F-35 Procurement

A case for competing Canada’s fighter aircraft requirements
In his FrontLine article “Strategy and the F-35”, former Chief of the Air Staff, LGen Ken Pennie, argues for the acquisition of the F-35 and focuses his analysis on the issues of requirements, competition, costs and industrial and regional benefits. Accordingly, I will do the same. However, attempts by supporters of the F-35 Joint Strike Fighter (JSF) program have not answered one key question. Namely, why take the decision now to purchase the F-35? Why would the government make a commitment now to purchase an aircraft that is still developmental, has no operational capabilities, and whose acquisition cost and long term support costs are still unknown? Why not wait until the F-35’s capabilities are proven and its costs precise? Wouldn’t that be a better time to make the multi billion-dollar decision on the jet aircraft to replace the CF-18s? The UK has deferred their decision on the F-35 until 2015. Surely we can defer ours too. The F-35 may turn out to be the right solution for Canada but as of today it definitely is not.

Requirements
Before spending billions of our tax dollars, Canadian citizens should be entitled to answers to some basic questions. What role are the planes expected to play? What specific requirements do they need to fulfill this role? Why is stealth mandatory? Why are two engines not mandatory? Why do we need precisely 65 aircraft? A public discussion on these and a myriad of other questions helps to ensure that the statement of requirements is unbiased. To-date this has not been the case, and Canadians have a right to wonder “why not?”
 
The answer may be found by examining the process followed by public servants in preparing the requirements document.
 
In 2006, DND officials recommended the F-35 to Minister O’Connor. Yet the statement of requirements was only completed four years later, in 2010. Surely no one can be shocked to discover that, as LGen Pennie wrote, “the JSF was the only plane in the western world to meet the mandatory requirements.” Can there be any doubt that the requirements were fixed or “wired” to ensure the desired outcome was obtained? The procurement process was hijacked and distorted by DND officials to suit their agenda. It has undermined the integrity and credibility of the requirements document.
 
Competition
Another important question that has not been satisfactorily answered, is why not hold a competition? If there is a valid reason not to compete this program, the government has not articulated it.
 
LGen Pennie’s article quite rightly confirms what I have been saying over the past year. Namely, that Canada did not participate in the evaluation of Lockheed Martin versus Boeing competition. He is wrong, however, when he asserts that Canada’s lack of participation was due to our “confidence in the U.S. ability to run an effective competition.” Frankly, I find it unconscionable that we would ever even consider entrusting a multi-billion dollar procurement decision for Canada to a third party. Our decision not to participate had nothing to do with confidence in the U.S. and everything to do with money and timing. For the privilege of being considered a “collaborative partner” in the definition of requirements and aircraft design, the British government committed $200 million to the concept demonstration phase and $2 billion to the system design and demonstration phase. In contrast, Canada committed the relatively smaller amounts of $10 million and $150 million respectively. In so doing, we achieved our main goal of allowing our Canadian industry to participate in this program as well as gain insight and understanding into leading edge jet aircraft technology and systems. Also, keep in mind that in the early 2000s we had not begun to turn our attention to replacing our CF-18s. Our jet aircraft were expected to last through 2017 or 2018. The military had not prepared its “statement of requirements” and we had not undertaken a detailed examination of the JSF’s expected capabilities. Given these realities, it made no sense for us to participate.
 
Is the JSF the only jet aircraft capable of replacing our current fleet of CF-18s? With the spiraling costs of the program, the U.S. congress is clearly at odds over this program. What would Canada do if the program were to be cancelled? Would we say there is no acceptable replacement for our CF-18s? I don’t think so. More likely we would redefine our requirements and pick the best available option in the marketplace. Clearly, more than one solution is available to replace our CF-18s, each with its unique advantages and disadvantages. An open, fair and transparent competition sorts these out and determines the best solution for Canada. There is ample time to conduct such a competition. Modifying the “statement of requirements” to permit an open, fair and transparent competition and undertaking the procurement process can be concluded within two to three years. Even if we begin as late as 2014, we can take a decision by 2016. Allowing 4 years for delivery, our replacements for our CF-18s would begin to arrive in 2020. I believe we can certainly sustain our existing fleet that long.
 
LGen Pennie pointed out the difficulties in comparing a govt to govt partnership with a private section bid. He suggests the complexities prevent a simple and equitable comparison of aircraft and/or costs. However, it is my assertion that we need not exit the 2006 MOU in order to conduct such a competition. In fact, the 2006 MOU is a well-written document, very favourable to all participants. It doesn’t exact any penalties in the event a participant wishes to terminate the relationship. Equally important, the MOU encourages participants to conduct business in accordance with its own laws. For example, clause 3.2.1.1.1 reads, in part, “Actual procurement of JSF Air Vehicles by the Participants will be subject to the Participants’ national laws and regulations and the outcome of the Participants’ national procurement decision-making processes.” Clause 19.1 states, in part, “All activities of the Participants under this MOU will be carried out in accordance with their national laws and regulations.”
 
In summary, it is not difficult to run a competition comparing the costs and capabilities of all contenders. If the F-35 is evaluated to be the winner of a competed RFP, Canada would be able to acquire the aircraft through the MOU. If one of the other alternatives is found to be a better solution, a contract would be struck for its acquisition. The key point being that we should remove much of the uncertainty with respect to capability and cost before spending billions of the taxpayers’ dollars.
 
Costs
“Over the lifetime of this program, the decade or so, the per-aircraft cost of the 2,443 aircraft we want has doubled in real terms. That’s our forecast for how much the aircraft is going to cost. Said differently, that’s what it’s going to cost if we keep doing what we’re doing. And that’s unacceptable. It’s unaffordable at that rate.” These words were spoken by Ashton Carter, the Pentagon’s top acquisition official as he testified before the U.S. Senate Armed Services Committee this spring.
 
Yet, our government continues to argue that it expects the cost per F-35 to be in the $75 million dollar range. In March 2011, the government tabled its detailed support for this estimate to the Parliamentary Procedure and House Affairs Committee. The only problem is that nowhere in its documentation is there support for their estimate. In its document entitled “Next Generation fighter Capability, Comparison of Costing,” the government indicates that its $75 million dollar figure was obtained from a Pentagon report entitled the “2009 Selected Acquisition Report.” I read that report, and the $75 million dollar figure is not mentioned in it. However, the report does state (page 36) that, as of Dec. 2009, the estimate for the average procurement unit cost (APUC) is $113.604 million. This is the cost Canada would pay, as it excludes research and development costs. It seems to me that our government should be asked to provide some evidence to support their claim that each F-35 will cost Canada $75 million. To-date it has not done so.
 
Alternative cost estimates per aircraft do vary, but all are significantly higher than the government’s estimate. Canada’s Office of the Parliamentary Budget Officer (PBO), estimated these costs at $148.5 million, with a total life cycle cost (over 30 years for the 65 aircraft) of $29.3 billion. This is remarkably higher than the government’s estimate of $16 billion over 20 years. Two points are worth emphasizing. First, the PBO acknowledged the risk associated with their estimate by indicating that their estimate reflects only a 75% confidence level (rather that the typically used 95% confidence level). Second, neither the PBO’s nor the government’s estimate should be viewed as a hard core number but rather as a ballpark for consideration. Therefore, the real question is, based on what we know today, which estimate is in the right ballpark?
 
A number of reports can help to shed light on the costs of the F-35.

• In April 2011, the U.S. Government Accountability Office (GAO) released a report indicating that from 2001 to June 2010, the average unit   procurement cost for the F-35 rose from $69 million to $133 million (note: the “F-35A” version, which Canada selected, is about 10% cheaper than the average GAO figures).
• The Pentagon released its “2010 Selected Acquisition Report.” On page 38, the report indicates that the APUC rose from $113.604 million as of Dec. 2009 to $132.806 in Dec. 2010.
• After June 2010, the F-35 program underwent a major review and restructuring in an attempt to curtail cost increases and get the program back on schedule. In March of this year, Vice Admiral David Venlet, the new chief of the F-35 Joint Program Office, appeared before a U.S. congressional committee regarding the F-35. He told the committee that, after his latest review of the program, he is confident in his new cost estimates. For the F-35A, his procurement cost estimate was $126.6 million (including $15 million for the engine).
• It has just been announced that Israel purchased 19 F-35As, at an average cost of $144.7 million. As Israel is only considered a “Security Co-operative Participant” their cost includes the research and development, test and evaluation costs of approximately $23 million for each aircraft. Canada’s price will exclude these costs. Eliminating these costs results in an average price of $121.7 million.

None of us can know for certain what the final cost to acquire the F-35 will be until we get a firm price quote. The government is rightly hopeful that as production increases, the costs will drop. To be sure, the Pentagon is doing everything possible to reduce the costs of the F-35. Shay Assad has just been named Pentagon director of defense pricing. He will be the key negotiator at the table as the Pentagon and Lockheed Martin hammer out a pricing deal for the latest batch of Joint Strike Fighters. Nevertheless, the costs continue to rise, and all evidence to-date indicates that we would pay closer $120 million per aircraft, rather than $75 million.
 
With respect to the life cycle costs, it is important to keep in mind two important factors. First, the F-35 is expected to remain operationally effective through the year 2040. Second, while the
 
F-35 is applying leading-edge logistics to help restrain the support costs, these support costs are heavily driven by the complexity of the software. The F-35 is the most software-intensive airplane ever built. The aircraft is estimated to use approximately 5.7 million lines of code, more than double that of the F-22 raptor. Maintaining and upgrading this software are what drive the support costs upward.
 
Addressing the 19 May hearing by the Senate Armed Service Committee, Ashton Carter stated that “70 cents of the cost of every programme is having it, 30 cents is getting it.” In its March 2009 report on the Joint Strike Fighter, the GAO stated “The total expected investment is now more than $1 trillion -more than $300 billion to acquire 2,456 aircraft and $760 billion in life cycle operation and support costs.” This ratio of the costs to buy versus the costs to support, of about 1 to 2.5, also mirrors my experiences at DND. Applying this ratio to Canada’s potential purchase would result in a purchase price of $7.8 billion (at $120 million per aircraft), long-term support costs of $19.5 billion, for a total cost of $27.3 billion.
 
What if the government maintains its insistence on the F-35, only to discover at the time of signing that the true costs are indeed about double its original estimate? This would necessitate allocating to the F-35 program about an extra $500 million a year for the next 30 years from DND’s capital account, or nearly 25% of the funds spent annually on machinery and equipment. As a consequence, many other priority capital acquisitions would be deferred. If I were the chief of the land staff or chief of the maritime staff, I would not be sleeping too well, knowing the impact this would have on my capital priorities.
 
Industrial and Regional Benefits (IRBs)
I am aware that Industry Canada has issued many communiqués extolling the virtues of the F-35 IRB program, and highlighting contracts signed. However, the IRBs to Canada will likely be at least 3-4 times greater through a competitive process than they will be through the MOU framework for the F-35. Let me explain.
 
The JSF program was smartly designed to try and keep costs down. First, the U.S. decided that its air force, navy and marines would share one basic platform design rather than building a completely different fighter for each. Second, it would allow for international participation, thereby increasing the volume sold and lowering the unit cost of production. Third, it would only allow industries from participating countries to compete for contracts in this program. Contracts would be awarded to those companies that provided the best value. There would be no handouts.
 
It is for this reason that I signed the MOU (7 February 2002) committing Canada to the second phase of this program. We wanted our industries to be part of this $200 billion dollar program (now nearly $400 billion). Our Canadian companies have performed brilliantly. From our initial investment of U$150 million, they have won contracts valued at between $300 and $400 million USD. So let’s be absolutely clear. At no time did we enter the program with the express purpose to buying these aircraft. We entered the program with one main objective; namely, to provide Canadian companies with an opportunity to compete for contracts in this multi billion-dollar program.
 
The essential point is that, in this program, companies must compete for contracts. There are no guarantees. Government figures suggest that there are about $12 billion in opportunities. Based on historical success rates, we can be hopeful that Canadian industry will garner $5-6 billion in contracts through the life of the JSF program.
 
While this amount is large, it pales by comparison to the IRB’s that would flow to Canada through a competition where all bidders must guarantee IRB’s equal to or greater than the value of the contract in order to be declared compliant. In this instance, we will likely have a contract of between $20-30 billion and guaranteed IRB’s of the same amount.
 
Finally, the issue of long-term sustainment of the F-35 should be a concern to Canadian industry. Under a competition, bidders would typically ensure that the ongoing support for the equipment takes place in Canada. Under the F-35 MOU, this assurance is not present. Canada maintains a large and highly capable aerospace industry. It would be very unfortunate if our industry lost out on this work.
 
Conclusion
The F-35 is not yet operational. Its development is four years late and its costs are not under control. Committing to acquire the F-35 now makes no economic or military sense. Compounding the problem by providing misleading and flawed arguments merely exacerbates the debacle. We should not accept billion dollar risks with the taxpayers’ money.

___
Mr. Williams retired in 2005 after a 33-year career in the federal public service. The last 10 years of his career were spent in the business of defence procurement, five years as ADM Supply Operations Service in PWGSC followed by five years as ADM Materiel at DND. He is now President of The Williams Group, providing expertise in the areas of policy, programs and procurement. In addition, Mr. Williams is a Research Associate with Defence Management Studies at the School of Public Policies at Queen’s University. In 2006, Mr. Williams authored “Reinventing Canadian Defence Procurement: A View From the Inside”. He can be reached at williamsgroup@rogers.com.
© FrontLine Defence 2011