PACP Committee Report

DISSENTING OPINION – NEW DEMOCRATIC PARTY OF CANADA - Chapter 2 of the Spring, 2012 Report of the Auditor General of Canada

The sole-sourced procurement process of the F-35 Lightning II Fighter Jet managed by the Harper government has proven to be the largest military procurement debacle in Canadian history.  Both parliamentarians and Canadians continue to be kept in the dark regarding acquisition costs, life-cycle costs, capabilities and process to select a replacement for our aging CF-18s.

New Democrats feel strongly that the Committee’s report does not accurately reflect what the committee heard from witnesses on Chapter 2 of the Auditor General of Canada’s Spring 2012 Report, “nReplacing Canada’s Fighter Jets”.  The NDP remains deeply concerned that this study did not allow parliamentarians to shed light and complete the inquiry on this very important matter. Only seven hours of testimony were dedicated to this study, and no responsible ministers appeared during the inquiry.

1.       Failure to Follow the Procurement Process

When spending taxpayer money to acquire military equipment, it is vital that the process be open, fair and transparent. In this way, the military gets the best equipment, Canadian taxpayers get the best price and Canadian industries get the best industrial benefits. In the case of the government’s decision to acquire the F-35, the process has been flawed, manipulated and not transparent. Important testimony on these issues emerged that is not adequately captured in the Committee’s report.

A)      SOLE SOURCING

An open and fair competition would require that the Statement of Operational Requirement (SOR) be made public and used as the basis for bids from suppliers. In the case of the F-35, the complete opposite happened. The government hid the SOR behind the guise of “National Security” and the requirements were written in such a way that only the F-35 could meet them.

The only justification to sole-source the F-35 was based on a one page, 60 word letter classified as secret from the Assistant Deputy Minister (Material) at the Department of National Defence (DND) addressed to the Assistant Deputy Minister of Acquisitions at the Department of Public Works and Government Services (PWGSC) on June 1, 2010. This was only two weeks before the government announced it had selected the F-35 to replace the CF-18 fighter jets. The term “Fifth Generation” was used four times in the letter; it is important to note that the AG said in his report that those terms are not a description of an operational requirement.  

An exception to the competitive process must be justified and is normally accompanied by a SOR and an options analysis. However, National Defence did not provide a SOR to PWGSC until after the government had announced its decision to sole-source the F-35.

During testimony on April 26, 2012, the AG strongly recommended “What’s important right now for the new committee that’s going to be looking at this is, number one, to have very clear direction about whether the F-35 is the only option.” We agree with the AG that it is important to clarify what options are being considered to replace the CF-18 fleet and feel this should be reflected in the Committee’s report. We also strongly feel that a true open competition is possible only if the New Fighter Procurement Secretariat is clearly mandated to review and change the SOR to replace Canada’s Fighter jets so that other options can be considered.

B)       INDUSTRIAL BENEFITS

The government’s failure to follow an open and transparent competition also had a negative impact on securing industrial benefits for Canadian companies. Under the Joint Strike Fighter (JSF) Program, industrial benefits are not guaranteed.  Canadian companies must first compete with companies from other countries in order to win contracts. In contrast, an open competitive process requires all bidders to guarantee industrial regional benefits (IRBs) equal or greater to the value of the contract.  In the case of the F-35, where the total cost is projected to be in the area of $40 billion or more, guaranteed IRBs would equal that same amount.

The government has steadily lowered the amount Canadian industry could benefit from the JSF program from $16.6 billion in 2009 to $9.85 billion earlier in 2012. The Auditor General noted in his report that “only the most optimistic scenarios were put forward” and that “the estimates were based on assumptions about the type of work that may be performed in Canada.” In testifying before the committee on April 26, he said he was “concerned that those estimates did not include a potential range. They included what really seemed to be just the best estimate of industrial benefits.”

2.       Lack of Transparency and Misleading Canadians

The Conservative government mislead parliamentarians and the Canadian public by saying before the last election that the cost of the F-35 was over $10 billion less than what they actually knew to be true.

A)      TWO SETS OF BOOKS

It is clear from the AG’s report and ensuing testimony at the Committee on Public Accounts that key decision makers in Cabinet were presented with a cost for the F-35 of $25 billion in June 2010, but presented a cost to the public of $14.7 billion in March 2011. This double accounting created two sets of books: one for the government and another for the public and parliamentarians.

The AG made it very clear both in his report and at committee that he had significant concerns with the completeness of the information provided to parliamentarians, as it did not include estimated operating, personnel, or ongoing maintenance costs, even though this information was included in estimates provided to Cabinet.

During committee testimony on April 26, 2012, the AG stated “We identified that there were some significant things were missing from the life cycle costing—for example, attrition, upgrades, and the fact that these aircraft were going to last for 36 years, not just 20 years. When we raised the issue of life cycle costing and the fact that it was not complete, I don't believe we were nitpicking in any way. I think that we were saying that there were some significant elements that were missing.”

He went on to articulate that cabinet approved both a $16 billion budget designated for operating costs over 20 years, and a $9 billion budget designated for the acquisition of the F-35 fighter jet: “The number of $25 billion was a number that was established by Defence that included both the purchase and the maintenance cost, and the budgets were approved through normal process.”

On that same day, the AG spoke to the media, and further clarified these statements:

“I can't speak to individuals who knew it, but it was information that was prepared within National Defence…and it's certainly my understanding that that would have been information that, yes, the government would have had.” When pressed, he said “...certain members of the executive.”

It is important to note that under questioning at the committee on May 1, 2012, the Deputy Minister of Defence clearly contradicted the AG when stood by the assertion that DND never had an estimate of $25 billion in 2008.

B)       NOT DISCLOSING THE FULL COST OF THE F-35

Despite an abundance of reports from the US Pentagon, the US Government Accountability Office, partner nations in the JSF Program and the Parliamentary Budget Officer (PBO), the Conservative government ignored the rising cost of the F-35 and decided to make only the acquisition and support costs public.

The government’s cost estimate of $5.7 billion for the support cost is based on the assumption that the operating cost for the F-35 will be similar to the current operating cost of the CF-18. However, the Pentagon’s latest SAR report has estimated the operating cost of the F-35 to be $32 000 per flight hour, as opposed to $18,900 for the F-18. Under questioning at the Committee on May 1 and May 3, 2012, the Deputy Minister of National Defence, and Assistant Deputy Minister (Material) at DND presented conflicting views regarding these average annual maintenance and repair costs. No valid explanation was given as to why operating costs of the F-35 would be similar to those of the CF-18.

Second, the government chose to ignore repeated requests from the House of Commons and the PBO to provide full life-cycle cots for the F-35. On May 3, 2012 the PBO told the committee “The government's public figures did not include all components of full life-cycle costs, as required by the House finance committee motion of March 2010.”

Third, both Treasury Board Policy and DND’s costing handbook stress the importance of including full life-cycle cost. Treasury Board guidelines state: “Inherent in procuring best value is the consideration of all relevant costs of the useful life of the acquisition, not solely the initial or basic contractual cost.” Furthermore DND’s costing handbook states that life cycle costs “must be assessed in order to develop a full appreciation of the differences between options under consideration.”

Fourth, the AG’s fall 2010 report on the Acquisition of Military Helicopters recommended that “National Defence should start estimating full life-cycle costs in the options analysis phase of its project management process and present these costs to decision makers at subsequent steps in the process as the estimates evolve.” In response to questioning at Committee on May 1, 2012, the Deputy Minister of Defence confirmed that he had indeed read chapter 6 of the AG’s Fall 2010 report and was therefore aware of the recommendation to include full life-cycle costs. Consequently, the NDP is very concerned that there is no reference to these guidelines in the Committee report despite being raised during testimony.

Conclusion:

In light of the evidence heard in committee, the NDP is deeply concerned about the government’s failure to follow a fair procurement process, provide plausible cost estimates according to Treasury Board policy and be transparent with Canadians on the true cost of the F-35.  It is clear from the Auditor General’s report and ensuing testimonies that the government failed to exercise due diligence.

Furthermore we are also concerned that the government’s proposed seven-point plan under the New Fighter Procurement Secretariat (initially named the F-35 Secretariat) has no intention to examine alternatives to the F-35. The government has chosen PWGSC to oversee the new secretariat despite the fact that the AG said PWGSC did not fully carry out its role as the government’s procurement authority and failed to demonstrate due diligence. Moreover, the government has yet to provide updated cost information to parliament in accordance with point three of the seven-point plan despite having obtained updated costing information from the JSF program seven months ago. Lastly, it does not appear that the NFPS will be mandated to review or change the SOR making it simply impossible to examine options other than the F-35. In light of this, we feel that the government has lost all credibility in managing this procurement.