Tue, 26 Apr 2011 14:00:59 -0500
So how much will Canada's next generation fighter jet - the proposed F-35 Joint Strike Fighter - really cost?
The Conservative government says the 65 planes, to be equipped with the latest in stealth technology, will cost $75 million each when the full amount ($16 billion for purchase and maintenance) is amortized over the next 12 years or so.
But now, April 25, National Defence says it's been told by the U.S. that the unit price for each plane may be a little higher, though DND still expects to deliver the program on budget.
A couple of things to keep in mind about this latest development. It looks to be the first time DND is admitting there has been a contingency plan built into the program to deal with at least some cost overruns.
The second is that when DND, and the prime minister, say the unit price may be a little higher, are they referring to both the purchase price per plane as well as the ongoing maintenance cost, which was how the original figure was arrived at.
The reason this important is because these latest cost estimates are based on a report by Bloomberg news service, which says that it is now the ongoing maintenance and operating costs of this next-generation fighter that has the Pentagon concerned.
Bloomberg cites a report, dated April 15 but which has not yet been made public, from the Pentagon to Congress that suggests operating costs may be more than double earlier estimates.
The cautionary note here is that the independent experts hired by the Pentagon are predicting the F-35s will break down more frequently than the fighter jets they are replacing and a Pentagon official is quoted saying the U.S. is still trying to "develop a more refined number."
As we reported earlier
The Parliamentary Budget Officer, Kevin Page, estimated last month that the planes will come in at more like $30 billion, or $128.8 million each, in the wake of Lockheed Martin's recent development problems.
And earlier this week, a U.S. expert, Winslow Wheeler of the Centre for Defence Information in Washington, put the cost per plane "in the neighbourhood of $148 million," which is almost double the government's estimate.
Who is right?
At this point, it is very difficult to say because, as CBC commentator Brian Stewart pointed out recently, unlike the last time Canada bought fighter jets there is no competitive bidding. Which means there are no competing manufacturers laying their costs and projections out there for all to see.
Defending the government's lowball figure, Dan Ross, the assistant deputy minister for procurement at the Department of National Defence, told reporters on March 17 that:
Countering this, recent U.S. reports on the F-35 have generally cited the average cost per jet as being spread across all the three variations and, on March 29, a representative from the U.S. General Accountability Office told Power and Politics that the jets will cost $110-115 million each.
Are there no alternatives?
In his analysis, cited above, Brian Stewart suggests there are other fighters that could fit Canada's need to replace the aging CF-18s. And Liberal Leader Michael Ignatieff has said the Liberals will scrap the F-35 deal and open the process to competitive bidding.
Not everyone feels that way, of course. The Conservative counter-argument is that to switch to open bidding at this stage, Canada would have to withdraw from the JSF consortium, thereby giving up its preferred place on the production line and the favourable pricing that goes with it.
Chief of Defence Staff Gen. Walter Natynczyk says the cost per unit is the cheapest for any fourth- or fifth-generation aircraft out there and that any attempt to buy older jets might actually cost more money.
At the same time, both Britain and Israel have cut back on the number of F-35s they had originally intended to purchase, while Australia and Norway are buying in tranches, because of their concerns over runaway costs.
Will we have to pay a cancellation fee if we back out?
Voters will remember that when the Jean Chretien Liberals came to power in 1993, their election promise to cancel the EH-101 Maritime helicopter purchase cost taxpayers about $500 million in penalties. (Plus, we are still waiting for the promised replacements.)
This time is different. The contract to purchase is not signed and is not expected to be signed until 2013. So there is no cancellation fee.
Cancelling the project would mean the loss of the approximately $165 million that the federal government has invested to allow Canadian companies to bid on the project.
Plus, Defence Minister Peter MacKay has argued that cancellation would mean Canada would lose up to $1 billion in royalties, economic benefits and R&D opportunities.
Presumably at least some of that would be regained if the alternative is to buy and participate in the development of a less costly alternative.