Ballooning F-35 Costs Questioned in Netherlands, Italy and Canada
 
(Source: defense-aerospace.com; published Oct. 29, 2012)
 
By Giovanni de Briganti
 
 
PARIS --- While the F-35 Joint Strike Fighter appears to have cleared a major hurdle in the Netherlands, when two separate reports recommended completing the current Operational Test & Evaluation Phase, the program is becoming embroiled in further controversy in Canada over the government’s reluctance to look at alternatives, while its ballooning price is becoming a political hot potato in Italy, where taxpayers facing an increase in their tax burden to 55% of their income are beginning to question its 17 billion euro cost.

But, despite the two reports, unanswered questions remain about the program in the Netherlands, too. The Algemene Rekenkamer (AR), the independent state auditor, concluded in its Oct. 25 report that immediate withdrawal from the program would bring no advantage to the Netherlands, but fell well short of recommending continuing beyond the program’s current phase.

It also found that increasing F-35 costs are eating into the size of the Dutch air force. “The Ministry of Defence will have to apply half its total capital expenditure budget for seven years to order 68 JSF aircraft and for nine years to order 85 aircraft,” as originally planned, it states. The previous government had announced it would reduce the number of aircraft to 58, but this figure is not enough to fulfill Dutch commitments to NATO, and would require “fundamental decisions…on other weapons systems, which might also affect the navy and the army,” the AR said.

Unexpected Dutch Discoveries

The AR’s report also contains some new information about the F-35’s costs and schedules that the Ministry of Defence had previously insisted were untrue. For example, the report confirms that the earliest possible Initial Operational Capability for Dutch F-35s is 2019, three years later than previously stated. This will require further extension of the remaining F-16s, at a cost of over €334 million, and at least an additional €180 million if the delay increases by another two years, to 2021, as the report fears may happen.

The acquisition budget currently earmarked for the F-35 program is €4.5 billion, of which €450 million have already been spent.

The remaining €4.05 billion will buy fewer than 40 aircraft, the report notes in a graphic (Figure 20, page 76), but even this figure is not very reliable as costs and delivery times are still impossible to estimate with any degree of accuracy, the AR said.

But the report’s biggest surprise is the ballooning cost of F-35 Operations & Support costs, which have more than quadrupled in a decade (see table below). And, the report notes, buying fewer aircraft will not only increase unit acquisition costs, but will also increase O&S costs, from €167 million to €194 million per aircraft, which is unlikely to sit well with the public and with parliamentarians.

Escalation of estimated Dutch Air Force F-35 O&S costs



(Source: Algemene Rekenkamer, Dutch MoD for data)


CORRECTION: Withdrawal penalty

We previously reported that, if the Netherlands were to completely pull out of the F-35 program, Lockheed Martin and its subcontractors would be entitled to claim related costs from the Pentagon, which would in turn be entitled to request their reimbursement from the Dutch state.

This has since been proved to be wrong.

This information was provided by industry officials during testimony for the AR report, but their statements were subsequently found to be wrong, or to have been misunderstood.

Our Dutch correspondent, who has looked at length into the issue, found that the AR “must have been fed by some pro-US sources in the industry or whatever.”

He adds that “in the PSFD MoU, there are some logical and restricted penalties, but nothing abnormal,” as we had previously reported. We apologize for the mistake.



The Netherlands has already spent €1.2 billion of the €1.7 billion it had reserved for the preparation, development and testing of the JSF, including the acquisition of two test aircraft.

If it were to withdraw before the end of the current phase, the Netherlands could save €265 million it would not have to pay out, but would have to pay out another €405 million, although the audit office noted that the total cost of withdrawal remains unknown. It would also lose out on most future production contracts on the aircraft.

Perplexed Italians

Italian taxpayers are beginning to realize that the F-35 acquisition costs are far higher than previously acknowledged by the government, while promised industrial benefits have not materialized so far.

National Armaments Director Gen. Claudio Debertolis acknowledged, in an interview published Oct. 16 by the web magazine Analisi Difesa, that the first F-35As for the Italian air force will cost $127.3 million each, while the first F-35Bs for the navy will each cost $137.1 million (both refer to Unit Recurring Fly-away costs).

These figures are about 50% higher than those that Debertolis had stated in testimony before Parliament’s defense committee on Feb. 7, when he had assured committee members that the first F-35As would cost $80 million each.

In the interview, Debertolis added that, as production volumes increased, unit prices should drop to $90.6 million for the F-35A and to $118.8 million for the F-35B STOVL version, and even further after the 50th production aircraft.

However, even these figures are very rough estimates, as one the one hand production is not increasing enough to lower production costs, and Italy’s decision earlier this year to reduce its planned F-35 purchase by nearly one-third, from 131 to 90 aircraft, will necessarily increase production costs.

Furthermore, Debertolis’ latest cost figures are still based on the initially-planned buy of 131 aircraft, as the lower figure has not yet been formalized in defense ministry planning.

Italian industry also fears it might not be able to draw all planned economic benefits from its participation in the F-35 program. Italy is investing 796 million euros in a new Final Assembly and Check-Out (FACO) facility at Cameri air base, near Novara, which was intended to assemble most of Italy’s planned 131 F-35s, other European aircraft, and to subsequently ensure their maintenance.

Overall, Italian industrial participation in the program will amount to direct offsets of about 13 billion euros for the development and production phases (over €3 billion from Pratt & Whitney and €9 billion from Lockheed Martin), with several billion euros to follow for in-service support and future upgrades. Revenue generated by the Cameri FACO facility is estimated at about 1.5 billion euros.

Over the program’s life, these offsets were expected to total about 77 percent of the 17 billion euros Italy has budgeted to buy and operate the aircraft.

However, to date Italian industry has only signed offset contracts worth $631 million, Debertolis said, compared to its investment of €2 - 2.25 billion euros in the program.

In addition, agreements signed with Lockheed Martin are valued at under 1 billion euros, and will support only a few hundred jobs out of the 11,000 workers currently working on the Eurofighter program, and who will lose their jobs as the production is currently winding down in Italy.

“When we talk about industrial risks, we are referring to the future. It’s a constant battle: if the Americans do not provide guarantees, then the program is really at risk….Our doubts don’t concern the aircraft, they concern how the United States will be able to guarantee our industrial offsets,” Debertolis said in the AD interview.

Wary Canadians

In Canada, the government is embroiled in a resurgent controversy as its promise to evaluate possible competitors to the F-35 is proving elusive. The incoming air force chief, Lt.-Gen. Yvan Blondin, said in an interview that the air force had not yet begun this evaluation, which was announced in the spring, prompting the air force command to issue an Oct. 22 statement in which it stated “Work continues on the evaluation of options to sustain a fighter jet capability well into the 21st century. The options analysis is a full evaluation of choices, not simply a refresh of the work that was done before.”

At issue is the government’s past conduct, when it signed on to the F-35 program on the basis of largely under-estimated costs and of a competitive evaluation which never took place. The government’s shenanigans were revealed in April by the Auditor-General in a scathing report.

In parallel, the National Fighter Procurement Secretariat (NFPS), set up earlier this year after management of the program was withdrawn from the ministry of defense, has awarded a contract to KPMG to review the MoD figures for the Next-Generation Fighter Capability project.

The Canadian government is also looking for another audit company to review how the new fighter program was handled. The Public Works Dept., which is now in charge of the acquisition program, has issued an RFP a study of the acquisition process up to last June, when the program was restructured. A contract should be awarded by December.

"This is one of several activities that need to be completed before conclusions about replacing the CF-18 will be presented to the government," the Public Works Dept. said in a statement.

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