The ballooning cost of the F-35 and MacKay's latest lie

#F35 #Cdnpoli -

Yes, I will be producing part 3 of the F-35 series. It likely won't be available until tomorrow evening.

In the meantime, I cannot let this go by. Andrew Coyne is apparently working on the same project and coming up with roughly the same figures I have so far.

In fact it was reported nearly two years ago by The Globe and Mail, in the same June 11, 2010, story that first stamped what is now conceded to be an incomplete accounting on the public mind. Drawing on “secret cabinet documents,” the paper reported that the total cost of the as-yet-unannounced purchase of 65 jets was not $9-billion, as it had earlier reported, but $16-billion, once maintenance costs of $7-billion over 20 years were factored in. However, way at the bottom of the story there appears this note: “In addition, the government is predicting that the operating costs to fly the stealth fighters over two decades will reach $9.6-billion.”

There it was, all this time, hiding in plain sight. The Globe didn’t realize its significance, and neither did anyone else. It’s clear from the story that the number the government was working with internally was $26-billion. Yet $16-billion became the standard figure in public discussion.

Got that? On a cabinet document. That means that the figures were there in front of MacKay and Harper. That was pre-election, pre-signing of the MoU of 2010. In fact the numbers are higher than that as Coyne points out today and which I will clarify when I complete part 3.

As I pointed out previously, after MacKay was interviewed on Question Period yesterday, his claim that life cycle costs are not included in final purchase price is absolutely bogus. In fact, what he is suggesting was done is in direct violation of Treasury Board directives. Coyne makes the same mention in his article. In fact, here is the extract from the Treasury Board Guide to Management: (My emphasis in text)

3. Life-Cycle Materiel Management

Life-cycle materiel management is the effective and efficient management of assets from the identification of requirements to the disposal of the assets. Materiel management strategies must always consider the full life-cycle costs and benefits of the alternatives for meeting program requirements. By using life-cycle costing techniques, departments can evaluate the total costs to the Crown of owning or leasing an asset before it is acquired. This evaluation is accomplished by considering such factors as the current value of the costs of future operation, maintenance, and disposal, in addition to initial and ongoing capital costs. Estimating life-cycle costs also creates standards by which costs can be monitored and controlled after acquisition. By adopting this approach to the management of materiel, departments can ensure that their materiel management and asset management decisions are financially prudent and represent the best value to the Crown.

The departmental planning phase, which includes business planning and budgeting, is the initial process that determines a department's priorities and strategic program objectives. The materiel life-cycle management process is based on these priorities and objectives.

The extended life of materiel assets has important implications for decision makers. For instance, an acquisition decision that is based on the lowest purchase price but that ignores potential operations and maintenance (O&M) costs may result in higher overall costs. Decision making in life-cycle materiel management is an interactive process that considers all four phases of an asset's life cycle. Effective management requires that an appropriate level of management interest and control be maintained through all phases in the materiel asset's life cycle.

The four phases of life-cycle materiel management are as follows:

1. assessing and planning materiel requirements;
2. acquiring materiel resources;
3. operating, using, and maintaining materiel; and
4. disposing of materiel.

Tip:
The life-cycle cost (LCC) of materiel assets can be expressed by the following simple formula: LCC = planning costs + acquisition costs + use and operating costs + disposal costs - residual value.

And there it is. There's even a "tip" for dummies. Take note of the 3rd phase of the LCMM and LCC.

Coyne picked up on one other thing that will be highlighted later: the life cycle cost projection. The life cycle cost projection for the F-35 is set at 20 years. 

Anyone who has ever been in the Canadian Armed Forces would look at that and ask, "What the ...?!!"

The F-18s are entering their 30th year of service. As it stands now those fighters will likely have to fly for at least another five years, and probably more. We do not dispose of fighters at 20 years. And with an 8000 hour estimated flying life, they will probably be operated for over 36 years.

There will be more coming on that in a later post. However, we should get back to Andrew Coyne's breakdown. 

The life-cycle costs of an asset are those it incurs over the whole of its useful life. Yet Defence’s figures are based on an arbitrary 20-year interval, not on the F-35’s actual projected life. The Parliamentary Budget Officer assesses this at 30 years, while the Auditor-General prefers 36 years. Take the midpoint between the two. Prorate the department’s estimate of operating costs over 33 years rather than 20, and you get a figure of, not $16-billion, but at least $26-billion. Add in acquisition costs of at least $9-billion (and probably more like $10- or $11-billion — but that’s another story), plus the two- or three-billion more the Auditor-General says should be included for attrition, upgrades and the like, and you’re looking at a total cost, all in, of something closer to $40-billion.

Not $9-billion. Not $15- or $16-billion. Not $25-billion. Forty-billion dollars. So far.

Yes. That's roughly the same figure I have. And where did the 20 year LCC come from? Lockheed Martin. 

Later.