In a world first with what is being described as “groundbreaking research”, a New Zealand Institute of Economic Research (NZIER) study has set out to put a lifetime value on the navy’s two ANZAC frigates.
Despite a huge anti-frigate campaign from peace groups and many sections of the Labour Party, in September 1989 then-Prime Minister Sir Geoffrey Palmer announced that New Zealand would purchase two of the Australian-built ANZAC frigates for $942 million.
Despite that opposition (which later included NZ First), the frigates have been described by the current Chief of the NZ Defence Force, Air Marshall Kevin Short, as one of only three Defence Force capabilities able to respond to what he called a “high threat environment.”
(The others were the SAS and, when he spoke last year, the P3 Orions, which have since been replaced by P8 Poseidons.)
Thus the frigates are the most substantial combat fighting capability that the defence force now has.
NZIER economist Derek Gill and Victoria University’s Centre for Strategic Studies senior fellow Jim Rolfe set out to put on a value on the frigates.
They concluded that over their 30-year lifetime, the vessels had a value of between $3.5 and $10 billion.
Though that gap seems large, it was a consequence of the way the pair conducted their research; they looked at what value three different groups of New Zealanders might place on the frigates.
The most straightforward was an assessment of what money had actually been spent on them; the authors called this valuation the “Ministers’ Valuation”, which included the original purchase price.
To that has been added the cost of the various upgrades to the ships and their operational costs.
The report concluded that the Ministers’ price was $6.8 billion over 30 years.
That part of the study was relatively straightforward since it was based largely on documentation.
But then Gill and Rolfe consulted a range of experts and asked them to put a value on the frigates in a variety of different strategic scenarios.
The valuation was based on the ships’ potential role in safeguarding New Zealand’s trade by acting as a deterrent should conflict break out either in our region or globally.
Rolfe told POLITIK that what they sought to establish was how much trade would be protected by the frigates undertaking a particular task and then ascribing the value of that trade to the value of the frigate over its 30-year lifetime.
They used five different strategic scenarios starting with a benign international environment in which there were no significant international tensions and very little likelihood of significant disruption to trade from state or non-state use of force. Therefore the value of the frigates was negligible.
Then they looked at Regional trade disruption (for example in the South China Sea), where disruption could arise through the activities of a regional power attempting to control access to and through international waters.
“Although trade is not specifically targeted, the activities of a regional maritime power in claiming widely recognised international waters as territory causes uncertainty to shipping schedules,” the study said in a clear reference to China.
“There could also be incidents in which merchant shipping is attacked specifically.”
They put the deterrence value at $10.7 million per annum.
In a Piracy scenario, in some parts of the world, piracy on trade routes would be rife, and the extent of shipping losses had the potential to partially disrupt maritime trade.
This scenario has echoes of the situation around the Horn of Africa and the southern coast of the Arabian Peninsula, where the frigate Te Mana was deployed in 2008 as part of the multi-national Operation Ocean Shield to protect merchant vessels from piracy.
The authors calculated the deterrent effect of this at $17 million a year.
The value escalates dramatically when state-to-state conflict breaks out, and in this scenario, states in conflict with each other conduct their conflict at sea, attempt to disrupt the trade of their opponent and force considerable disruption to maritime trade, even where that is not directed to or from one of the parties to the conflict.
The deterrent value is estimated at $44 million a year.
In the event of major international conflict where there was a general conflict between groups of states and across regions, maritime trade could be targeted in any part of the world.
The deterrent value is estimated at $50 million per year.
The values have been calculated assuming New Zealand’s frigates would join other “like-minded” countries in attempting to deter or restrict the conflict.
Gill and Rolfe then turned to “1000minds”, which is software initially developed at the University of Otago to prioritise hospital patients to try and gauge the priorities of the general public as far as the frigates were concerned.
From those priorities, they would then derive a “public” valuation for the frigates.
They did so by asking respondents whether they would favour increased taxation to sustain specified activities or, alternatively, whether they would prefer that the activities be reduced or not undertaken and tax correspondingly reduced.
The researchers found that New Zealanders split into three groups; hawks, who were willing to pay more tax to support the frigates and doves, who were opposed to spending on the frigates and a third group they called “stoics” who favoured the status quo.
The hawks were the smallest group, whilst the stoics were the largest.
However, defending New Zealand was the most important attribute of the frigates in the public survey.
“Keeping our options open so the country can use our Navy 20 to 30 years into the future” also ranked highly in the capability survey, the report said.
Supporting friends and allies was middle ranking, while the frigates’ role in global security was the least important attribute.
This produced a range of values from the public for the frigates of $3.9 to $9.8 billion.
Overall, the three different analytical groups produced a range in value for the frigates from $3.5 to $10 billion over 30 years.
The researchers plan to continue their work and to refine their processes further.
But one of the world’s most eminent defence economists, Professor Keith Hartley of the University of York, described the work as “an impressive and pioneering contribution to our knowledge in this important field.”
“Scholars have recognised the challenge of defining and measuring defence output, but this is the first attempt at empirical measurement,” he said.
Rolfe told POLITIK that initially, the work might help policymakers value their capital assets and their military equipment,
“And that, in turn, should give them a steer about value for money,” he said.
“How do you measure submarines against jet aircraft, for example?
“If there was an order of magnitude difference in the values that you came up with, we would certainly want a second opinion.
“The fact that none of the values we have calculated has an order of magnitude difference says they’re all within the margin of error in effect.
“The differences that are there are arithmetical rather than fundamental.”