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F-35 program to get overhaul after scathing report

April 3, 2012 – Michael Ferguson's first report as auditor general, issued Tuesday, is heavy-hitting, and highlights a long list of problems with how the decisions were made to buy 65 planes from Lockheed Martin to replace the aging CF-18s. But it also raises questions about how much the planes will cost and what DND officials were telling Canadians, and their members of Parliament, about that pricetag.

Michael Ferguson's first report as auditor general, issued Tuesday, is heavy-hitting, and highlights a long list of problems with how the decisions were made to buy 65 planes from Lockheed Martin to replace the aging CF-18s. But it also raises questions about how much the planes will cost and what DND officials were telling Canadians, and their members of Parliament, about that pricetag.

Defence Minister Peter MacKay announced in July 2010 that Canada would be buying the F-35 Lightning II through its participation in the U.S.-led Joint Strike Fighter Program, but Ferguson said it was the fighter jet of choice as far back as 2006.

"When National Defence decided to recommend the acquisition of the F-35, it was too involved with the aircraft and the JSF Program to run a fair competition. It applied the rules for standard procurement projects but prepared key documents and took key steps out of proper sequence," the report says.

"As a result, the process was inefficient and not managed well. Key decisions were made without required approvals or supporting documentation."

The report also shows that DND estimated the total cost of the F-35 program at $25 billion over 20 years when the decision was made internally to go forward with it in 2010. But in 2011, when DND responded to a report by Parliamentary Budget Officer Kevin Page, officials said the cost would only be $14.7 billion.

Ferguson won't point fingers

"We felt that that would have been a prime opportunity for national defence to bring forward to Parliament the full cost of the project and they didn't do that, and that really would have been the chance to set the record straight on what the cost of the project is going to be," Ferguson said at a news conference after his report was tabled in the House of Commons.

Even the $25 billion estimate isn't accurate and should be "refined" because it doesn't include upgrade costs, for example, or the cost of replacing any jets that are lost over their life cycle.

Ferguson would not point fingers at any individual bureaucrats or ministers, repeating only that his audit identified weaknesses in the processes used to choose the F-35 and that there were significant information gaps.

"It's in the hands of Parliament to decide what to do with the report," he said. Ferguson suggested his report could be studied by parliamentary committees, which have the ability to call ministers and other witnesses.

The NDP's military procurement critic, Matthew Kellway, said Ferguson's report shows the decision to buy the F-35 was "rigged from the start."

"The auditor general's report is a scathing indictment of how the Conservative government has bungled the F-35 from day one," he told reporters.

Opposition critics have long called for an open competition to replace Canada's aging CF-18 fleet and repeated that demand Tuesday.

Liberal MP Ralph Goodale said the government misled Parliament while his party's defence critic John MacKay said there was "deceit and incompetence at the highest levels."

MacKay said the government trashed the parliamentary budget officer when he released his own higher estimates of the F-35 program and that Tuesday's report shows Page was "far more right than he was wrong."

F-35 was jet of choice in 2006

The audit found that by the end of 2006, DND and Canadian military officials were actively involved in the development of the F-35 plane and that it "was clearly the fighter jet of choice."

The proper procurement process should have kicked in then because decisions and activities were already underway that led to its eventual procurement, Ferguson's report said. Ferguson found that many of the steps and documents used to support the government's 2010 decision to buy the F-35 were "of little consequence" because the key questions, including whether to run an open competition, were taken much earlier, "calling into question the integrity of the process."

Ferguson also found that DND did not provide complete or timely information to senior decision-makers – or to parliamentarians. He said briefing materials did not explain the risks of relying on projections for decision-making, for example, or the risks of relying on the F-35 to replace the CF-18.

In 2008, for example, DND did an analysis of three contender aircraft including the F-35 and it determined that the Lockheed Martin model offered the best value. This analysis was pivotal in the decision to buy the F-35, the audit said, but its conclusions were given to senior decision-makers with no documentation to support those conclusions.

Ferguson said he has significant concerns about the cost information that DND officials gave to MPs. They said that cost data provided by U.S. authorities had been validated by experts and all the countries participating in the program when that wasn't "accurate," and that DND officials knew the program costs were likely to increase and didn't tell Parliament.

The auditor general also found that the estimated budget set aside for the F-35 — $25 billion — likely isn't enough to cover the costs. That budget was established without complete information, he determined, and some of the information still won't be known for years to come.

If the $25 billion proves to be too low, DND will have to find ways to cover the additional costs or ask the government for more money. Ferguson alternatively suggests the military might have to reduce the number of planes being bought, or their flying hours.

Public Works and Government Services, meanwhile, didn't carry out its responsibilities properly either. The audit found that DND didn't bring the department in until late in the process and that Public Works endorsed the key decision to sole source the acquisition of the F-35 "without the required documentation and analysis."

But Ferguson largely blames DND, for "hampering" the Public Works Department's ability to carry out its work, saying it didn't give the documentation it was asked for in a timely manner.

The government has often defended the F-35 purchase by saying it will mean billions of dollars in industrial benefits for Canadian companies, but Ferguson also casts doubt on DND's figures in his report. The estimations of contract opportunities have fluctuated wildly over the years, from as low as $5.2 billion US to as high as $16.6 billion US, and he said the projections were never independently validated.

He also said that briefing materials for ministers and decision-makers did not explain the basis for the projections and only put forward the most optimistic scenario, not the real range of potential benefits. Ferguson ends his harsh assessment of DND's role in the F-35 procurement by recommending it should refine its cost estimates and regularly provide "the actual complete costs" for the full life cycle of the aircraft.

Government promises a review

As CBC News reported Monday, Associate Defence Minister Julian Fantino confirmed immediately after the tabling of the report that the government will re-examine the F-35 program in light of the findings from Ferguson's office.

The government is stripping DND of its responsibility for the program and is setting up a special secretariat of deputy ministers inside the Public Works Department to manage the program.

The funding envelope allocated for the acquisition of the F-35 will be frozen. The Treasury Board will commission an independent review of DND's acquisition and sustainment project assumptions and potential costs for the F-35, which will be made public, the government said in a statement.

"Funding will remain frozen and Canada will not purchase new aircraft until further due diligence, oversight and transparency is applied to the process of replacing the Canadian Forces' aging CF-18 fleet," Rona Ambrose, public works minister, said in the statement.

The government said DND "will continue to evaluate options" for replacing Canada's fighter jets.

Lockheed Martin declined an interview request from CBC News but provided a statement saying it supports the government's response to the auditor general's report.

Fantino first suggested to the House defence committee in March that the purchase of the F-35 was not a foregone conclusion.

Canada would remain involved in the Joint Strike Fighter program, he said, but "the decision, the determinate decision, has not as yet been made as to whether or not we are going to actually purchase, buy, acquire, the F-35."

Prime Minister Stephen Harper said later that Canada has participated in the F-35 development program with its allies for 15 years and the aerospace industry had received "hundreds of millions of dollars in contracts" because of it.

"We haven't yet signed a contract, as you know, we retain that flexibility but we are committed to continuing our aerospace sector's participation in the development of the F-35."

Ferguson was appointed in November 2011, taking over from interim auditor general John Wiersema, who led the office after Sheila Fraser retired.

Tuesday's report also includes audits of:

* Transport Canada's oversight of civil aviation safety. * How the Canada Border Services Agency works with other departments to monitor the health and safety risks of imported consumer goods. * What the Canada Revenue Agency has done to address non-compliance in filing tax returns. * Several Crown corporations, including the Canadian Dairy Commission and the Canadian Race Relations Foundation.

He highlights a number of concerns with Transport Canada's surveillance program to monitor airlines for compliance with safety regulations. Ferguson found that it can take a long time for the department to address emerging safety issues — up to 10 years in some cases — and that some inspections of airlines are not being carried out properly.

The audit determined that only two-thirds of planned inspections have been done and that the department hasn't determined how long an aviation company can operate without being inspected.

Overall, Ferguson's report said consumer goods that pose a risk to health and safety are adequately controlled at the border but he wants to see the Canada Border Services Agency and Health Canada reach an agreement on what products should be allowed to enter the country.