The Navy's $500 million "Project Protector" is floundering, with six of its seven ships still undelivered - even though the taxpayer has paid the bulk of the bill.
The ships are already more than a year overdue, and the delivery date is officially defined as "unclear".
Official advice to Defence Minister Wayne Mapp is that the delays are affecting morale and causing much-needed personnel to leave the Navy.
And the advice shows that personnel shortages are limiting the availability of the ships it does have for sea duty.
The Navy is refusing to accept the Project Protector ships until outstanding problems are fixed by makers BAE Systems.
Dr Mapp would not give an exact figure, but said "the bulk" of the bill had been paid and there would be no walking away from the deal.
He conceded the taxpayer was losing out and said seeking compensation from BAE Systems was an option. He said the ships were needed as soon as possible to address the retention problems.
"You can't hire then train a whole lot of people, assign them to particular vessels, then not get the vessels," Dr Mapp said yesterday.
Project Protector was supposed to improve the Navy's capabilities, but the only ship delivered is the HMNZS Canterbury, which is sub-standard, plagued with problems and needs another $20 million spent on it.
The two offshore patrol vessels have been sent back to Melbourne and the 70 crew that were stationed with them brought home.
Dr Mapp said the ships had a weight problem - at about 100 tonnes overweight they could not sail in Antarctic waters as required.
The four inshore patrol vessels are also delayed, with health and safety issues preventing them getting a warranty.
The Ministry of Defence briefing to the incoming minister showed a myriad of problems across the Navy, Air Force and Army.
The ministry says $884 million is available to pay for planned projects by 2012, but between $1.4 billion and $2.2 billion is needed - a shortfall of up to $1.3 billion.
Dr Mapp said what funding was needed "depends on what you get".
The briefing says National's policy of keeping Whenuapai as a military base will require "a very substantial capital injection".
It says work has been proceeding since 2002 to close Whenuapai and move to Ohakea which is being prepared for the extra workload.
Dr Mapp said Whenuapai would get funding for "deferred maintenance".
The Air Force also faces delays for its major projects beyond the Boeing 757s that were out of action when required to evacuate New Zealanders from the recent unrest in Bangkok. The briefing shows the C-130 Hercules and P-3 Orion are also delayed, meaning operations have to be juggled.
The briefing also points to problems the Army has getting enough personnel to maintain operations.
Multi-role vessel: HMNZS Canterbury is in service but plagued with problems. $177 million + $20 million to fix.
Two offshore patrol vessels: HMNZS Otago and Wellington finished below standard and sent back. $90 million each.
Four inshore patrol vessels: Not accepted. $143 million altogether.