The Auditor General's report and Canada's curious F-35 deal - Macleans.ca

The Auditor General’s report and Canada’s curious F-35 deal

Some disturbing findings surface in Sheila Fraser’s audit

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Auditor General Sheila Fraser’s coruscating report on the slippery way the Department of National Defence handled its recent multi-billion-dollar helicopter purchases is setting off alarm bells about how DND might be managing its even more costly jet fighter buy.

Fraser’s findings from her audit of the $11-billion helicopter deals couldn’t be more disturbing. She said DND officials held back crucial information about the likely escalation in the cost of 28 Cyclone and 15 Chinook choppers, which led to Treasury Board approving the purchases based on off-the-shelf cost estimates that were ridiculously optimistic.

And Fraser drew a rough parallel between the helicopter fiasco and the planned procurement, announced last June July, of 65 F-35 fighter jets for an estimated $9 billion, plus another perhaps $7 billion in maintenance costs. “I hope no one is assessing [the F-35 procurement] as low risk,” she said today.

That warning sounded only prudent, and led to opposition salvos in Question Period. Still, I doubt the real risks involved in the F-35 arrangement are widely understood. In fact, there’s not much similarity between the way DND went about buying those helicopters and its rather unusual arrangement for acquiring the jets.

One of Fraser’s main points about the helicopters is that DND presented the Chinook purchase without explaining to the government’s Treasury Board bean counters that upgrading Boeing’s basic model to meet Canada’s particular needs would inflate the cost. That’s what happened, in a big way—boosting the price of each aircraft by about 70 per cent.

That raises an obvious question about the F-35s: Could costs involved in bringing the jets to market and adapting them for Canada’s military purposes drastically raise their price too? In other words, should the Canadian taxpayer brace again for sticker shock?

I pursued this question a few weeks ago with DND officials for a Maclean’s story. The explanation I got then from Michael Slack, DND’s project manager for the so-called Joint Strike Fighter, was greeted with no small degree of skepticism by some politicians, critics of the F-35 purchase, and journalists. Today’s blast from Fraser isn’t likely to do anything to reduce that widespread wariness about DND’s claims.

Still, Slack couldn’t have been more emphatic and categorical in stating that Canada is protected against any increase in the costs of designing, developing and testing the Lockheed Martin F-35 Joint Strike Fighter. Back in 2002, he said, Canada contributed $100 million in cash and $50 million in R & D services to the development of the aircraft, on the express agreement that any future cost escalation was not our problem.

The deal was that the U.S. would shoulder the burden if design and development costs ending up ballooning—as they predictably have. Despite those overruns, Slack said, the price Canada will pay is limited to the actual cost of manufacturing the jet in the year we take delivery. He said that “average unit flyaway cost” is currently projected to be $70-$75 million per jet, with delivery of Canada’s jets slated to begin in 2016.

The U.S. government  includes those soaring development costs in their price-per-jet estimates, and so published projections from Washington put the U.S. cost up over $100 million for each F-35. “The system design and development phase costs have mushroomed,” Slack said. “That’s reflected in some of the cost evaluations the Americans are doing. But the only thing that’s relevant to Canada is the average unit flyaway cost.”

Two other points about the cost of the F-35s bear keeping in mind.

Firstly, Canada apparently won’t have to place a firm order until the fall of 2012, and won’t have to agree to a contract until 2013. So it seems that if the cost to Canada spins out of control, despite Slack’s assurances, there’s still a chance to back out.

Secondly, there remains a key variable that might yet increase Canada’s per jet price. Consider what we’ve agreed to pay—the average per unit flyaway cost. That means our price depends on how many F-35s in total are sold. More sales, we pay less. Fewer sales, we pay more.

On that point, Slack told me he saw potential for some of the core partner countries involved in the development of the F-35 (U.S., Britain, Italy, the Netherlands, Turkey, Australia, Denmark and Norway) to buy fewer than originally expected. But, at the same time, he argued that risk is offset by the likelihood of new buyers to coming forward from outside the Joint Strike Fighter project group.

The latest news on the total sales front isn’t promising, though. As of this week, the austerity-minded government of Prime Minister David Cameron has signaled it will dramatically scale back Britain’s order for F-35s from 135 to some much lower number. So the question looming over the F-35 project, it seems to me, is less about the cost of bringing the jet into product, as about how many of the fighters Lockheed Martin manages to ultimately sell.