The most recent development on the weakness of the proposed F-35 acquisition has revolved around the latest Auditor General’s report. Although it is significant that the author, Michael Ferguson, found that the Conservative government excluded $10 billion in costs that he felt should have been included in the stated price of the procurement, such as operating and personnel values, this is not the primary weakness of the program.
In fact, the recent criticism by the Auditor General was effectively brushed aside as a simple difference in opinion on what costs should be included in the final total. The deputy minister of National Defence, Robert Fonberg, insisted that presenting the acquisition and sustainment costs alone was in keeping with historical practice. Although the report resulted in a shift in the procurement process and the creation of a new oversight secretariat within Public Works and Government Services Canada, this has not repaired the damage already done.
On 16 July 2010, the government announced its commitment to procure 65 F-35s and claimed that the program would cost approximately $16 billion; this would include maintenance for a period of 20 years. The government quickly adopted a stance of cost certainty and aggressively defended its estimate against constant challenges by the opposition parties during the election campaign of 2011.
The primary challenges were that the government failed to properly justify a sole-sourced procurement and underestimated the acquisition costs of a developmental platform. The original representation of the cost to replace Canada’s CF-18s was voiced in the context of a firm agreement to spend approximately US$75 million per plane. Notwithstanding discussions on what costs would be added to the total later, even the baseline was considered by professional observers to be vastly under target.
Mike Sullivan, the director of acquisition management at the U.S. Government Accountability Office, explained that he was unsure of how the Canadian government’s estimate could have been reached and estimated the cost to be “somewhere between $110-115 million.” One of the most damaging tests to the Conservative credibility on the issue was the March 2011 report led by the Parliamentary Budget Officer, Kevin Page, who also asserted that the government’s estimate of $16 billion for the full program was extremely unlikely.
The primary reason that there is such a debate on the potential contract value for this procurement is that the F-35 was (and still is) in development; this makes determining final costs with any degree of certainty exceedingly difficult. What we do know is that the F-35 is already five years behind schedule and total development overruns are projected to exceed US$21 billion – sixty percent above the original estimate.
But this reality should come as no surprise to anyone familiar with the purchase of high technology defence equipment; prices usually rise until the final model has completed testing and qualification. Canadian history is replete with examples of developmental aircraft being over budget and unable to meet estimated schedules. The Avro Arrow is the most famous, of course, but the Canadian taxpayer has recently been given a far more egregious example.
The worst case study of inflated procurement costs and late delivery, due largely to developmental delays, is the Maritime Helicopter Project (MHP) and the purchase of the Sikorsky Cyclone. The MHP mirrors some of the production problems currently being experienced by the F-35. Although the process to replace the Sea King was started (for a third time) in 2000 and a contract was signed in 2004, the Canadian media discovered in January 2008 Sikorsky would not be able to deliver the first new Cyclone until 2010 or 2011 as it was not yet certified. As of June 2012, Canada has yet to receive the new helicopters. The efforts to replace the Sea King have taken over 30 years and counting and have cost Canada hundreds of millions of dollars and hampered our military capability.
Although there is still no formal contract for the F-35, both cases reveal how the choice of an incomplete military design has been highly problematic from a political, financial and a military perspective. Canadian leaders have yet to learn the risks involved in purchasing a first run platform and optimism always rules the day. Caution and the presentation of more conservative figures would have been more prudent as soon as it became obvious that the cost per aircraft was no longer valid.
It is easily argued that the MHP was a politically led procurement with a predetermined winner – or rather a loser, the Cormorant – from the beginning. But at least there was an attempt to show the public that they tried to get the best option, even if in the end they did not. The lack of an open competition with a formal request for proposals based on a clear set of operational military requirements is, of course, related to the public challenges on cost. Competitive pricing is often removed in sole-source purchases and it makes the public skeptical on whether they are getting the best deal for their tax dollars; this is especially true if it is the most expensive procurement in Canadian history. If the other options are unacceptable, the government needs to provide some degree of proof. The F-35 could be the best value for Canadians, but this has yet to be demonstrated to the public.
The Conservative government mistakenly underestimated the potential for the escalation of costs on an incomplete design, drew a firm line in the sand, and eschewed any possibility of error in the calculation. A considerably higher price tag than the initial estimates should not only have been considered possible, but altogether likely.
The procurement of the F-35 has unfortunately become the latest example of the politics of procurement in Canada. The program has become an easy target due to the government’s exclusion of a domestic competition and the provision of overly optimistic cost estimates.
While this is one of the few times where the procurement process was begun early enough to properly phase out the existing military platform, the perception that there was a lack of due diligence on a major capital expenditure has created a general lack of public trust in the procurement process.
Dr. Aaron Plamondon is a Research Fellow with the Centre for Military and Strategic Studies and the author of The Politics of Procurement: Military Acquisition in Canada and the Sea King Helicopter.