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Please find below the summary and recommendations of Derek Quigley's review of the F16s lease-to-buy deal. We have not included the full review as it is rather lengthy.
The full report is available online at http://www.executive.govt.nz/f16/index.htm, or we can email it to you as a Word attachment. We can also post you a copy, at a cost of $11-50 (cost price copying and postage).
Review of the lease of F-16 aircraft for the Royal New Zealand Air Force
by the Hon. Derek Quigley
6 March 2000
pages 54 to 58.
Summary and Conclusions
1. This review is based on three long-standing defence policy assumptions:
· that balanced forces should be available to enable New Zealand to contribute to alliance operations;
· that air combat capability is an essential part of a balanced force; and
· that the three designated roles for the air combat force, close air support, air interdiction and maritime strike are appropriate for the NZDF's air combat capability.
2. There is no priority-setting mechanism in the NZDF, either within the Services or between them, that effectively and consistently links individual activities or projects to the Government's most pressing national security concerns. Defence is still far too inwardly focused.
3. The NZDF is now in a parlous fiscal position. The pressure is most acute in the capital plan area, with a capital expenditure requirement over the next ten years of more than $5 billion. This figure contrasts with the 20-year capital estimate of $4.4 billion made in the 1997 Defence Assessment (DA97).
4. The NZDF is also experiencing cash-flow problems and will require capital injections (i.e. extra money over and above what it receives from its depreciation fund) in excess of what had been contemplated in DA97. At that time, an extra $509 million was contemplated for the following 10-year period. Today - based on current estimates, which the NZDF cannot guarantee - the figure is approximately $1 billion.
5. The estimate of $1 billion does not however illustrate the extent of the immediate problems if what Defence regards as essential projects, such as upgrading Army communications, acquiring new armoured vehicles, purchasing new light operational vehicles, and the RNZAF Project Sirius go ahead. These four projects alone are expected to require an extra capital injection of around $683 million over the next two to three years, over and above the capital injection required for current capital commitments.
6. It is against this background that the F-16 project needs to be considered.
7. The RNZAF's Skyhawks were scheduled in DA97 to be replaced between 2007/08 and 2010/11 at a cost of $653 million based on 1997 dollars and the then exchange rate.
8. In terms of existing policy, the critical mass for the air combat force is a squadron of 18 aircraft. The deal to replace the Skyhawks with 28 F-16s - on a basis of "take it or leave it" - was approved by the Cabinet in November 1998. Twenty-two are to be flown, and the remaining six used for spares. Delivery is scheduled during the period August 2001 to April 2002.
9. The F-16 contract is a "lease to buy" arrangement which allows either party to exit on 180 days' notice. New Zealand has an option to purchase the planes, which can be taken up at any time during the period of lease, but does not have to be taken up. This option, until exercised, imposes no liabilities on New Zealand, and New Zealand is therefore not locked into the F-16 deal indefinitely.
10. However, assuming the option to purchase is exercised, and the aircraft upgraded, the cost would be $1000 million plus. In contrast, the basic lease and regeneration package provides the RNZAF with aircraft - until June 2009 - for around $363 million. A full upgrade would enable full participation in peace-enforcement missions. If not upgraded, the aircraft would still have the performance and weapons delivery accuracy to participate in lower order peace support operations.
11. Even at $1000 million, the deal is a good one. Net present value calculations for nine different scenarios contrasting the F-16 A/B package with new F-16 C/Ds ranging in price from US$30 million each down to US$12.5 million (both excluding spares and upgrades), give a positive benefit in favour of the F-16 A/Bs from $342 million to $21 million.
12. The F-16s New Zealand has contracted to acquire are vastly superior in performance - even before upgrading - to the RNZAF's current Skyhawks. Their acquisition could also enable the current fleet of A-4K Skyhawks to be sold.
13. The F-16s come at a cost in terms of NZDF finances. Capital is now required earlier than the scheduled Skyhawk replacement date. Estimated operating costs are also higher than for the Skyhawks. The capital impact in particular, means that there are less funds for other NZDF projects, particularly over the next two or three years.
14. If the F-16 contract were cancelled, officials estimate that $154 million would be freed up for other NZDF capital projects. This figure, however, does not include the cost of replacing the Skyhawks as they were scheduled to be replaced between 2007 and 2011.
15. Advice from the Treasury following a recent visit to the United States, suggests an exit cost of approximately $11million. This could be affected up or down by unwinding the Debt Management Office hedging arrangements on the F-16 contract. A one cent movement in the value of the $NZ makes a difference of ±$5 million.
16. Cancellation, however, implies one of two things: either accepting the risk of a higher replacement cost for the Skyhawks in the future, or losing the air combat capability.
17. The F-16 contract needs to be seen in a wider context. Although it creates immediate cash-flow difficulties and impacts on funds otherwise available for other projects, it is symptomatic of a much deeper problem. The NZDF is attempting to fund a full range of capabilities with insufficient money and without having determined specific priorities.
18. The solutions are:
· more money, or
· setting new priorities for capital and operating expenditure, by either
- downsizing one or more of the existing capabilities, or
- eliminating one or more of them.
19. There would be substantial operating and capital savings if the F-16 project were cancelled and the existing air combat force disbanded. Operating savings could be as high as $140 million per annum, but would take time to achieve. On the capital side, the Treasury memorandum accompanying this report shows net capital injection savings through to 2008/09 of $85 million to $180 million, depending on the sale price achieved for the Skyhawks, the Macchis and an airbase.
20. The abandonment of the Air Combat Capability would be a fundamental departure from existing policy and would have major implications on an NZDF-wide basis. There would also be diplomatic issues involved. This issue should therefore - in my view - only be considered as part of a wider review.
21. Viewed from New Zealand's point of view, there are benefits in having well-trained and well equipped Defence Force personnel. New Zealand would lose a great deal across all three services if the level of access to leading-edge military professionalism and experience were reduced. The F-16 contract provides an opportunity to build on the NZDF's present level of professionalism.
22. The Skyhawks have now been in service with the RNZAF for 30 years but represent a 1950s design. In the words of the Whineray Report, they are no longer adequate as an air combat capability in the modern world. This is largely due to the limits of their ageing airframes, lack of speed and manoeuvrability.
23. They will require extensive capital expenditure (approximately $35 million) over the period 2002 to 2005 to maintain reliability and supportability - effectively just to keep them going. Further upgrades costing around $70 million would be required to enable them to operate in other than a benign environment. There are doubts within NZDF whether it is worth spending this latter sum in view of their age. On the basis of information received during the review, it would be better to sell them now while they retain a reasonable value.
24. In contrast, the F-16A/Bs are virtually unused and have a full airframe fatigue life of up to 30 years. They unquestionably offer a significant improvement in capability over the Skyhawks and even without upgrades could be deployed to lower-order peace support operations. Upgraded, they would be able to participate in full peace enforcement activities and easily integrate into an air wing within a coalition force. This would provide the Government with a wider range of NZDF deployment options than it currently has.
25. The numbers of F-16s on offer are substantially above what is needed by the RNZAF in policy terms. Indeed, the RNZAF operated 14 Skyhawks for more than a decade from 1970. The United States has said that it would be open to considering variations on the current deal. Indicative information supplied during the review suggests that 14 F-16s operating from one base (Ohakea) would save approximately $30 million annually and provide capital savings of approximately $200 million.
26. In my view the possibility of acquiring a reduced number of F-16s should be explored to maintain expertise and to preserve an operational capability that may need to be expanded should strategic circumstances deteriorate significantly at some point in the future. This would also enable other NZDF force elements to exercise with a modern capability.
1. That the Government consider approaching the United States Government with a view to renegotiate the current F-16 package to include a lesser number of aircraft.
2. That all Defence projects be reviewed as a matter of urgency, on a project by project basis, with a view to prioritising and funding them on the basis of their capacity - judged from an NZDF-wide perspective - to advance New Zealand's national interests.
3. That steps be taken to implement as soon as practicable all those aspects of the 1998 National Real Estate Consolidation Strategy that are already agreed by NZDF, and that decisions be taken on the remainder.
4. That those parts of the 1991 Review of Defence Funding that have not yet been implemented, be urgently considered and where relevant adopted. For background information, please check out:
Main page on military spending and alliances.