By Alan Williams
Defence Watch Guest Writer
In Mr. Shimooka’s Vimy Paper, “The Fourth Dimension: The F-35 Program, Defence Procurement, and the Conservative Government, 2006-2015”, he purports to present a history of the events surrounding the F-35 debacle. Unfortunately, in my view it is a flawed study reflecting Mr. Shimooka’s failure to grasp some of the basic principles of defence procurement and his acceptance of Lockheed Martin’s version of costs.
Below are just a few examples:
PROCESS AND ACCOUNTABILITY
Example 1
On page 12, Mr. Shimooka writes that there were several unique challenges for the Canadian government.
“The first involved how to properly manage an acquisition process given the unusual nature of the JSF Partnership. With its cooperative development approach, the F-35 did not conform to any other program within the bureaucracy’s experience. The government would need to guarantee two objectives simultaneously: managing a selection process that would ensure that Canada obtained the best possible replacement for the CF-18 (in terms of capability and cost), while cultivating the potential for tens of billions of dollars in opportunities for Canadian industry within the JSF program if the F-35 was selected as a replacement.”
Frankly, participating in the JSF program while simultaneously pursuing an open, fair and transparent competitive process presents no problem at all. As long as Canada remained a partner in the JSF program its industries were entitled to pursue and hopefully win significant contracts. Should Canada choose an aircraft other than the F-35, it would forego its opportunity to bid on contracts within the JSF program. Best estimates were that Canadian industry might garner up to $10-$12 billion in contracts. After all, nothing was guaranteed. However, any successful bidder would be required to guarantee industrial opportunities equal to or greater than the value of the contract, at least twice as great as under the JSF program. Furthermore, the Department of Innovation, Science and Economic Development is in the position of ensuring that these jobs are high value jobs.
Example 2
On page 12, Mr. Shimooka identifies the selection process as the second major challenge for the government. Specifically,
“How to establish criteria for selecting a replacement, when one option is clearly more capable and will be used by most of Canada’s major allies?”
This too is a non-issue. First, the criteria or statement of requirements (SOR) needs to be based on the roles for the jet as articulated by the federal government. What is required is not necessarily the jet that has the most capabilities but the one that has the proven, operational capabilities that meet Canada’s needs. Note, I refer to proven, operational capabilities, not theoretical capabilities described on paper but not yet operationally approved.
Second, whether or not a jet is used by most of our allies is irrelevant. We should buy the jet that meets our needs not those of other countries. As for the issue of interoperability, we have and will continue to operate in theatres of operation with allies who bring a wide-range of aircraft to the fight. To this end, we regularly conduct military exercises or “war games” with our allies simulating operational situations and ensuring that notwithstanding the differing assets, we can communicate and work effectively together.
Example 3
On page 13, Mr. Shimooka writes,
“The 2006 assessment was fairly clear, suggesting the F-35 was likely the most capable and lowest cost option – and one that offered major industrial benefits for Canadian firms. The government accepted the recommendations, and on its basis signed the MOU in December of that year.”
The 2006 assessment was indeed pivotal, not in that it was used as the basis for signing the Phase III MOU. Rather, that it was used to support a recommendation made on Sept. 19, 2006 to the Minister of National Defence by the ADM (MAT) to purchase the F-35 – a crucial milestone that Mr. Shimooka omits.
There were two fundamental problems with this recommendation. First, in 2006 the F-35 was in its embryonic stages of development with its capabilities and its costs still unknown. To make such a recommendation at that time was indefensible. Second, in making such a recommendation, the ADM (MAT) abdicated his role and accountability as the individual responsible for acquisition within DND. Acquisition decisions are placed in the hands of civilian, rather than military, authorities to ensure objectivity and rigour before making recommendations up the line to ministers. In this case, the ADM (MAT) merely accepted the air force’s superficial analysis and ignored his duties.
This unsupportable recommendation launched the long downward spiral into what I refer to as the
F-35 debacle. Once accepted, neither the bureaucrats nor government leaders would back off the recommendation no matter what facts were available to them.
Example 4
Mr. Shimooka goes to great lengths to applaud the internal work at DND. On page four, he states:
“Nevertheless officials within DND, and later the National Fighter Procurement Secretariat worked to overcome these challenges, exercising due diligence with a rigorous evaluation process. The work of both included numerous safeguards to ensure the integrity of the entire approach. Although the effort was not flawless, the assessments made by these bodies were accurate and validated in subsequent years.”
Furthermore in his executive summary he writes,
“The federal bureaucracy, initially led by the Department of National Defence worked to undertake a proper evaluation of the CF-18 replacement program. Far from being exorbitantly expensive or technologically defective, it discovered the F-35 was the best option for Canada and recommended a sole source selection in 2010.” and that this study “is a story not of bureaucratic mismanagement or military bias.”
The reality is that no amount of internal analysis can substitute for an open, fair and transparent competition. First, internal analysis does not include the highly sensitive, secret operational information only provided through a competitive framework. Second, price and industrial benefits are factors in determining a successful bid and these can only be optimized and realized through a competition.
Furthermore, there is a vast difference between believing, rightly or wrongly, that “the F-35 is the best option for Canada” and recommending “a sole-source selection”. The former is an opinion. The latter is a procurement strategy that must comply with applicable legislation. Under section 506.12 (b) of the Agreement on Internal Trade, a sole-source option can be pursued if there is “an absence of competition”. In this case, it does not comply. There is no legal justification for a sole-source award.
If the F-35 did not exist, would we say that no other aircraft exists to meet our needs? Would we therefore not purchase any fighter aircraft replacement? Of course not! There can be no doubt that there are a number of alternatives to the F-35. These include Boeing’s Super Hornet, Dassault’s Rafale, Saab’s Gripen and EADS/BAE’s Eurofighter Typhoon. These are used by many of our allies and each, to a greater or lesser extent, can meet Canada’s fighter replacement needs. Which one can best meet Canada’s needs taking into consideration price and industrial and technical benefits can only be determined through a competition. Of course, if you have predetermined which aircraft you want, then you wire or fix the requirements to suit your needs. That is what occurred.
Contrary to Mr. Shimooka’s assertion, this indeed is a story of bureaucratic mismanagement and military bias.
COSTS
Example 5
On page 11, Mr. Shimooka writes that after a major replan of the JSF program, a target was established that “would see the aircraft cost approximately $75 million dollars a copy.” Frankly, the $75 million figure never was the price any purchaser would ever pay to purchase an F-35. Rather, it reflects one of the many costs that went into building the F-35. It is a tribute to Lockheed Martin’s ingenious marketing strategy that the public was led to believe that Canada would pay $75 million per aircraft. Sadly, our government and officials bought into this strategy and apparently so has Mr. Shimooka.
An analogy may help to explain Lockheed Martin’s deceptive cost communications strategy. How would you react if you were to enter a furniture store, ask a salesperson about the price for a chair and be told that direct labour cost was $75? You would likely be pretty upset. You would recognize that the $75 cost figure may or may not be correct but is not the price you would pay. The final price would be composed of direct labour, direct material, overhead and profit. You would feel that the salesperson is trying to deceive you.
As the attached U.S. Cost Definitions chart indicates, the $75 million referred to by Mr. Shimooka only represents the “recurring flyaway cost“ of the F-35. The final price that Canada will pay to purchase the aircraft will be composed of the recurring flyaway cost, the non-recurring flyaway cost, the weapon systems cost and the procurement cost.
By the way, according to the Selected Acquisition Report FY2017 referred to by Mr. Shimooka, if a buyer were to purchase the F-35A in 2016, the “recurring flyaway cost” for the jet would be $99.6 million. In 2012, these costs would have been $91.6 million.
THE OFFICE OF THE PARLIAMENTARY BUDGET OFFICE (PBO) REPORT/
AUDITOR GENERAL (AG) REPORT
I am sure that officials in the PBO and AG can adequately defend their reports. However, it is important to note that neither of these reports would likely have been demanded were it not for the government’s misleading cost information. Anyone involved with defence procurement had to know that the government’s initial claim that it would cost $9 billion to acquire 65 jets and $7 billion to support them was ludicrous. The long-term support costs are typically 2-3 times as great as the initial acquisition cost. In this case the government was claiming the support costs were less than the acquisition costs!
CONCLUSION
Much as Mr. Shimooka may try to construct another narrative, the Conservative government’s decision to sole-source the F-35A, was a disaster of its own making. Resorting to a campaign of misinformation and a strategy to understate the costs of the program, the government lost all credibility.
At the outset, it launched a misinformation campaign, justifying its decision with statements it had to know were false. These included:
-Claiming the F-35 was the best plane at the best price;
-Claiming the F-35 was the result of a Canadian competition;
-Claiming the F-35 was needed for interoperability;
-Claiming the F-35 was needed for industrial benefits.
Later on, when it was forced to pause as a result of the PBO and AG reports, the government again resorted to subterfuge, developing a seven-point plan that was nothing more than a stalling strategy.
Finally, as its last attempt to foist the F-35A upon an unwitting Canadian taxpayer, the government attempted to undertake a clandestine deal with the U.S. Air Force. Not surprisingly, this duplicitous behavior was discovered and the government had to back off.
Understating of Costs
Parliament and the public simply wanted to know how much this program was going to cost. Instead of providing a full and fair response, the government continuously understated the costs, thereby inviting the intervention of the PBO and AG. The PBO and AG reports further damaged the credibility of the government by reinforcing the extent of the government’s deceit. From an initial government estimate of $16 billion, current estimates are that the program will cost Canadians over $40 billion.
The irony, of course, is that the F-35A may yet be the best aircraft to meet Canada’s needs. The only way of knowing for certain is through an open, fair and transparent competition, a competition based upon the government’s public articulation of the role it sees for our military and the role it sees for Canada’s fighter replacement. Acquiring aircraft through a sole-source contract is not only illegal but bad business. Costs are higher and industrial benefits are lower. Most importantly, only through a competition can we be certain that we have purchased the best plane to meet the needs of our men and women in the military.
In his conclusion, Mr. Shimooka contends that:
“Canadian political parties and the public have largely failed to grasp the underlying facts, and created a discourse that bore little resemblance to reality.”
Fortunately, the exact opposite was true. That’s why the Conservative government failed to achieve its objective.
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Alan Williams is a former ADM (MAT) at DND. He is now President of The Williams Group, providing companies with procurement expertise. In 2002 he signed the Memorandum of Understanding committing Canada to the second phase of the Joint Strike Fighter program. Mr. Williams is the author of two books, “Reinventing Canadian Defence Procurement: A View From the Inside” published in 2006 and “Canada, Democracy and the F-35” published in 2012. He can be reached at williamsgroup691@gmail.com.
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