National Defence Committee on Oct. 19th, 2010

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

All right.

The opposition is talking about how they're very concerned about the cost overruns within the process in the United States. They've suggested that this will impact the cost to Canada.

Will their costs and development and so on and the fact that they're going over budget, according to the news, impact the price of the F-35s for us?

[Dan Ross]

The U.S. government has specifically made a decision not to pass any of that cost on to the partner countries, and in fact additional time and money for the testing will come entirely from the Pentagon. That's been pretty clear from the beginning.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

A prior witness stated that we should undergo the entire exercise of designing and tendering the F-18 replacement from scratch because it would be the transparent thing to do, even if the end result were the purchase of the F-35.

Now in the best-case scenario, how long would this take? Would there be a gap between the F-18 retirement and the replacement availability? What would the financial cost be, not necessarily the price--I know you probably couldn't tell--but perhaps just a percentage increase on the price of the F-35, and of course the cost of the valuable time of our public servants to conduct this exercise?

[Dan Ross]

There are a number of issues associated with that. There would be a cost increase at the end of the day if you only had one fifth-generation fighter to procure and you had to do it under foreign military sales. There's an actual cost increase in the acquisition program, as I talked about in my opening remarks.

In terms of the actual process, a program of this magnitude and complexity would take several years, probably no fewer than four years. It would take tens of millions of dollars of support from Public Works, my own teams, etc. It's unlikely that it would be less than $20 million or $30 million.

I think the biggest costs would be that the global supply chain is being finalized now for joint strike fighters. They need to nail down who is providing what piece now and drive that into a very efficient production line to get the costs to be as low as possible as quickly as possible. They have clearly made the point that they wanted to nail down their supply chain by the end of 2010.

Waiting till 2013–14 to make a commitment would have potentially a serious effect on Canadian industry and its ability to participate, because unless you make a commitment to buy, you don't get to play in the industrial participation.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

There's also the cost of not participating in the royalties program, I think.

[Dan Ross]

Yes, Ma'am.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

You mentioned supply chain. Because of the increased market penetration in addition to the F-35s--for example take Haley Industries, which the VP for Magellan referred to in this committee, they do the sand castings for jet engines.... As a consequence of being part of the joint strike fighter manufacturing process, its product line is being introduced to companies and countries it may not previously have dealt with. So it stands to reason that Haley Industries may be invited to tender on future contracts in addition to the F-35. Is that a possibility? And not just this company, but other companies that traditionally haven't had the same international market that this project affords.

[Dan Ross]

That's the view that Mr. Lajeunesse feels fairly strongly about, that it's not just about joint strike fighter, it's about the reputation of Canadian companies internationally and the opportunities on aerospace programs. And that makes sense.

It's difficult to penetrate the aerospace market. The technical airworthiness requirements are extremely rigorous. Participation in a program like joint strike fighter brings with it the certification under technical airworthiness, without which you don't get sales. So there are a lot of dimensions to that. I'm not an expert, an Industry Canada expert, but I am responsible for technical airworthiness in a department. I understand how rigorous it is for us to qualify suppliers for even the existing craft we have. But to be inside that game is an extremely important advantage.

[The Chair, Conservative, Maxime Bernier]

Merci. Thank you very much.

Mr. Wilfert, I understand you will share your time.

[Bryon Wilfert, Liberal, Richmond Hill, ON]

Mr. Dryden will start, and if there's any time I'll follow.

[The Chair, Conservative, Maxime Bernier]

Mr. Dryden.

[Ken Dryden, Liberal, York Centre, ON]

Thank you.

Thanks, Mr. Ross.

You talked about the life expectancy of an airplane like this of around 40 years and you talked in terms of the F-18 and how when it came on line around 1980 no one could have imagined Kosovo, Kuwait, or Afghanistan. And beyond that, nobody could have imagined the fall of the wall and the disintegration of the Soviet Union.

I would assume that as this process is engaged, the Department of Foreign Affairs conducts a review, an examination of what it would imagine the world to be over the next 40 years, even though one is always going to have surprises. But you do the best you can to try to imagine what those needs are going to be. I would also assume that the Department of National Defence does not determine the foreign policy of Canada but would participate in the review that Foreign Affairs would do. I would assume that after Foreign Affairs had done that review, it would be up to the Department of National Defence to develop a plan as to how best one could prepare for those next 40 years.

Is that correct? Is that the process? And if that is the process, where is that Foreign Affairs plan? Is it something you can table with us so we can have the benefit of that? That's a central question to the whole question about the F-35. What is it that we would imagine for the years from 2020 on where this kind of very expensive technology would be used?

[Dan Ross]

I'm not aware of a detailed Foreign Affairs assessment of future threats. I do know that the intelligence agencies in the country, including DND's Chief of Defence Intelligence, do contribute to that type of analysis. I'm not personally involved with Foreign Affairs in that process, so I shouldn't speak to it.

But there is a pretty rigorous analysis of current threats by the intelligence community, threats that are developing from actual political and technological capability, and I keep abreast of those current threats.

[Ken Dryden, Liberal, York Centre, ON]

Sir, I understand that, but I find that incredibly surprising. Here we have an immense expenditure of money, a huge commitment over the next number of years. What you know and what I know also is that in fact what one has as technology is often what one ends up using, and therefore, it isn't just that technology follows policy; often it ends up the other way around.

So the kind of decision we're making about these planes is going to have an immense impact on the nature of our foreign policy over the next 40 years. Just having this kind of intelligence you're talking about is one thing, and I understand that. But I would have to imagine that a decision like this would have been rooted in a plan of imagining what those next 40 years will be. Otherwise, how would one know whether this was the right expenditure of money?

[Dan Ross]

I'm not sure if it's doable to envisage what threats we would have that, say, 25 years ago....

[Ken Dryden, Liberal, York Centre, ON]

Sir, we're always doing that. We do that in terms of health. We don't know, but we have to be able to offer as best a guess as we can, or else how can we make plans for the future? Yes, we can't know that, but that exercise is a crucial exercise to engage in.

[Dan Ross]

I'm wandering into a very classified intelligence area here, and I have to admit that I'm not specifically aware of the detailed analysis that goes on there. But there is very significant effort given to anticipating the threats from perhaps Russia or China or Korea and who they market them to around the world and what those threats would entail that you would have to be prepared to face.

[Ken Dryden, Liberal, York Centre, ON]

But you, sir, said in your original comment how all of this is a question of risk or less risk for our children and our grandchildren. Whatever decisions we make in foreign policy, they are choices. If we don't go in this direction, we go in another.

[The Chair, Conservative, Maxime Bernier]

Thank you very much.

I will have to give the floor to Mr. Bachand.

You have five minutes.

[Claude Bachand, Bloc, Saint-Jean, QC]

Thank you, Mr. Chairman.

Mr. Ross, I would like to read you an excerpt from a document that was produced by the Israeli armed forces. I will read it in English because as usual it is in English.

Lockheed Martin, meanwhile, is trying to ramp up orders for the F-35 quickly, even though the aircraft are now expected to remain in testing until 2015. A large order book would allow the firm to offer early buyers much lower prices for each plane, using dollar averaging over a substantial initial batch, instead of charging $150 million-$170 million for early production aircraft and $100 million or so for the same plane 3 years later.

That's pretty interesting, isn't it? We would have a tendency to think that we might as well wait before ordering the planes.

The dynamic is standard for military aircraft of all types, but the F-35 is about 5-7 years late versus its market ideal market window. Potential customers with air fleets that are reaching their expiry date are reluctant to pay those early production costs, and if enough of them defect, the F-35 program as a whole could find itself in trouble.

I would like to know if you agree with what I just read. When you explain your view, could you tell us whether, at this moment, the approximate cost of the aircraft that we will buying from Lockheed Martin is known?

[Dan Ross]

It's in Canada's interest that the current pricing scheme stay the way it is. If you, for example, averaged out the price now for the most efficient and least efficient and brought it all up, it would actually come up a little bit.

We don't want to pay that price. We have planned our F-18 fleet to be life expanded, to actually be at its worst fatigue life when it's cheapest to buy F-35s, during the most efficient portion of the production run.

Earlier buyers would really like us to average that price up higher, and they would pay less now—bring their price down and bring ours up, at 2016 to 2018, trying to bring it up higher. We haven't gone there because it would cost us money.

Now, the U.S. Navy and the United States Air Force will buy early. They have to. Their F-16s, F-18s, and F-15s are being retired, and they have no choice. They really do need their joint strike fighters delivered. They will pay the higher production price earlier, and they will obviously as well share the low part of the curve with us when we want to buy.

We're well aware of that issue and we're happy with where we are.

[Claude Bachand, Bloc, Saint-Jean, QC]

So you are not in a position to tell us right now that an F-35 aircraft that Canada will buy will be worth $100 million, $120 million or $175 million, because if any countries withdraw, the aircraft may cost us more. So we do not have any idea, at this point, how much this aircraft will cost when we take delivery.

[Dan Ross]

Sir, we have a very good idea of the price--a very good idea--and the actuals are tracking below.... There was a very significant review done in the Pentagon by an independent budget office, and they predicted a certain cashflow as the production goes. They are actually performing below that line, and our expected price, when we buy, is between the $70 million and $75 million range. We hope, as the testing is finished, as the global supply chain is firmed up and becomes more and more efficient, that they will continue to beat those predictions and drive it lower.

[Claude Bachand, Bloc, Saint-Jean, QC]

Could you give us some idea of the partnerships? There are three types of partnerships: partnership No 1, where the United Kingdom is the only one; partnership No 2, which includes Italy and the Netherlands, and partnership No 3, where Canada and a few other countries sign the agreement. What does it mean to be a level 3 partner with Lockheed Martin?

[Dan Ross]

I can't describe it in accurate detail. I'd have to get you more information. It has no specific disadvantage for Canada. We contributed somewhat less money than the British, but, frankly, the price to our aircraft is exactly the same price that any partner will pay at the year of production. It's exactly the same price that the British would pay, and our Canadian companies have done amazingly well. So we contributed less as a tier three partner, but we're getting exactly the same, so it's worked out very well for us.