Better know $25 billion

In an interview with CTV’s Question Period, Peter MacKay explains the $25-billion estimate that National Defence prepared for the F-35 in June 2010.

“Well I’m glad you’ve raised this issue, in fact I think it was Craig Oliver that first put this on the air in recent days; the 10 billion dollar gap or difference in estimation is accounted for by the way in which we pay pilots, we maintain the aircraft, that is to say that that 10 million dollar difference is money that we are paying right now. So there’s a different interpretation in the all up costs at arriving at 25 billion. We have included that figure in estimates and information provided to the auditor General. And that information goes back to the year 2010. Those figures are there for all to see. But it is a different calculation than an acquisition. We have always said that 9 billion dollars is the cost of the aircraft. There’s an additional 5.7 billion then for maintenance that is weapons, onboard equipment etc. But the 10 billion dollars is money that we’re paying right now Kevin. That is money that goes to pay the pilots of the F18 program, and fuel, oil, upkeep of the existing fleet.”

It is probably worth reviewing again how the cost of the F-35 has been explained over the last two years.

When the decision to acquire the plane was announced in July 2010, the purchase officially totalled $9 billion.

The Government of Canada has committed approximately $9 billion to the acquisition of 65 F-35 aircraft and associated weapons, infrastructure, initial spares, training simulators, contingency funds and project operating costs. Delivery of the new aircraft is expected to start in 2016.

Including a 20-year maintenance contract, the purchase was reported to total $16 billion.

When the Department of National Defence responded to the Parliamentary Budget Officer in March 2011, it reported a total of $14.7 billion. That total included:

Capital acquisition costs, Initial logistics and training (including simulators), Project management (initial), Weapons (initial buy), Infrastructure, Contingency, inflation and Contracted sustainment.

But as the Auditor General explained last week, National Defence had an internal estimate, prepared in June 2010, that totalled $25.12 billion. That estimate includes three budget lines that were not included in the estimate provided to the Parliamentary Budget Officer:

Contingency ($860 million), Operating costs ($4.83 billion) and National Defence personnel ($4.74 billion). 

In addition to sorting through all that, there remains what the Auditor General reported about the government’s estimates.

2.69 To date, there have been two key announcements regarding the budget for replacing the CF-18s: the May 2008 Canada First Defence Strategy and the July 2010 announcement of the F-35 purchase. The Canada First Defence Strategy established a budget of CAN$9 billion to acquire 65 next generation fighter aircraft. This budget figure was subsequently included in National Defence’s 2009 Investment Plan. It was also carried forward into decision documents to support the July 2010 announcement. Also in 2008, a budget of CAN$16 billion was established to operate and sustain the F-35 over 20 years. These budgets were based on estimates provided by National Defence, yet there is no documented analysis to show how they were developed. In 2010, National Defence informed decision makers that the costs of operating and sustaining the F-35 would be covered by existing funds.

2.70 These budgets have since been treated as a maximum by National Defence, yet many decisions that could affect the ultimate costs are still to be taken. Moreover, as noted in paragraphs 2.11 and 2.12, United States’ estimates of the future purchase price of the F-35 are in flux. Estimates for sustainment costs are not fully developed. Although the budgets established for the acquisition (CAN$9 billion) and for operations and sustainment (CAN$16 billion) include provision for contingency, there is a risk that these budgets may not be sufficient.