Introduction
9.1 Disposal of NZDF assets is covered by two documents – the CMF and DFO 52. The CMF provides a framework for “capability disposal” as part of the capability definition, acquisition, in-service, and disposal cycle, whereas DFO 52 provides the rules, regulations, and delegations that control disposal of assets.
DFO 52
9.2 DFO 52 Chapter 12 prescribes the procedures for the disposal of surplus stores and applies to all Services. It does not prescribe any value limits, leaving the disposal to the respective Service Chief. The DFO provides for a variety of disposal methods as deemed appropriate by the Service Chief or delegate. It does note that “gratuitous disposal” is a valid method, and Section 9.17 provides delegations, whereby items to be gifted and valued over $20,000 require Ministerial approval.
9.3 At the time of writing, the MoD’s Evaluation Division were undertaking a review of the disposal of major NZDF equipment. While their final report is yet to be released, indications are that there is little wrong with what the Services are doing as far as process goes, but there is a need for earlier communication with the Minister to establish any “community benefit” directions – which differ from the “best monetary return” philosophy currently used by NZDF and Treasury – and to provide policy advice on options. There appears to be a gap in some aspects of the NZDF's internal policy guidance as well.
9.4 Comments from the questionnaires and interviews conducted by DCAMP generally agreed that the process outlined in DFO 52 is robust, well understood, and appears to work well. There was some concern that it is not applied uniformly across all Services and suggestions that this might be solved by a central, joint disposal agency. There was greater concern over disposal of large assets, which requires better planning, management, and oversight to mitigate potential risks.
9.5 DFO 52 does not provide a process for identifying when an asset is “surplus” and to be disposed. It states (12.2) that “Single Service stores accounting instructions are to include procedures covering the identification of and disposal of surplus stores.” Whether larger assets (e.g., a ship) come under this DFO is not clear.
Review of DFO 52
9.6 Questionnaire comments noted that implementation of DFO 52 varied between the Services and possibly even between bases of the same service. Being able to identify clearly when assets (especially larger items) should be disposed of is important. Significant assets or groups of similar assets should have a strategic asset management plan that optimises both the in-service operating/maintenance costs and the disposal benefits.
9.7 The establishment of the Joint Logistic Support Organisation (JLSO) is an opportunity to review DFO 52 to ensure a more strategic approach to disposal. This review could examine whether there are efficiencies in a central disposal group, and whether this would enhance the identification of all risks associated with disposals, including
military, fiscal, legal and political risks. Like acquisition, disposal is a specialised skill, and should be considered as part of the capability replacement process. The letter of expectation from the Minister of Defence to the incoming CDF dated 27 June 2006, has directed review of asset disposal procedures within the NZDF.
Disposal under the CMF
9.8 The current CMF (May 2004 version) mandates a process for the development of a disposal strategy (CMF Chapter 6). It envisages an ongoing process (CMF 6.1) beginning when the new capability is first defined (CMF 6.2), and updated during the Acquisition (6.3), Introduction into Service (6.5), and In-Service (6.7) phases. It requires detailed plans, identification of the costs of disposal and the resources required for disposal. It identifies the Service manager (6.7) as responsible for the disposal of capability at the end of its service life.
Identifying end of Operational and Economic Life 9.9 For any item of SME, there are three possible “ends of life”:
♦ end of useful life, which can occur at any time after acquisition – for example if the associated capability is withdrawn or the asset is rendered technologically obsolete
♦ end of operational life, which occurs when the asset’s effectiveness decreases to the point where it can no longer be relied on to be serviceable
♦ end of economic life, which occurs when it ceases to be cost-efficient to keep the asset in service due to escalating maintenance, repair, or operating costs. 9.10 Information on any rising cost of maintenance and/or declining operational availability
can be obtained from NZDF financial systems and from OPRES. Regular comparison of this data would give an indication of when an “end of life” is being reached. However, this process can generally only identify ex post when the asset should be withdrawn from service. It is unlikely to give a prior indication sufficiently far in advance to provide the lead-time needed for purchasing a replacement and introducing it into service.
The Need to Plan in Advance for Disposal
9.11 Although the CMF requires a disposal strategy to be developed and updated, it does not provide a process to identify in advance when an asset should be considered for disposal. More analysis is required on this aspect, including development of through- life asset management plans, and developing cumulative cost and effectiveness curves. Whether the asset should be replaced, and with what, is a separate process that should follow the CMF framework.
9.12 A key risk to disposal that needs to be addressed during acquisition derives from obtaining the permission of the exporting country to dispose of military equipment to a third party. This is a key barrier to the success of a disposal. It is sometimes unavoidable, since the stark choice may be between having the asset through its life or having the freedom to maximise its disposal value.
Impact on NZDF Finances of Asset Disposal
9.13 In general, the financial return on an asset disposal should be maximised and this return should be planned for and incorporated into projected budgets. This occurs in most cases currently for both LTDP and CP Minor projects.
9.14 There is no review process to test whether proceeds are maximised and in many cases, estimating both the amount and timing of proceeds has proven problematic. In some cases assets are seen as providing wider social benefits and proceeds are not maximised. An example is the sinking of frigates as maritime attractions. DCAMP considers that the process for managing these decisions is transparent.
Recommendation 14
That the CMF revision include a procedure for assessing when end of life, both operational and economic, has been reached, regardless of whether the asset is to be replaced. This determination should be made pursuant to an analysis of financial and OPRES data.
Recommendation 15