Royal New Zealand Navy Discussions and Updates

[Todjaeger]

Don't fight the white.

Depreciation and the cost are capital are a reality for anyone in the corporate sector, and the rest of the state sector. I've yet to hear a convincing argument that Defence should be any different.

As Assail mentioned, the objectives for the corporate sector, as well as sources of funding etc are completely different from Defence and other state/gov't functions.

The objective of a business is to make money for the owners/investors. As a result of that, the total value of the business needs to be known at various points for a number of reasons, amongst them tax exposure, total value in the event of sale, value for collateral, etc

Plus as Assail mentioned, whether or not there is an adequate (or any) ROI. If a business earns $1mil. carrying out business activity, but uses up $3 mil. worth of equipment, then there is a net decrease in value to the business.

OTOH for something like Defence, the product is intangible, since the product is the defence and security of NZ and NZ interests. That is not something the can really be given a price tag.

Given also the source of funding for gov't departments (taxes, fees, etc) depreciation has no relevance, because the equipment being depreciated has no role in funding the department. In business, depreciation plays a role in part to determine ROI, but also as an estimate on the value of that piece of kit, in the event the kit were to be sold, or to estimate when it would require replacement. It has also been used to 'cook' the books of some companies, by using a skewed depreciation estimate. The US company Waste Management comes to mind, where at one point, the company books were using a 55-year est. depreciation cycle for their rubbish-hauling vehicles.

Now depreciation for most of the NZDF kit makes little sense, since from a business/commercial enterprise POV, most of the kit has no predictable resale value. Take a $500 mil. frigate at initial purchase for instance. Assuming a full 30-year sevice life, one could not point at the frigate after 15 years of service (before or after MLU) and state that it is worth $250 mil. Nor can one point to the frigate at different periods in it's service life to determine the ROI from the $500 mil. purchase, because the frigate is not generating revenue.

If anything in business, defence and emergency services function like insurance expenses and/or hazard mitigation efforts. They are sunk costs, generating no income or revenue but are in place to prevent or mitigate the appropriate circumstances. And even that is not a particularly good analogy, since in many instances, the monetary value can really only be determined after the fact, if it was needed.

 

[Lucasnz]

The above points in terms of Capital Charge and Depreciation are all valid. Capital Charge in my view is completely irrelevant across all of government, not just defence. I look at this way; why should NZDF or some other agency be required to account for 8.5% (might be lower now) on an asset that allows the government to respond to the disasters like the Chch earthquake. In other words there is no factoring in of the "Public Benefit" that agencies like the NZDF provide the government.

Historically Capital Charge was introduced into the business world to ensure managers were accountable for the assets they controlled. Governments shouldn't be seeking a return on there investment via commercial means they should be measured in terms of health outcomes, the ability of the NZDF to meet government objectives etc.

As far as I know NZ and the UK are the only countries that use Capital Charge at a Government Level. Australia introduced it but got rid of it pretty quickly.

Depreciation is a different beast given that the New Zealand Government operates on an accrual basis as opposed to the early 1980's cash basis. There are no separate financial reporting standards for the public sector in New Zealand (at present), though some standards allow for minor modification. Consequently all government departments must account for depreciation under the applicable New Zealand Financial Reporting Standards which themselves are based on International Accounting Standards (NZIAS).

With Assets like Frigates, Buildings, Plane etc. NZIAS 16 requires that the assets be valued at "fair value", not necessarily book value where the values can be estimated reliably. I suspect defence would find it hard to re-value military assets.

Within the context of frigate there are a number of sub-components that would impact on Depreciation. While the hull might have a 30 year life Defence might recognise that the electronics might only last for 15; so the sub-components that make up a ship will not necessarily be evenly spread over the life of the hull.

 

[swerve]

Todjaeger:

Yep. The application of accounting standards designed for commercial businesses to state-owned firms & state organisations providing services which could be provided by private firms was a good thing, enabling much better comparisons of costs.

Extending it to all government activities was crazy.

 

[KiwiRob]

I am not, 2% is the nato minimum, the new zealand government is spending 82Bn or 45% of GDP, that would equate to 4.4%-8.8% of current government expenditure if total expenditure remained unchanged. Considering national security is a core government role, up there with law, order, and enforcement, it is not unreasonable at all, and should be a priority, with luxuries like wealth redistribution coming afterwards.

If we arent going to maintain a credible military capability then we may as well save what we currently spend and disband the armed forces entirely.

2% might be the NATO minimum but only a few NATO members spend anywhere near that 2%.

Here’s a look at how European countries -- both in and out of NATO -- and how much of their GDP they spent on defence in 2012 and 2013, based on World Bank statistics. (NATO countries are marked with an asterisk.)

Georgia: 2.9 percent
Britain*: 2.3 percent
Greece*: 2.6 percent
France*: 2.3 percent
Poland*: 1.9 percent
Portugal*: 1.8 percent
Italy*: 1.7 percent
Bulgaria*: 1.5 percent
Finland: 1.5 percent
Denmark*: 1.4 percent
Norway*: 1.4 percent
Germany*: 1.3 percent
Sweden: 1.2 percent
Belgium*: 1.1 percent
Lithuania*: 1 percent
Spain*: 0.9 percent
Switzerland: 0.8 percent
Austria: 0.8 percent
Hungary*: 0.8 percent
Luxembourg*: 0.6 percent

http://www.washingtonpost.com/blogs...n-defense-heres-how-much-theyre-shelling-out/

 

[ASSAIL]

Todjaeger:

Yep. The application of accounting standards designed for commercial businesses to state-owned firms & state organisations providing services which could be provided by private firms was a good thing, enabling much better comparisons of costs.

Extending it to all government activities was crazy.

Call me a cynic but the application of a capital charge/depreciation is a good way for govts. to underfund defence whilst assuring voters that a credible percentage of GDP is being allocated to defence

 

[40 deg south]

Call me a cynic but the application of a capital charge/depreciation is a good way for govts. to underfund defence whilst assuring voters that a credible percentage of GDP is being allocated to defence

I'm not sure how that would work, given that (AFAIK) the capital charge applies uniformly across all government departments. It could give a misleading impression of the dollar amount spent on defence, but if every department is similarly affected surely it wouldn't change the percentage.

It is an accounting method the government adopted many years ago, and the probability of Defence being exempted from it is close to nil.

 

[40 deg south]

An Taoiseach Confirms

Since there has been some mention of a third OPV, the Irish Naval Service has just achieved this goal.

Interesting that is a half-sister to our OPVs, with a 5-metre stretch but no helicopter facilities.

E$54 million euros seems a reasonable price for something built in the UK.

 

[Zero Alpha]

I'm not sure how that would work, given that (AFAIK) the capital charge applies uniformly across all government departments. It could give a misleading impression of the dollar amount spent on defence, but if every department is similarly affected surely it wouldn't change the percentage.

It is an accounting method the government adopted many years ago, and the probability of Defence being exempted from it is close to nil.

Defence is one of the departments recognized as being capital-intensive. In practice this means Treasury near-automatically supports applications for funding baseline adjustments when there is a need to increase the amount of capital employed.

Reading comments here, it's clear there is a fair degree of misunderstanding of what the Capital Charge is intended to do. It is not intended to represent a return on capital employed, or any similar such profitability measure. It's a mechanism to accurately capture the cost of capital (essentially borrowing) to fund the asset. The level of the charge varies over a rolling 3 year period. The current Capital Charge is significantly less than it was in the late 90s/early 2000s, reflecting the lower cost of capital. In very simple terms, the Capital Charge is the cost of borrowing the money to fund the asset.

Depreciation is a different kettle of fish. In most simple terms, it is the allocation of the cost of the asset, over its estimated life. Effectively the cumulative depreciation of an asset is set aside to fund asset replacements. Like Capital Charge, depreciation funding is specifically allocated by Treasury.

Both of these tools effectively promote sensible capital asset planning, allowing the department to make choices on how best to employ its funding. Simplistically this means choices like ownership versus leasing can be made. At a more sophisticated level it means reinvestment decisions can be made based on a total cost of ownership.

None of this stuff is unfamiliar for people working in capital-intensive companies. I suspect the reason so much criticism is leveled against fairly simple accounting concepts is the lack of experience most in the defence community have with real-world problems of financing asset lifecycles. It's all a bit much like voodoo mumbo-jumbo for people who don't work with these issues all the time.

Update: The quote below may be useful.

The Spirit of Reform: Managing the New Zealand State Sector in a Time of Change

The capital charge has a dual purpose: it signals that capital is not costless and should be managed as would any other cost of production, and it spurs managers to include the cost of capital in comparing the cost of outputs produced by government entities with the cost of obtaining the outputs from outside suppliers. The charge puts internal contracting on the same footing as contracting out and encourages full cost recovery of outputs sold to governmental or private users.

When it was introduced in 1991, the capital charge generated much confusion, undoubtedly because it was so novel and unfamiliar. Many tough issues had to be confronted in valuing assets and in computing the charge. Within a few years, however, the charge was widely accepted by chief executives and headquarters managers. There appears to be less appreciation of it in field and regional offices, where the charge tends to be viewed as a bookkeeping exercise rather than as an incentive to manage assets.

On introduction, departments were compensated for the charge; their appropriations were increased by an amount equal to the charge. (No compensation was provided for the charge apportioned to outputs sold to third parties.) Since then, changes in the capital charge due to changes in net worth (other than through revaluation of assets) has not been automatically compensated. If a department disposes some assets, and returns capital to the Crown, the charge will be reduced accordingly. Inasmuch as the charge is part of the pool of operating funds that can be used at the discretion of the chief executive, the money saved by having the capital charge reduced can be used for other operating purposes. This rule gives departments a strong incentive to divest surplus assets, to maintain working capital and inventories at efficient levels, and to consider renting rather than buying office accommodations and other facilities. Surveys conducted by the Treasury and outside consultants confirm that the capital charge has spurred departments to actively manage their assets and to incorporate the cost of the charge in setting user charges.

http://www.ssc.govt.nz/spirit-of-reform

 

[ASSAIL]

Defence is one of the departments recognized as being capital-intensive. In practice this means Treasury near-automatically supports applications for funding baseline adjustments when there is a need to increase the amount of capital employed.

Reading comments here, it's clear there is a fair degree of misunderstanding of what the Capital Charge is intended to do. It is not intended to represent a return on capital employed, or any similar such profitability measure. It's a mechanism to accurately capture the cost of capital (essentially borrowing) to fund the asset. The level of the charge varies over a rolling 3 year period. The current Capital Charge is significantly less than it was in the late 90s/early 2000s, reflecting the lower cost of capital. In very simple terms, the Capital Charge is the cost of borrowing the money to fund the asset.

Depreciation is a different kettle of fish. In most simple terms, it is the allocation of the cost of the asset, over its estimated life. Effectively the cumulative depreciation of an asset is set aside to fund asset replacements. Like Capital Charge, depreciation funding is specifically allocated by Treasury.

Both of these tools effectively promote sensible capital asset planning, allowing the department to make choices on how best to employ its funding. Simplistically this means choices like ownership versus leasing can be made. At a more sophisticated level it means reinvestment decisions can be made based on a total cost of ownership.

None of this stuff is unfamiliar for people working in capital-intensive companies. I suspect the reason so much criticism is leveled against fairly simple accounting concepts is the lack of experience most in the defence community have with real-world problems of financing asset lifecycles. It's all a bit much like voodoo mumbo-jumbo for people who don't work with these issues all the time.

Update: The quote below may be useful.

The Spirit of Reform: Managing the New Zealand State Sector in a Time of Change



http://www.ssc.govt.nz/spirit-of-reform

Sensible capital asset planning is the reason why the total cost of an asset should be allocated when acquired, including borrowing costs, and depreciation accounted for over the assets life. Australian purchases include these in their nominal price and this is the very reason why price comparisons of various nations defence assets need to be carefully examined.
These concepts are not voodoo as you suggest. I have owned a capital intensive business for the last 18 years and have sat on the board of a public listed company, I fully understand the principles.
From your quoted article - this well fits service providing govt. departments where economies are sought in the provision of these services and managers made aware of the financial ramifications of their decisions. However, unless the capital charge was not included in the purchase price of major assets it still makes little sense for major defence assets IMHO.

 

[gf0012-aust]

Sensible capital asset planning is the reason why the total cost of an asset should be allocated when acquired, including borrowing costs, and depreciation accounted for over the assets life. Australian purchases include these in their nominal price and this is the very reason why price comparisons of various nations defence assets need to be carefully examined.
These concepts are not voodoo as you suggest. I have owned a capital intensive business for the last 18 years and have sat on the board of a public listed company, I fully understand the principles.
From your quoted article - this well fits service providing govt. departments where economies are sought in the provision of these services and managers made aware of the financial ramifications of their decisions. However, unless the capital charge was not included in the purchase price of major assets it still makes little sense for major defence assets IMHO.

The other thing Aust does is factor in generous contingency - US SecDef seemed to be impressed with the contingency model we use. Contingency can be up to 30% of actual + through life costs

 

[kiwi in exile]

Australian Helicopter Performs Basic Fast Rope Course >> Naval Today
Do our naval boarding teams train for this?
Have seen photos of EIC training for fast roping, and I thing a few years back there was a TV3 clip of NZ police fast roping into the interislander from a Huey.
Would be a useful capability to have.

 

[gf0012-aust]

Australian Helicopter Performs Basic Fast Rope Course >> Naval Today
Do our naval boarding teams train for this?

Yes, multiple NZ agencies practice this

 

[Zero Alpha]

Yes, multiple NZ agencies practice this

It's somewhat controversial.

Going back a few years, only the SAS dealt with boats/ships. IF you look at YouTube there is some footage of the STG trying to fast rope on to a ferry using a pair of BK117s (One from Helipro, and the LifeFlight machine). The Helipro BK departed from the briefing and nearly caused an air-to-air.

Several organisations say they can perform the task. Few do it credibly.

 

[gf0012-aust]

Several organisations say they can perform the task. Few do it credibly.

some are less credible than others, but they still have to keep their ends in, and practice in a variety of ways

Gen public in Oz and NZ are pretty clueless (no fault of their own as press aren't usually invited) as to how often the various shops practice these skills

 

[MrConservative]

some are less credible than others, but they still have to keep their ends in, and practice in a variety of ways

Gen public in Oz and NZ are pretty clueless (no fault of their own as press aren't usually invited) as to how often the various shops practice these skills

And of course some shops were only getting into this business in recent years.

With some it was probably better to not to invite the media along when on the skills development curve.

 

[kiwi in exile]

The latest APDR has a breakdown of the new systems for the Kiwi ANZACs

Rheinmetal MASS softkill system.
SAGEM Vampir IRST
Kelvin Hughes Sharp eye 2d radar
Thales SMART-S Mk 2 3d radar

Compares ESSM to CAMM. States that ESSM block 2 active version will erase CAMMs advantages, but that it isn't even at the design stage yet. CAMM maritime launch system will replace the VLS. Soft launch is a cheaper, lighter systems and blast and heat are no longer issues. My concern is that removing the Mk41 VLS means no anti ship weapons in future.

 

[ngatimozart]

The latest APDR has a breakdown of the new systems for the Kiwi ANZACs

Rheinmetal MASS softkill system.
SAGEM Vampir IRST
Kelvin Hughes Sharp eye 2d radar
Thales SMART-S Mk 2 3d radar

Compares ESSM to CAMM. States that ESSM block 2 active version will erase CAMMs advantages, but that it isn't even at the design stage yet. CAMM maritime launch system will replace the VLS. Soft launch is a cheaper, lighter systems and blast and heat are no longer issues. My concern is that removing the Mk41 VLS means no anti ship weapons in future.

From what I understand the Mk41 VLS in the RNZN FFHs are not the strike length variant so to operate any VLS AShW from the frigates we would have to change out the VLS anyway to the strike length variant. Removing the standard length Mk 41VLS however does preclude acquiring something like ASROC for these frigates in future. Are you sure they are removing the Mk41 VLS? Sea Ceptor is compatible with the Mk41 VLS so it would be cheaper to leave it in situ rather than replacing it.

 

[StobieWan]

I'd have thought they'd just re-use Mk41 if it's already in place and wired - why re-invent the wheel?



We've seen CAMM out of Mk41 via the exls cannister I believe, it's not difficult to do and it'd be better to keep Mk41 in play.

 

[StevoJH]

It could be due to weight issues. The dedicated Sea Ceptor VLS might reduce the weight by enough to make the switch worthwhile.

Especially since they can get rid of the illuminators as well.

 

[Todjaeger]

It could be due to weight issues. The dedicated Sea Ceptor VLS might reduce the weight by enough to make the switch worthwhile.

Especially since they can get rid of the illuminators as well.

It is possible, but the tests have shown that Sea Ceptor can be quad packed into a Mk-41 VLS. The questions I have are what is the cost and impact on ship stability by removing the Mk-41 VLS, and how many Sea Ceptor missiles can be carried by a soft launch VLS which fits into the space occupied by the current Mk-41 VLS.

-Cheers