The F-35: The Conservatives were ‘dead right’

You might have thought that the auditor general’s report and the KPMG audit amounted to a repudiation of the Harper government’s accounting for the F-35. Gary Goodyear would like to assure you otherwise.

“I can tell you the F-35 is another file – now we see KPMG come out with a report that couldn’t be more plain and simple – that Conservatives were dead right and that those planes would cost $9 billion and that the service contract for 20 years would be $16 billion.”

Setting aside everything the Conservatives said about the F-35 beyond the cost estimate, Mr. Goodyear seems to have chosen a particular set of terms on which to define the government’s correctness.

Granted, this is all a bit confusing, but let’s go over this one more time. The stated acquisition cost does, indeed, remain at $9 billion: that’s the budget the government says it will adhere to in purchasing new fighter jets. But $16 billion was once thought to be the total cost for acquisition and maintenance—in March 2011, the government tabled an estimate of $14.7 billion. The KPMG audit, meanwhile, identified $15.2 billion in “sustainment” costs, in addition to that $9 billion for acquisition.

But the “life-cycle” cost estimate was a particular concern of the auditor general and here, so far as the math is concerned, is the real trouble.

Treasury Board policies require consideration of all relevant costs over the useful life of equipment, not just the initial acquisition or basic contract cost. Careful planning and full costing are needed to ensure that all of the elements required to provide the needed capability come together in a timely and predictable way and that adequate funds are available to support the equipment over the long term. We examined whether National Defence conducted full life-cycle costing related to its Next Generation Fighter Capability project and whether cost estimates were complete, supported, and validated, using the best information available at the time. Estimating future full life-cycle costs for military equipment, especially the F-35, is challenging…

We have a number of observations regarding the life-cycle costing for the F-35. First, costs have not been fully presented in relation to the life of the aircraft. The estimated life expectancy of the F-35 is about 8,000 flying hours, or about 36 years based on predicted usage. National Defence plans to operate the fleet for at least that long. It is able to estimate costs over 36 years. We recognize that long-term estimates are highly sensitive to assumptions about future costs as well as to currency exchange rates. However, in presenting costs to government decision makers and to Parliament, National Defence estimated life-cycle costs over 20 years. This practice understates operating, personnel, and sustainment costs, as well as some capital costs, because the time period is shorter than the aircraft’s estimated life expectancy. The JSF Program Office provided National Defence with projected sustainment costs over 36 years…

We also have significant concerns about the completeness of cost information provided to parliamentarians. In March 2011, National Defence responded publicly to the Parliamentary Budget Officer’s report. This response did not include estimated operating, personnel, or ongoing training costs (Exhibit 2.6). Also, we observed that National Defence told parliamentarians that cost data provided by US authorities had been validated by US experts and partner countries, which was not accurate at the time. At the time of its response, National Defence knew the costs were likely to increase but did not so inform parliamentarians.

As Andrew Coyne has pointed out, National Defence agreed with the auditor general in 2010, on a separate file, that life-cycle costing was appropriate.

As noted above, in responding to the parliamentary budget officer, the government tabled an estimate of $14.7 billion over 20 years for capital, acquisition and sustainment costs.

According to the auditor general, National Defence had an internal estimate in June 2010 that covered capital, acquisition, maintenance, personnel and operating costs over 20 years. That estimate came to $25.1 billion. (Andrew has noted that a $25 billion estimate was briefly, and fleetingly, acknowledged in June 2010, only to disappear from the debate soon thereafter.)

According to KPMG, an estimate that covers capital, acquisition, maintenance, personnel, operating and development costs comes to $45.8 billion over 42 years.

So we have three sets of numbers: $15 to $16 billion over 20 years (the publicly debated cost), $25.1 billion over 20 years (National Defence’s internal estimate) and $45.8 billion over 42 years (the KPMG estimate).

But as Andrew has argued, it is difficult to compare the KPMG estimate to the previously acknowledged estimate because the KPMG audit includes money and time for development. If you remove the development figures from the KPMG audit, you get an estimate of $45.2 billion over 30 years.

For the sake of comparison, it is probably most accurate to say that the stated cost has gone from $15 to $16 billion over 20 years to $45.2 billion over 30 years. (Peter MacKay’s office has waded into this debate and Colin Horgan has parsed it here.)