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.  

Speaking of things that fly ....

Can you say awkward?

Questions are being raised about the Conservative government's procurement of Russian helicopters that Canadian pilots have been secretly using to fly troops into combat in Afghanistan.

Until this week, the government had been silent about the MI-17 "Hip" helicopters that were leased last year. The government still refuses to provide any details of their procurement, including how much the lease cost.

Ooooh. I would think the auditor-general might have wanted to know about that. In the AG Fall 2010 report there is diddly about an MI-17 acquisition.

"It was competed, it was open, but for reasons of security I really can't go into any other details," Defence Minister Peter MacKay said Wednesday.

I wouldn't be too sure about that. Since the AG missed it in a detailed report entitled Acquisition of Military Helicopters, one has to question the veracity of MacKay's statement. Sounds like some details weren't available to the AG.

So off to the digs and what do we discover? Ah yes, there was an idea way back when it was realized that the CH-47 Chinooks we ordered were not going to appear before the previously scheduled end of the Afghanistan mission. 

Shortly after the RFP’s release, Canadian defense think-tank CASR began pointing out 2 potential solutions to this dilemma. One is the possible solution discussed during November 2005 coverage of Canada’s “emergency” purchases for Operation Archer: buy Mi-17 helicopters, the same type flown by East European NATO allies and by the Afghan Air Force. A Russian trade delegation made that precise offer during their March 2006 visit to Canada, and a Canadian company named Kelowna Flightcraft is already cooperating with the Mil factory in Kazan, producing Mi-17KF “Kittiwakes” with fully Westernized avionics and rear loading ramps.

Right. And if you read the above you'll notice that the original had a bunch of links in it back to the Simon Fraser University based CASR think-tank site. Back to that, right after this.

Mi-17s wouldn’t be a substitute for the Chinook. Their load is 24 fully-equipped troops at best, with an external sling load of 3,000 kg, vs. the stated Canadian requirement of 30 troops and 5,443 kg. Hot and high altitude conditions will reduce those totals further. On the other hand, their cost is about 1/8 that of a new CH-47 Chinook, and deliveries would have been rapid. They would create a temporary solution, one which could be repurposed later to other military roles, given away to the Afghans, or even given civilian rescue or disaster-related roles as Chinooks become available.

So, the Chinook would still have to be purchased, but to fill an immediate need, these things might work. However, cost conscious Canadians would see the price differential and ask, "Why, Peter?" 

Ah yes... those CASR links. Don't waste your time. Despite the fact that Defense Industry Daily was able to link back as recently as 28 Oct 2010, CASR now has this statement regarding all previous things MI-17.(highlighting mine)

This Background Index previously focused on the Canadian Forces medium-lift tactical helicopters required for Afghanistan. That medium-lift role has now been filled through the purchase of six ex-US Army CH-147D Chinooks. At the end of Canada's Afghan mission, remaining CH-146s  – one CF Chinook is said to have been lost to enemy action – are to be sold back to the US government. Those 'D models will be replaced by CH-147F MHLH (Medium-to Heavy-Lift Helicopters).

In earlier Background pages, we covered CF options and alternatives to hard-to get Chinooks. With CH-147s in place with Canada's JTF-Afghanistan Air Wing in Kandahar, those alternatives became moot and the pages have been removed.

Really?! Not so moot. And the timing is so ... coincidental.

In the CBC article we hear from University of Calgary political science professor Rob Huebert.

Defence analyst Rob Huebert said the huge price difference between the two helicopters might help explain why the government has kept the deal secret.

"From a political perspective, one can also see that the Conservatives may not want to be seen to be undermining their claim that they needed the Chinooks to the degree that they did," Huebert said.

But he said the air force was wise to choose an American helicopter to be a permanent part of the Canadian equipment in order to have access to experts or spare parts. That could be a concern if relations with Russia start to freeze up, he said.

Whoa, there! First part good. Second part bad.
Yes, there are a lot of questions as to why the Harperites kept this deal secret. The MacKay line of security is a load of crap. Huebert has it right that this has a lot of potential to embarrass the Conservatives. And they could be left wanting for any coherent answer.

No. Huebert is over-simplifying and playing at "cold war" mentalism with regard to suppliers. While the MI-17 (MI-172) "Kittiwake" is a Russian-built airframe, it incorporates avionics from BAE in the UK and (brace yourself) Kelowna Flightcraft in Canada. As they are only too happy to point out.

No, the problem for the Conservatives is that having leased Russian helicopters, and with Canadian companies involved, it makes the northern dance with the "Bears" look a lot less ominous and the theatrics of MacKay and Soudas even more pathetic.

Worse though, is that Harper and MacKay have yet to learn that it isn't their money. Any suggestion that this was "open" is misleading at best.

Another question: "It was competed," says MacKay.

Against what? Who were the other contenders? Where did it appear so all of us could be assured of a proper bidding process? Where?

Mind you, given the Harper/Soudas/MacKay definition of a competition it was probably a tossing of credit cards into the middle of the table to see who was going to pay for the drinks.