Tuesday, September 28, 2010

F-35 industrial benefits in the spotlight again

If you've been following the early debate on the issue of the Harper government's announced intent to purchase, untendered, 65 F-35s from Lockheed Martin for $16 billion, you'll know that Tony Clement keeps invoking the "preferential" aspects of the deal as a rationale for Canada going ahead with a purchase on an untendered basis. Clement's position is that Canadian industry will see industrial benefits by becoming part of a preferred group of nations who are buying and therefore whose industries get preference on bidding for contracts (he relies upon section 7.3 of the Memorandum of Understanding ("MOU")). There's a report from last night that blows a bit of a hole in Clement and his government's argument that Canadian companies are better off, or at least have little to worry about, under their government's untendered route.

The U.S. government is trying to control the costs of producing the F-35, a new agreement with Lockheed Martin to do so was in American reports last week. From the Postmedia report, a hint of how that might play out for Canada:
Ashton Carter, the U.S. defence undersecretary, sent out a recent memo to acquisition officials outlining the need for more efficient methods of purchasing military equipment, highlighting efforts to drive down the cost of the F-35 being built by Lockheed Martin.

An "analysis is being done in association with the negotiation of the early lot production contract," Carter wrote. "The Department is scrubbing costs with the aim of identifying unneeded cost and rewarding its elimination over time."

Lockheed Martin spokesman Jeffery Adams said the firm is studying the details of 23 initiatives announced by U.S. Defence Secretary Robert Gates and Carter regarding affordability and efficiency in military procurement.

Asked what impact the initiatives will have on F-35 contracts now being carried out by Canadian firms, as well as potential future contracts, Adams said "it's too soon to provide a detailed assessment of the implications and potential impacts on our programs and business."
What do you think the odds are that the Lockheed Martin spokesman would say that Canadian firms will be affected? With a purchase of 65 jets hanging in the balance? Not good.

There's also an analyst cited in the report who believes that the overall production numbers of JSFs (approximately 3173) might be reduced in order to cut costs, with implications for the work available for Canadian firms. So, there's a little bit of risk creeping in to the facts on the F-35 industrial contracts. But I'm sure we'll hear very thorough talking points to rebut it all away at the PMO managed F-35 industrial event apparently going on in Ottawa today.

One other pesky thing here, at the risk of this post getting too long. As pointed out above, this is the government's line on the untendered purchase rationale:
Canada is purchasing this fifth generation fighter aircraft through the preferential mechanisms of the multinational JSF PSFD Memorandum of Understanding and delivery of the new aircraft is expected to start in 2016. (emphasis added)
They take that, I guess, from 7.3 of the MOU. At least, this is the section that Tony Clement relied upon quite heavily on an appearance on Power & Politics recently:


Note the word "normally" and that the awarding is subject to "Best Value offers," i.e., could be non-"preferred" nations' companies. And then read 3.2.1.1.1:

The government seems to be ignoring the above section in favour of its interpretation that we're squeezed into buying due to the preferential industrial benefit clause. So on the one hand, countries are free to have their own normal procurement processes and National Defence was indeed planning for that. But on the other hand, there's this industrial benefits clause that seemingly grants some kind of preference for nations buying F-35s, but with the caveats noted above that undermine its preferential nature.

I don't get the government's narrow interpretation and heavy reliance upon 7.3, unless there are provisions in this MOU that are more relevant than those above that I've missed (or that are found in other agreements, although this MOU seems to be the governing document). It just looks like the government is leaning on industry as cover for the choice to sole-source when, contrary to what they're telling us, they could have had a competition. With the largest military expenditure in our history at hand, that still seems like the wise route to take.