Costs to and including the 15 March 2000 payment

As at 29 February 2000, approximately $NZ35.4 million had been paid to the United States Government in scheduled lease and support payments. By 15 March, this figure is scheduled to increase to approximately $57 million. Not all of the moneys paid as support payments have, however, been drawn down.

Additional project costs incurred so far by NZDF/MOD total just over $1 million. They include capitalisation of earlier costs and administrative costs associated with stationing the resident project management team (see below) in Utah.

Categories of expenditure where commitments may accrue are as follows:

• Airfares, hotel accommodation and allowances for attendance at on-going reviews and definitisation conferences for approximately 30 personnel;

• Programme Management Personnel - Salaries and other employment related costs for six personnel thus far assigned permanently to manage the programme for the United States DoD;

• Activation Units - Time and material funding to cover the costs of undertaking programme planning and definitisation; and

• International Affairs Oversight - Partial salary and other personnel related costs for United States Air Force International Affairs oversight.

• Pratt & Whitney (engine manufacturer) - Time and material funding to cover the costs of undertaking programme planning and definitisation;

• Lockheed Martin (airframe manufacturer) - Time and material funding to cover the costs of undertaking programme planning and definitisation; and

• Other Costs - As a result of definitisation, costs will start to accrue against the award of contracts to commercial companies or release authority from the United States DoD stock for spares and support equipment.

• Travel, hotel costs and allowances for attending planning and definitisation meetings;

• NZ Resident Team in Utah (One MOD project leader and four RNZAF personnel); and

• On-going costs for:
  - communications;
  - housing rental;
  - overseas posting allowances;
  - utilities;
  - insurance;
  - storage of personal effects; and
  - medical coverage.

The support payments schedule is for planning purposes only. As at the end of February, the reactivation programme, and therefore the draw-downs on it were behind schedule. Slippage has the effect of spreading these payments outwards. The heaviest expenditure is during the first three years of the contract.

If the lease were not renewed after five years, or if the purchase option not exercised, New Zealand would still have had to bear the sunk costs expended up to the point of termination. At the end of five years, these are estimated at NZ$276 million, and at 10 years, NZ$363 million. There would also be additional costs associated with returning the aircraft to the United States.

This section outlines the fiscal impacts of the issues raised in the following terms of reference:

5.3 Consider the impact of the project on the current Defence capital equipment expenditure plans and on the total level of Defence expenditure in the current and following fiscal years;

5.5 Assess the consequences of cancellation, deferment, amendment or confirmation of the project: fiscal cost, diplomatic and legal considerations;

5.6 Examine the implications of decisions on the F-16 project for retention of a broader air strike capability; and

5.7 Identify costs and benefits of continuing to maintain the Skyhawk capability and the costs and benefits of early disposal.

The figures are based on information supplied by the New Zealand Defence Force (NZDF) and the Ministry of Defence (MoD), and have been collated by the Treasury. A Treasury memorandum accompanies this report.

There are substantial risks around some of the figures provided to the Treasury by NZDF. The figures have changed a number of times during the review and on past project cost experience, are likely to be under-estimated.

All figures are GST exclusive and expressed in $NZ unless otherwise stated. The 10-year capital plan figures are based on an exchange rate of $NZ1=$US0.52.

As a consequence of going ahead with the F-16A/B package and bringing the replacement of the Skyhawks forward, there is a significant cash impact on the Defence budget.

Future options and costs

The broad thrust of the terms of reference requires four options to be considered. They are to either: confirm, cancel, defer or amend the current 'lease-to-buy' deal. The implications and costs of these options are outlined below.

The analysis is based on a number of capital and operating scenarios over a ten-year timeframe (unlike the NPV analysis discussed earlier, which looked at the through-life costs over 25 years). The implications associated with the following scenarios clearly extend outside this timeframe and, therefore, need to be considered in the appropriate context.