F-35 issues

[stampeder]

Cancellation fees? But the PM has said that there is not contract.

[Mooks]

Its not in a contract but the Memorandum of Understanding, that we signed in 2006. This is an agreement between JSF Partner countries which defines their contribution and participation in the program. Through this agreement we paid our portion of development funding (among other things) and in return our companies were given the opportunity to bid for contracts. It should also be noted that the MOU states that we intend to buy the fighter (and that we will lose our contracts if we withdraw), and outlines a calculation for cancellation penalties.

Edit: if you're interested you can read the MOU here:

http://www.jsf.mil/downloads/down_documentation.htm

[Jake]

Nice! It is surprising this has not been picked up on yet by the opposition or media. Harper is going to get roasted. So was he twisting his words (yet again) on the no-contract fact? While this might turn out to be what we buy it still smells like a shady used-car salesman transaction. Why is it so difficult to be forthright?

MOU Canada apparently signed
http://www.jsf.mil/downloads/documen...ate_4_2010.PDF

Section 5.1
Table 5-1 (In TY U.S. Dollars)
Participant Maximum
Contribution
Australia $0.690B
Canada $0.551B
Denmark $0.33B
Italy $0.904B
The Netherlands $0.586B
Norway $0.33B
Turkey $0.690B
United Kingdom $0.952B
United States $16.843B

Section 19

19.6 In the event a Participant withdraws from the JSF SDD
Framework MOU, such action will constitute that Participant’s
automatic withdrawal from the JSF PSFD MOU, effective 90 days
after the Participant’s written notification to withdraw from
the JSF SDD Framework MOU. The terms applicable to voluntary
withdrawal, detailed in paragraph 19.4 of this Section, will
apply to an automatic withdrawal.

But it is not clear to me what portion of that $551 million is at stake.

[redzone]

im a bit confused.

So the auditor general says the cost is 20 bill vs the 9 bill that the feds projected BUT he included a 36 year life cycle vs a 20 year life cycle? doesnt that save the tax payer in the long run by not having to buy new jets in 20 years ?

[Mooks]

Nice! It is surprising this has not been picked up on yet by the opposition or media. Harper is going to get roasted. So was he twisting his words (yet again) on the no-contract fact? While this might turn out to be what we buy it still smells like a shady used-car salesman transaction. Why is it so difficult to be forthright?

The existence of the MOU is well known by the press. It was discussed heavily in the Auditor general's report.

Its hardly shady at all... this thing has been published publicly for six years. Joint partnership programs are actually very common in every other Western country. Examples would include the Eurofighter,A400,Tornado (UK, Ger, Ita, spain), Standard Block IIA (Japan-US), MEADS (US-Germany), NH-90 (Fra, Ger, Ita, Netherlands, Portugal.) It is a way to offset the high costs of development for a new system by increasing the number of examples produced and dividing the costs among different partners.

The problem with these programs is that they often go over budget (its a R&D portion that has several members), there is less control over the project and its difficult to actually run a "competition" between your joint venture and other competitorsThe JSF program also mitigated some of the negative aspects of development by capping the potential financial exposure to development cost overruns. However in the Canadian case, there wasn't really a good time to run a competition after 2006. Its really artificial, because the government is already committed to buy the fighter due to the industrial contracts. However most contracts of this type do not see competitive processes at all, at least not after the beginning. I don't think the Brits ever had a competition for the Eurofighter for example. If there is a problem, you withdraw. But that requires

I think the problem was that the Government tried applying parts of a "normal" procurement, when the contract doesn't really translate well into it. I think they should have been more communication about the program. I think there is a pretty big issue with the centrally managed communication system established by the Prime Minister's Office, which has utterly failed in this case. Had they made more DND officers available to explain this program (as was the previous system) I think they would have avoided the worst aspects of the media coverage they now face.

[Mooks]

im a bit confused.

So the auditor general says the cost is 20 bill vs the 9 bill that the feds projected BUT he included a 36 year life cycle vs a 20 year life cycle? doesnt that save the tax payer in the long run by not having to buy new jets in 20 years ?

No this is an accounting issue. Basically the government published figures for 20 years of operations, when its expects to run the program for 36 years.

In this case, I sympathize with the government. Any calculation even beyond ten years is highly speculative, not to mention the difference between 20 and 36. I find the focus on 36 years of service in fighter aircraft as being more politically motivated in order to paint a program in the worst possible light. Such figures cannot account for a number of different variables that may occur. Think about our C-130s... they were originally bought during the Pearson government, then a number of airframes purchased during the Trudeau and Mulroney governments. Then we vacillated on a replacement for 10 years. Its O&M costs would have shot up in the 1970s oil shocks, flattened during the 1980s, and then increased significantly during the 1990s due to massive growth in use and grown even larger after 2000 as oil prices spiked and the airframe's age extended beyond its expected life.

There is no context to the 36 year number. The Canadian economy may accumulate 80~100 trillion dollars over 36 years... 16 or 25 billion is a very small drop in that bucket both in terms of the government's budget and as part of our entire GDP.

One last note. If we were to buy one of the F-35's competitors instead, it is quite likely that we would be buying a replacement in 20 years rather than 36. Most are expected to be replaced by 2035, because they are airframes designed in the 1980s and 90s. The Super Hornet is likely to be replaced in US service by 2030, so we would really only get 15 years of service out of our aircraft before a major increase in operational costs.

[stampeder]

...one set of books was available inside DND, while another "for communication purposes" was presented publicly, in which he said the government was "low-balling" the numbers.

http://www.cbc.ca/news/politics/stor...5s-budget.html

[Jake]

The existence of the MOU is well known by the press. It was discussed heavily in the Auditor general's report.

They (the press) may have known but I they have seemingly not picked up on the penalty details of the contract err I mean MOU. They will eventually and then we will have an interesting debate in the commons.

And I still say it is shady especially when the leaders are saying no contract is signed. Obviously they are playing with the words.

[Jake]

I managed to find a single article with more details on the $551 million.

http://www2.canada.com/story.html?id=6368318&p=1

[Jake]

Here is a great summary of the numbers. Canada.com as well.

http://www.canada.com/news/Debate+re...748/story.html

As of September 2011, a total of $335 million of the $710 million committed to developing the fighter and supporting Canada’s aerospace industry had been spent. The government has declined to provide a more up-to-date number.

[Mooks]

They (the press) may have known but I they have seemingly not picked up on the penalty details of the contract err I mean MOU. They will eventually and then we will have an interesting debate in the commons.

Again, the penalty issue has been known by the press since 2010, if not earlier. There is I think a CBC article from back then. It was debated in the 2011 election as well.

And I still say it is shady especially when the leaders are saying no contract is signed. Obviously they are playing with the words.

But a contract isn't signed. Contract indicates that Canada will pay X price for Y units. No such contract exists. It has made an agreement that it intends to purchase the fighter, and in return Canadian companies get the opportunity to bid for contracts. Thats almost by letter what a memorandum of understanding entails in business.

[stampeder]

Originally Posted by Mooks

But a contract isn't signed. Contract indicates that Canada will pay X price for Y units. No such contract exists.

But you've warned that Canada will be required to pay a penalty for not continuing with the F-35. So, presumably the government would pay a penalty out of pure altruism.

[Mooks]

Yes but that does not mean its a contract. This isn't an issue of semantics. MOUs are a common feature of international relations for the past 50 years. They are created to show general intent by two or more parties, usually with some sort or reciprocal agreement. They are intended to be less stringent in order to avoid the need for a treaty. Contracts are much more specific; that is a business deal with defined actions that must occur with certain times.

Without the MOU we would not have had the opportunity to bid on those contracts, which would have been a huge blow for the Canadian industry. As the Embassy pointed out in a MArch 28th article, Heroux Devtek makes $750,000 dollars off of each F-35 built... multiply that over 2440 airframes. There are a number of contracts of a similar scale from other companies.

According to your profile Stampeder, you live in North Delta; the JSF is bringing hundreds of millions of dollars to your local economy through Asco and Avcorp (you can see their large facility below the Alex Fraser) who won major contracts on the fighter. Avcorp manufactures the carrier variant's external wing panels. Right there is a tangible benefit of the F-35 program, as its employees live and invest in Delta. This area can count on high paying, skilled jobs for the next 15 years because of the F-35. The partnership program also raises their visibility on the international market, and allows them to bid for even larger contracts in the future.

I'm not saying that you need to be a cheerleader, but I would consider very carefully the consequences of canceling this program. This isn't something that does not have any affect on you. North Delta is one of the areas that are benefiting the most from the partnership program.

[Mooks]

Originally Posted by stampeder

http://www.cbc.ca/news/politics/stor...5s-budget.html

I would caution that you take the PBO's figures with a grain of salt. The future cost of an F-35A is not $137 million as he claims from the GAO report. If you look at the chart on page 13, it states that the LRIP 4 contract (ie the F-35s bought last year) is for 32 units at 3.7 billion dollars; $117 million today. What is also critical to note in that chart is that the F-35's unit cost has only deviated about 10% from its agreed price. Beyond all the hackles being raised by the opposition parties about massive cost increases, its really only 10%.

For a better idea of the future unit price of an F-35, its best to look at the US Department of Defense Selected Acquisitions report submitted to the US congress. It projects the F-35's cost in 2021 will be around 65 million in todays dollars (which we then add 10% on because of the consistent cost increases seen in the GAO report and 10 million or so for Canadian modifications.) That cost is within the boundaries set by the Government of Canada in its budget documents for the F-35.

[Jake]

There is I think a CBC article from back then

I tried to find it and came up empty. It would be nice if you could provide the link. Otherwise I can't comment until I see.

This MOU has many binding financial conditions. I am not going to argue semantics.

the penalty issue has been known by the press since 2010

Post just one source please. One that contains some numbers.

Also the Canada.com articles have stated that updated numbers are not available. So do we know where we stand? Do you?