I’ll leave others to try to figure out the rest: whether there will be a truly open competition now that the original sole-source contract is dead, whether Canadian firms will still be able to bid on F-35 work if we don’t buy it, and so on. I’d just like to focus on the comparatively simple question of how much these planes really cost, and why it matters.
You will be familiar with how the government’s official estimate of the cost of the planes has, ahem, evolved over the years: from $9-billion originally (just the acquisition cost), to $16-billion (including acquisition and “sustainment,” but not operating costs), to the $25-billion (including all costs, but only over 20 years) it grudgingly owned up to after the Auditor General’s report last spring.
As you’ll recall, the Auditor General said even that figure severely underestimated the true cost of the project, as the actual service life of the planes was not 20 years, but 36 years. Others, including the Parliamentary Budget Officer, put it at 30 years: that’s the number KPMG used. And the figure that popped out of its calculators was $45.8-billion.
Now, this increase in the reported price does not mean the cost of the planes has “skyrocketed” or “ballooned” or whatever other word you might have read. I mean, it has — from $75-million per plane to $88-million, with further increases likely to follow. But acquisition costs are only a fraction of the total: just $9-billion, a figure that has not changed even after this 20% increase in unit price. The rest, almost all of it, is for sustainment and operations.
The increase in the reported price, then, does not so much reflect movements in the actual costs of the plane, as it does the government’s willingness to fess up to them. But, as I say, they have not really done so even now.
The new line, as expressed in government documents and repeated by the Defence minister, Peter MacKay, is that the planes will cost $45.8-billion “over 42 years.” Not 20 years, or 30 years, but 42 years. And then the spin: it was a billion dollars a year before, it’s pretty much a billion dollars a years now. So you see? Nothing’s changed.
Except it isn’t 42 years. Not in any comparable sense. The 20 years used in previous cost estimates was the (supposed) service life of the planes: that is, how long they’re expected to be in use, after delivery. KMPG’s report, as I said, assumed a service life of 30 years. So to compare apples to apples, you would have to say the planes are now projected to cost $45-billion over 30 years.
How does the government get 42 years? By adding in 12 years for “development and acquisition,” from the decision to acquire the planes in 2010 to the delivery of the last plane in 2022. No previous estimate included development costs. And indeed they add next to nothing to the total: just $565-million. But by tacking on another 12 years, they allow the government to spread the cost over a much longer time frame, and make the annual cost of the planes seem much lower than it is.
Does any of this matter? Yes it does. It matters for two important reasons. First, because we need to know how much of a commitment we are taking on when we make a capital purchase. It’s useful to know the annual figure. But we also need to know the total — both the annual cost, and how many years we’ll be paying it — because we need to set aside those funds for planning purposes.
If we don’t — if we only pencil in the costs over 20 years for planes that will in fact be flying for 30, or if we include the acquisition costs, but leave out the operating costs — then we will find ourselves, some years hence, having to do one of two things. Either we will have to allocate less funds to other programs to make room for the planes. Or we will have to stop flying the planes.
This is why Treasury Board guidelines on capital purchases stipulate, as they have for many years, that all costs over the full life-cycle of the equipment should be included, including operating costs. That’s why defence departments across NATO follow the same principle. It’s why the previous Auditor General, Sheila Fraser, in her 2010 report, criticized Defence for failing to include all costs in its accounting — again, she specifically mentioned operating costs — and it is presumably why the Defence department agreed, in writing, to do so.
Yet, even now, MacKay and his officials are still trying to claim operating costs should not really be included, because “we’d have to spend that money anyway,” i.e. regardless of which plane was purchased, or even if we somehow hung onto the old CF-18s. This is interesting, but irrelevant. It’s useful to know how much more one plane would cost than another. But we also just need to know the cost, period. We don’t just need to compare the cost of one fighter jet with another. We also need to compare the benefits of spending a given sum on fighter jets, as a budget item, versus the other purposes to which the same money could be put: tanks, or health care, or cutting taxes.
And this brings us to the second reason this matters: because whatever the rules are, the government is obliged to follow them; because it knew what the rules are, and didn’t. I can understand why, in a way. There’s no doubt life-cycle costs can be misunderstood, or misrepresented, as if that $45.8-billion were just the acquisition cost, or as if it all came out of one year’s budget. But just because a rule is inconvenient does not entitle you to ignore it.
And even if one were inclined to excuse the initial deception, what is really inexcusable is the government’s subsequent refusal to back down, even when it was called on it, but rather to carry on spinning — as it did after the Parliamentary Budget Officer’s report, as it did after the (current) Auditor General’s report, as it is doing even today.
Original Article
Source: national post
Author: Andrew Coyne
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