National Defence pressured other departments in 2010 to jump on the F-35 program by warning that $15.4-billion in regional spinoffs could be lost if there were any delays, according to federal documents.
The move was part of a widespread lobbying effort to promote the fighter jet that included a large-scale sales job by its manufacturer, Lockheed Martin, and other Canadian firms that wanted a piece of the $400-billion U.S.-led project.
Two years later, the industrial regional benefits linked to the F-35 program remain mostly a promise. Canada signalled its full commitment to the F-35 in 2010, with plans to sign a formal contract in 2013, but the full program is now under review following a hard-hitting report by the Auditor-General this week.
So far, Canada has reaped $350-million in benefits, and a defence official said the potential spinoffs for Canadian industry are in the $7-billion to $8-billion range over the next 40 years, or about half of the program’s estimated $15-billion price tag. Even if the maximum amount of benefits is reached, it will be much lower than the spinoffs generated by traditional military procurements.
Still, DND’s 2010 push for a sole-sourced contract on the F-35 proved highly effective inside the Harper government, which decided to sell the program as a job-creation tool across Canada.
An internal Defence document that circulated among senior government officials in 2010 warned that failure to approve the program would jeopardize Canada’s standing with its allies as well as jobs in the aerospace industry.
“Canada must commit to the [Joint Strike Fighter]program to realize benefits,” said the presentation that included the Canadian Forces’ coats of arms. “Further delays in Canada’s decision could result in lost work for industry.”
The document added that allied countries and the private sector were “awaiting Canada’s commitment,” and that entering into a prolonged competitive process, instead of going sole-sourced, would send a negative message to the Americans.
As part of its promotion of the F-35, Lockheed Martin Aeronautics dealt with its usual lobbying firm in Ottawa, CFN Consultants, which specializes in military and procurement matters.
In addition, public records show the firm hired Prospectus Associates, a consultancy with strong ties to the Conservative Party as well as Defence Minister Peter MacKay. Principal Robert Evershed communicated in October, 2010, with Mr. MacKay and the minister of industry at the time, Tony Clement, shortly before the two ministers travelled to the Lockheed Martin production facility in Texas.
Traditionally, regional benefits on major military contracts in Canada have been equal to the purchase price. For example, a company that received a contract of $1-billion had to guarantee that it would spend that same amount in Canada, either on the actual contract or on other projects, subject to approval by Industry Canada.
However, the F-35 program was different as it offered no guaranteed regional benefits for Canadian firms. Instead, the companies gained access to a pool of contracts and the opportunity to bid on the work, along with firms in the eight other countries that were members of the program.
In that context, DND promoted the fact that the “opportunities” associated with the potential contracts included $12-billion in production work, and $3.4-billion in maintenance work after the aircraft were delivered, for a total of $15.4-billion, according to federal records.
In its cabinet submission, DND emphasized the fact that Canada’s purchase of a fleet of 65 F-35s, designed to replace the CF-18s at the end of the decade, would be paid in increments, starting four years down the road, while the spinoffs would start right away.
“Industrial benefits would begin immediately even though government would not have to make significant acquisition payments until 2014-15,” stated the 2010 document.
The government’s process to purchase the F-35s was the subject of a scathing report by Auditor-General Michael Ferguson this week. The report blamed the government for being “overly confident” in the aircraft’s ability to come in on budget and on time.
In addition, the Auditor-General pointed out that the rush to announce a deal on the F-35 in 2010 was fuelled by outside lobbying efforts. “Between late 2008 and mid-2009, National Defence led a process to get a government decision to buy the F-35, partly in response to pressure from industry to commit to buy the F-35 in order to keep and increase industrial benefits,” the Auditor-General said.
Mr. Ferguson added in his report that senior government officials and ministers were misinformed on the issue of regional benefits, as they only received the “most optimistic scenario” before coming to a decision on the F-35.
On Thursday, Mr. Ferguson appeared in front of the public accounts committee of the House, saying Conservative ministers were aware the overall cost of the F-35 program, including personnel and operating costs, totalled $25-billion, instead of the publicly stated budget of $14-billion to $15-billion. Much of the difference between $15-billion and $25-billion is operating costs – including National Defence personnel salaries – that are largely fixed and would be incurred regardless of what fighter plane Canada was flying.
Prior to the F-35 purchase, the Harper government faced much criticism over the quality of the regional benefits obtained from Lockheed Martin and Boeing, two U.S. manufacturers that received untendered contracts for new transport planes in 2006. In particular, industry groups complained the new transport planes would not be maintained in Canada, leaving skilled work on the aircraft to be accomplished in the United States.
Prime Minister Stephen Harper heavily promoted the F-35 project after its approval by cabinet, pointing out that it would create thousands of “well-paid, highly skilled Canadian jobs.”
On Tuesday, however, Mr. Harper announced that his government is reviewing the entire purchase, with federal sources saying the government is hitting the “reset button.”