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An F-35 Joint Strike Fighter arrives at Edwards Air Force Base in California in this May 2010 file photograph.Tom Reynolds

National Defence gambled on the F-35 fighter jet without running a fair competition, all the while lacking any cost certainty or any guarantee the plane could replace the current fleet of CF-18s by the end of the decade, the Auditor-General says.

The $16-billion plan to purchase a fleet of Lockheed-Martin F-35 jets could cost $25-billion over the project's lifespan, yet it was done in unco-ordinated fashion among federal departments, with key data hidden from decision-makers and parliamentarians.

The scathing report by the Auditor-General will fuel a political headache for the Harper government, which has ignored years of opposition attacks on the matter and which was fully committed to the F-35 until a few weeks ago. The Conservatives have put together a plan to review the process and could ultimately select another fighter, but the report raises a number of questions about the 2010 announcement to skip a tendering process and directly buy a fleet of 65 stealth F-35s, which are still in development.

Michael Ferguson, who is launching his 10-year tenure as Auditor-General with this report, is particularly harsh on DND's handling of the purchase, going back to the 2006 decision to formally sign on to the U.S.-led project.

"National Defence did not exercise the diligence that would be expected in managing a $25-billion commitment," Mr. Ferguson said in a news release. "It is important that a purchase of this size be managed rigorously and transparently."

Given cost increases and production delays in the F-35 program, the Auditor-General is raising concerns about DND's plans to phase out its CF-18s by the end of the decade.

"Briefing material did not inform senior decision makers, central agencies, and the Minister of the problems and associated risks of relying on the F-35 to replace the CF-18. Nor did National Defence provide complete cost information to parliamentarians," the report said.

The report added the $16-billion estimate for the cost of the project was "likely underestimated," given it was established "without the aid of complete cost and other information."

A major element in major military purchases in Canada is the potential for regional industrial benefits. However, in this case, the government was only told of "the most optimistic scenario," leaving doubts about the actual benefits that will flow to Canadian companies.

"We are concerned, because these projections were used to support key decisions related to Canada's participation in the [Joint Strike Fighter] Program and the purchase of the F-35 aircraft," the report said.

Ottawa embarked on a sole-sourced process in 2006 to purchase the F-35, ignoring four other existing aircraft that might have proven to be safer choices. However, the Public Works department – which is responsible for the actual acquisition – was only fully involved in the process by late 2009.

"[Public Works]did not demonstrate due diligence in its role as the government's procurement authority," the report said.

In fact, Public Works only received the "statement of operational requirement" for the new fighters in August 2010, while the government had already signaled its intention to buy the F-35s the previous month.

"Practically speaking, by 2010, Canada was too involved in the JSF Program and the F-35 to run a fair competition," the report said.

In his news release, Mr. Ferguson added: "[DND]did not acknowledge that the decision to purchase the F-35 was well underway four years before it was officially announced."

Overall, the Auditor-General said that DND has been "overly confident" in its strategy to buy new fighter jets.

The report comes as the department is struggling to complete other major military procurements, including its 2004 decision to purchase Sikorsky helicopters, which were also still being developed, to replace the current fleet of Sea Kings. The new helicopters have yet to be delivered.

Civil aviation, border controls and debt

Other chapters in the report included the following findings:

» On federal oversight of civil aviation, Transport Canada received praise for implementing a new surveillance system. However concern was expressed that the department is not collecting important risk factors such as the financial health of an aviation company. Concerns were also raised about the level of documentation produced by inspectors.

The Auditor-General's report states that "we also found that many fewer inspections are done than planned. This is significant considering that only the companies and the operations areas considered to be of higher risk are selected for inspection in any given year."

» On border controls on commercial imports, the audit's findings are largely favourable. The report notes that there is a need for a clearer agreement between Canada Border Services Agency and Health Canada on how to handle health-related products at the border.

» On the federal government's management of interest-bearing debt, the report says the Department of Finance uses "a sound process." However the Auditor-General says Ottawa needs to do a better job of clearly explaining how much of the federal debt is related to its pension obligations to public servants.

The federal debt for 2010-11 stood at $801.8-billion, of which $146.1-billion is obligations to public sector pension plans. This debt is largely because prior to 2000, the federal government did not set aside money in a separate fund to cover its pension obligations. The C.D. Howe Institute has argued that Ottawa should use a different accounting method, which would then value its unfunded pension liabilities at about $227-billion. The Auditor-General's report does not weigh into that debate.

With a report from Bill Curry