I was almost tempted to let the matter rest, but then DND said this:
In 2010, the Department calculated that… the estimated cost for acquiring, sustaining and operating the [F-35] fleet… was $25.1 billion.
Ha! Here’s what their website says DND’s original public estimate was:
the total estimated cost and sustainment of Canada’s 65 F-35 Joint Strike Fighters is $14.7 billion.
They’re not lying, exactly. It’s just that the $25 billion figure was an internal one shared with the minister and Cabinet. $14.7 billion was the number which the Minister of National Defence, Peter MacKay, decided the pubic was better off knowing.
And sadly, with the latest round of reports, it seems that the government is still trying to play fast and loose with the numbers. I’m afraid this is going to get rather complicated, because we’ve had quite a number of different cost estimates for the F-35. A full analysis of all of them will have to wait. For today, I’m just going to concentrate on what’s happened between the Auditor General’s spring report, Replacing Canada’s Fighter Jets, DND’s new “annual update,” and KPMG’s independent review (which is basically just a re-analysis of DND’s new figures).
In deference to what is apparently a rather juvenile preference not to read detailed analysis, judging from the prattle that passes for professional media, I will give you the convenience of putting the headline figure up front. This is the bottom line: DND has severely slashed its service expectations for the F-35 in order to keep operating costs down to $45 billion, and it has still to account for billions of dollars more in costs.
The main glaring problem the Auditor-General identified in his report was that DND’s sustainment and operating cost estimate was based on a 20-year life cycle, whereas their internal planning documents showed they were planning on using the planes for 36 years — essentially, implying to the public that the last 16 years of service life on the airframes would be miraculously free of charge. That was the main rationale behind the official Sixth Estate estimate for the fighters, which had $48 billion looked almost dead on relative to the newest estimates.
Many of my readers weren’t convinced at the time, and still aren’t. They point out that we may well abandon the F-35 within 20 years due to steady technological progress. That may well be true — see this new Postmedia analysis for reasons why. But I have two responses. First of all, it’s not necessarily ridiculous to use a fighter for 40 years, keeping it alive through regular upgrade programs. The CF-18s will be around 40 years old by the time we retire them. The Americans have a 50-year plan for the F-35. Second, if the official plan is to use them for 36 years, then the official cost estimates have to reflect that. Anything less is naked deceit. Whether you personally think the F-35 won’t be around in 30 or 20 or even 5 years is irrelevant to that fact.
To that end, it’s important to note what’s happened in the costing estimates. Despite what you may have heard about the “42-year” life cycle plan used in the new analyses, if you actually read them, which I realize most journalists can’t do for one reason or another, the DND report makes clear that the new costing estimate is based on using the F-35 for 30 years, not 36 years. No explanation for the shortened life cycle is provided. However, assuming those extra 6 years cost the same, on average, as the preceding 30, which isn’t exactly how old cars work but I admit might be how old planes work, then that’s another $7 billion, at $1.17 billion per year.
Is Minister MacKay lying about the figures again, or has he just changed his mind about the F-35′s life expectancy and failed to tell anyone? The answer may lie in the details. The airframe is apparently expected to be good for 8000 flying hours. DND planning estimates are to fly each aircraft, on average, 15 hours per month. That comes out to only 5400 flying hours over 30 years. Even after 36 years, it’s still just under 6500 hours per aircraft. If DND really has switched from a 36-year plan to a 30-year plan, Canadians need to be told why. Otherwise, we’re left to wonder whether you’re just being fed yet another bogus costing estimate in order to make the numbers look a little less disastrous than they really are.
Moreover, the numbers have been played with just to make all of this possible, otherwise the real figures would be even higher yet. For instance, DND simultaneously claims that it is slashing planned annual flying time by around 25% “to reflect the increased use of simulation,” and that it will cut its simulator acquisition budget by 33% “to reflect current plans.” I’m not sure how both can be true, and so once again we must wonder whether we are being sold a bill of goods.
That cut in flying time raises another interesting question. Collectively, at the above rates, 65 F-35 jets are “worth” around 520,000 hours of flight time, but they will only actually fly for 350,000 hours. At the so-called original estimate of 15,800 flying hours per year, and building in the benefits of replacement aircraft starting their service “clocks” later on in the life cycle, the F-35s would probably start reaching the end of their expected service life around 36 years. Not 30 years. Once again we are left to wonder at the revised life cycle.
This is not a mild issue. The F-35′s expected service life is apparently a collective 520,000 hours. The Auditor General was apparently told they would be used for 570,000 hours, the discrepancy being made up for through procurement of replacement aircraft. The new figures claim the F-35s will only be flown for 351,000 hours. That’s an almost 40% cut in usage. If Canadians are only going to use the planes for less than two-thirds of the anticipated time, why aren’t we buying less than two-thirds of the anticipated planes?
KPMG noticed this too, and says DND will need to “conduct further analysis” about what happens after 30 years.
Speaking of replacement costs, more must be said about that. DND didn’t use to admit publicly they’d need to pay for any replacements. Last spring, they told the Auditor General they’d need 14 replacement aircraft. They now say they will need 7 to 11 replacement F-35s over its service lifetime. That, says DND, will cost an estimated $982 million. KPMG says it will be anywhere from $700 million to $1.3 billion. But that’s for 7-11 aircraft. Not 14 aircraft.
How is this possible? Buried in the DND report is an estimated loss rate of 2-3 aircraft per 100,000 flying hours, which, over 30 years, is 7 to 11 planes under the current reduced flight budget. At the original flying budget spread over the original 36 years, it’s a total of 11 to 17 aircraft, which is where the Auditor General got his 14-plane figure from. So in order to keep costs down below $50 billion, DND has not only reduced the plane’s expected service lifetime, it has substantially reduced the amount of flying the plane will do during that service lifetime.
We’re not done yet, though. In its new report, DND admits that the per-unit costs are creeping upward from the $75 million estimate, but it doesn’t know what the final tally will be. More seriously, it’s tacked on another $600 million in setup costs, for “sustainment set-up” (whatever that means) and a “reprogramming lab.” You won’t see that reflected in the overall acquisition tally, which remains mysteriously unchanged. The reason: they’ve compensated by slashing the amounts set aside for training, “initial spares” (by 50%), infrastructure (by almost 50%), and ammunition (by 80%). You can decide how realistic that is. Either way, that’s a total of$600 million in magic cuts to what sound kind of like necessary expenses, seemingly just in order to make the overall acquisition tallies match what they were six months ago.
This brings us to yet another issue. Government regulations require that major project budgets contain contingency allocations — money set aside to cover possible cost increases. Based on the current accounting rules and the cost estimate models, KPMG says that the contingency fund for the F-35 project should be $2.5 billion, but could be as low as $1.1 billion. But DND’s official contingency fund for the F-35 is only $600 million. KPMG asked DND about this, and was told that DND’s “risk mitigation strategy” is to “reduce the number of aircraft” it purchases, down to 55 planes if necessary. So why are we buying 65 planes, again, if 55 will do?
All this wouldn’t be complete without one final kick in the pants. Military procurement regulations require that producers commit to the Industrial Regional Benefits program, under which they spend the equivalent of the construction of the military equipment in Canada. It doesn’t mean they have to build the vehicles in Canada — they can choose to build the vehicles somewhere else, but then invest in a Canadian plant that builds something else. But the F-35 is exempted from the Industrial Regional Benefits program.
We were promised it wouldn’t matter, because Canadian companies would get to bid on F-35-related contracts spread out over the entire consortium. All told, we were told, we might even come out ahead. Of course, other companies were also told that their defence industries could come out ahead. You can decide for yourself how likely it is that the overall purchase price of the F-35 will somehow be less than the overall construction cost of the F-35. Maybe Lockheed Martin is just really, really generous?
Anyhow, Industry Canada has released a new report, too, on the anticipated industrial benefits of F-35 construction. So far, it says enthusiastically, Canadian companies have received all of $438 million in contracts. But there’s another $9.3 billion in opportunities waiting for them, which would bring us pretty much up to the construction cost. Thus Canada reaps the rewards of the Industrial Regional Benefits program, without actually subjecting Lockheed Martin to the regulations of that program.
Well, maybe. If you read far enough, you’ll see that what Industry Canada has actually done is identify $9.3 billion in contracts for which Canadian companies will be “eligible to compete.” Then it’s taken that as the assumed total. Now, I admit I don’t have much experience bidding on big contracts. But I assume it would be considered foolhardy to assume that you’ll win each and every contract you’re invited to bid on. Yes?Tweet