleet would have consisted of 69 upgraded armoured personnel carriers and 12 new fire-support vehicles replacing the Scorpions at a cost of $160 million.

The Army was apparently keen to continue with tracked vehicles, but the Defence Force was not convinced, noting that other armies were switching to wheels.

March 1998: The cabinet approved the upgrade and purchase, now costed at $180 million.

September 1998: The Army completed a "wheels versus tracks" review, which concluded that wheeled vehicles were more mobile, and therefore more suited to New Zealand's needs. It then recommended buying a fleet of wheeled transport vehicles and separate wheeled fire-support vehicles.

The report is highly critical of the Army for not making up its mind up earlier on the kind of vehicle it wanted: "In our view, the debate should have been resolved before putting proposals to cabinet. Not doing so caused confusion."

November 1998 to February 1999: Defence Minister Bradford ordered officials to examine a joint purchase with Australia of a wheeled armoured vehicle, known as the Aslav. The 20-year-old design was ruled out because it could not be fitted with enough additional armour to protect infantry travelling to and from a battlefield - one of the Army's main requirements.

March 1999: The Secretary of Defence advised Mr Bradford that the older Australian vehicle was not suitable but a new variant, known as the LAV3, would be. He recommended a tender process, under which the vehicles would arrive by July 2001. Ministry staff later called this timetable unrealistic.

May 1999: The cabinet approved the purchase of 24 fire-support vehicles and enough mobility vehicles (later estimated as 60) for a battalion and one company. All the vehicles would be wheeled as part of a new policy to "motorise" the Army, which the report says should have been debated much earlier.

The cost had crept up to $212 million.

At this stage, a spat broke out between the Army and the ministry and Defence Force over vehicle specifications. The Defence Force said it wanted the Army to describe what the vehicle should be able to do - for example, cover certain types of terrain at certain speeds. But the Army kept producing overly specific demands, such as minimum ground clearance, which were likely to put off potential bidders.

The debate would later turn into accusations that the very specific requirements were designed to get only one vehicle - the LAV3.

June 1999: The ministry decided on an independent review of the specifications by HVR Consulting Services, a British company.

The report expresses surprise at the ministry's choice and the lack of documentation supporting it, but rejects claims made later that HVR had a conflict of interest.

July 1999: HVR's report said the detailed specifications were possibly based on the LAV3. But the report says "the most important recommendation in HVR's report was that the MoD should not go to tender - the LAV3 vehicle was so far ahead of the competition that HVR recommended that the MoD should consider direct purchase, rather than conducting a tender."

August 1999: Despite the report's advice, the ministry decided to go ahead with the tender to get a range of options at the lowest possible price.

The report criticises this decision, saying New Zealand could have bought the LAV3 at the same price as the Canadian Government. Delaying only meant increased costs through military inflation and the falling dollar.

October 1999: Bidders objected that the specifications seemed designed to choose the LAV3. The ministry decided on "waivers" for bidders not meeting all the requirements.

December 1999: Despite the waiver system, only two bids were received - for the LAV3 and the Fuchs, made by Henschel Wehrtechnik, of Germany, which did not meet several key requirements.

February 2000: The LAV3 was selected as the preferred vehicle for further negotiation.

By this time, another problem was emerging. New Zealand had ordered a combination of armoured vehicles, most without a cannon. The LAV3 had a turret and a 25mm cannon, but Army and ministry officials who visited the manufacturers, General Motors Defence, in Canada had assumed it would be cheaper to make without the cannon. In fact it was much more expensive.

However, there was an upside. If all the vehicles had cannons, the Army could equip two full battalions with 105 - at an increased cost of $255 million, $43 million more than the Government had approved. The report criticises the ministry for not going back to the Government for permission to spend the extra.

September 2000: Despite continuing disagreement between the Army, which wanted to push ahead with the LAV3, and the Defence Force and the ministry, which wanted a partial delay, the Government decided to buy 105 vehicles over five years, even though the cost had now ballooned to $646 million and the first vehicles would not arrive until September 2003.

The cost increase included a $60 million loss in value of the New Zealand dollar because of the ministry's failure to provide foreign exchange cover.

August 2001: The updated cost estimate is now $677 million.

The report recommends

* In future, large defence purchases should be overseen by a steering committee, chaired by the Secretary of Defence and possibly including the Treasury.

Large defence purchases involve significant fiscal risk, so Treasury officials should monitor the process and raise concerns if necessary. The committee should receive independent reports from experts "not inhibited by the culture and political environment of the organisations".

* There must be an improvement in the dysfunctional relationship between the Army, the Defence Force and the ministry, which mistrusted one another's motives throughout the debate.

The report notes that "strong personalities were involved and views were expressed in a very forthright and robust fashion".

It strongly supports a Government review of the structural relationship between the Defence Force and the ministry and urges that this should include individual services such as the Army.

* The defence planning system should be reviewed to see if it can ever operate effectively or should be replaced. The report notes that after 10 years it is still not accepted by some of the people whose cooperation is needed to make it work.

It says an effective planning system would have ensured there was a detailed analysis of what equipment was needed and early identification of its maintenance requirements and the key issues in the "wheels versus tracks" debate.

* Outside experts should be brought in much earlier for future projects.

* The Ministry of Defence should consider buying direct instead of tendering if it is obvious which is the best type of equipment to buy. With the price of military equipment rising by 10 to 12 per cent a year and the dollar falling against North American currencies, quick action is often needed.

New policy guidelines will determine how this decision should be made.

* The ministry should be more flexible about "essential requirements" in tenders, as failure to meet just one specification can disqualify a bidder.

New Zealand should look for commercial "off-the-shelf" solutions, rather than asking for specific technical requirements which few companies would be prepared to meet for a small country.