08:37 GMT, March 21, 2011 On March 10, 2011, the Parliamentary Budget Officer published a report on F-35 cost estimates which contains numbers and estimates that differ from the program analysis conducted by the Department of National Defence. The results of this discrepancy are misleading to the Canadian public and our international allies. The Department of National Defence stands behind its estimates for F-35 acquisition. The narrative below outlines how departmental costs are arrived at and why they are the most accurate numbers for this procurement process.
THE PRICE OF SOVEREIGNTY
The Canadian Forces protect the sovereignty of one of the largest expanses of airspace in the world, extending well out over the Atlantic, Arctic, and Pacific oceans. Canada also shares responsibility for the defence of North America with the United States, and has international defence commitments as a member of the North Atlantic Treaty Organization.
Canada requires a fighter aircraft to contribute to the safety and security of Canadians while effectively supporting foreign policy and national security objectives, as set out in the Canada First Defence Strategy. Following this strategy’s release, the Air Force examined in detail the operational requirements for Canada's new fighters. A systematic analysis of fighter aircraft roles; future operating environment; threats from air, land and sea; and technological advances revealed the need for a fifth generation aircraft and stealth capability. Stealth qualities include high-resolution sensors; the ability to manage huge volumes of data in increasingly complex tactical environments (fusion); and the means to share this information through secure high-capacity networks (interoperability).
A meticulous analysis of mandatory requirements for the next generation fighter capability made it clear that only a fifth generation fighter could satisfy those requirements in the increasingly complex and uncertain future security environment. The F-35 is the only available fifth generation fighter aircraft that meets the Canadian Forces’ requirements.
Following the Government of Canada’s selection of the F-35 Lightning II as the replacement fighter jet for its decades-old CF-18 Hornet, the Department of National Defence (DND) is moving forward with implementing this project. The Department is committed to openness, transparency and accountability to Canadians, and as such is providing the facts and details on how the cost estimates for the F-35 fleet are arrived at and the breakdown of those costs.
Canada is exercising its option as a partner in the multi-national Joint Strike Fighter (JSF) program to acquire the Conventional Take Off and Landing (CTOL) variant, which is the least costly variant and the one being purchased by the majority of the JSF partner nations. Canada will acquire its F-35 aircraft at the peak of production when costs are lowest.
Development and flight tests of Canada’s variant are progressing well, with the first production CTOL making its maiden flight in February. In fact, by the time Canada takes expected delivery of its first F-35, not only will several hundred aircraft will have already been delivered, but it is estimated that the world wide fleet will have flown about half a million hours.
Canada’s acquisition includes 65 aircraft, along with initial logistical support, including simulators and spares, project management, infrastructure, weapons and contingency costs, which total $9 billion CAD. The total estimated project cost breakdown is as follows:
Acquisition Breakdown Cost:
• Aircraft: 5.58 B
• Block Upgrades: 0.18 B
• Refuelling Probe: 0.10 B
• Drag Chute: 0.06 B
• Government Supplied Material: 0.01 B
• Other Miscellaneous Systems: 0.07 B
Subtotal: 6.00 B
• Integrated Logistics Support (including simulators and spares): 1.30 B
• Project Management Office: 0.20 B
• Infrastructure: 0.40 B
• Weapons: 0.30 B
• Contingency: 0.80 B
Total Estimated Project Cost: 9.00 B
The $6 billion CAD figure (which is part of the $9 billion acquisition cost) refers to an estimated $75 million US per aircraft as well as exchange rates, necessary items, materials, systems and inclusion of upgrades.
ARRIVING AT CANADA’S COSTS
The US-led JSF program is not only the largest defence procurement in history, it is arguably also the most scrutinized. The JSF cost estimation process is a continuous, detailed activity involving multiple experts and independent reviews. With independent review by the eight other partner nations involved and extensive oversight of the program within the US Government, every aspect is being closely monitored.
The JSF Program Office (JPO) production cost estimate is derived using a year-long cost analysis process involving a large team that is actively engaged in managing the daily costs of the F-35 production and supplier base.
As a signatory to the Production, Sustainment and Follow-On Development Memorandum of Understanding (MoU), signed in 2006, Canada is provided with an annual detailed cost estimate by the JSF Program Office. This MoU is the agreement that guides the JSF partners through the F-35’s development, production, purchasing and maintenance phases. Additionally, Canadian project office representatives go over cost estimates specific to Canada with their JSF Program Office counterparts at least once annually. The culmination of all of this data is what DND bases its own estimates on.
REAL COSTS AND ACTUAL DATA
JPO cost assessments use a bottom-up analysis which incorporates detailed estimates at the assembly and component levels. These actual figures are preferable and offer much more reliability than possible with a top-down approach, such as one that simply bases aircraft cost on weight.
JPO estimates take into account actual trends in the labour and supplier base including signed contracts and actual costs. They also factor in proven savings associated with the commonality of design of the three JSF variants of aircraft.
To date, actual costs for those Low Rate Initial Production (small lots of aircraft produced to ensure production line peak efficiency) under contract have all come in lower than the JPO estimates. To purchase Canada’s variant off the production line today would be $128 million USD per aircraft, which is already far below the Parliamentary Budget Officer’s estimate. Also of note, this figure is much higher than the $75 million USD Canada estimates it will pay when purchasing aircraft between 2016 and 2022, at the peak of production.
THE NUMBERS BEHIND SUSTAINMENT
The JPO sustainment cost estimate is also derived using a year-long process involving all nine partner nations. Each country reviews and updates the associated JPO Ground Rules & Assumptions and their respective aircraft delivery plans to reflect their latest approaches to F-35 fleet operation and sustainment. This input is coordinated and reconciled, and forms the input to costing models which generate the sustainment cost estimate.
The costing models are continuously updated to incorporate actual data and experience from sustaining the ever increasing JSF flying fleet. To date, more than 680 flights have been flown by 11 aircraft generating some 1,000 flight hours of experience to pull from.
DND’s estimated cost for sustainment over a 20-year period is $5.7 billion. Combined with the $9 billion acquisition cost, thetotal estimated cost and sustainment of Canada’s 65 F-35 Joint Strike Fighters is $14.7 billion.
ADDITIONAL CHECKS AND BALANCES
In addition to the rigorous cost estimation processes above, JSF costing is also monitored by independent US Government cost review groups: the Joint Estimating Team and the Cost Assessment and Program Evaluation directorate. The JSF program has also recently undergone a very thorough and detailed Technical Baseline Review, a successful endeavour to restructure the program. This involved approximately 120 subject matter experts from across the full spectrum of activities associated with a program of this size and nature (including manufacturing, aircraft production, flight testing, etc.). As a result of that effort, the JSF program has been re-structured to provide an even more solid and realistic foundation for development, production and sustainment.
STANDING BY OUR NUMBERS
DND stands behind the estimates communicated publicly for F-35 acquisition and sustainment. Canada’s estimates have not changed since the Government announced this acquisition on 16 July, 2010. Given the level of effort and rigour demonstrated in cost estimating processes, the validation of estimates with actual data, and the unprecedented level of scrutiny, DND remains confident that its cost estimates are the most accurate numbers for this procurement process. Additionally the cost estimates’ reliability will continue to improve year after year as actual cost data to produce and sustain the worldwide fleet are factored in to the process.
HIGH VALUE WORK AND JOBS FOR CANADIANS
The estimated value of opportunities for Canadian industry arising from Canada’s acquisition of 65 F-35 aircraft, at a cost of $9 billion, is approximately $12 billion. This value is arrived at through analysis by the Prime Contractors based on their assessment of Canadian companies’ capabilities and projected F-35 production requirements.
Through the Industrial Participation approach, Canadian companies have privileged access to the work available to produce and sustain the 3,100+ aircraft currently forecast to be acquired by the partner countries.
Sixty-four Canadian companies have secured contracts valued at approximately $350 million CAD. This includes contracts that have been completed as well as work currently underway. Since 2007, the value of contracts held by Canadian companies has nearly doubled (94 per cent increase).
The estimated $12 billion in potential benefits does not include the additional work that will be done by Canadian industry resulting from sales to non-partner countries (such as Israel, which announced a contract to acquire approximately 75 F-35s). Nor does the value include any of the potential benefits that will result from Canadian industrial participation in sustainment valued at $5.7 billion (maintenance, training, simulation, etc.). Industry Canada continues to work closely with the Prime Contractors to identify sustainment opportunities for Canadian companies.
THE COST OF CANCELLATION
If Canada withdrew from the Production, Sustainment and Follow-On Development agreement, there would be costs associated with that withdrawal, which would have to be negotiated with the other partners. Canada would be required to purchase the F-35 aircraft through the Foreign Military Sales program and have to pay approximately $850-900 million CAD more for the aircraft in addition to royalties to the JSF partner countries. To back out now on its commitment to purchase the F-35, Canada would forfeit all its current investments under the MoU, which include $225 million to date. The Industrial Participation Plan would also be invalidated as it is continent on Canada’s commitment to purchase the F-35.
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