4Hidden costs?
73.The Times also claimed that the F-35 would entail “substantial” hidden costs to the taxpayer, “spares, software upgrades and retrofits are understood not have been covered in sums quoted by the US government and Lockheed Martin, the primary contractor”.
74.For example, while Lockheed Martin recently said that the price of the plane had fallen below £77 million per unit, The Times claimed that “the real price [including the upgrades and retrofits mentioned above] of an “average” F-35 delivered this year is going to be much higher—between £130 million and £155 million each”.68 According to The Times, these figures have been “buried in US defense contracts and have not been included in the published figures”.69
75.In its briefing, the MoD rejected the claim that there were hidden costs in the programme, said that they did not “recognise” the figures provided in the article and argued that the programme “remains within its cost approval” as detailed within the 2016 Equipment Plan.
76.When asked how The Times had arrived at their figure of around £130–155 million per F-35B fighter produced this year, once modifications and retrofits have been taken into account, Alexi Mostrous explained their methodology:
We analysed lot 9—the aircraft delivered this year—because we could not compare the lot 10 contracts, which had not been released yet.
We started off by looking at the fly-away costs, which are public, but the US Government also releases a whole series of details about the individual contracts given to companies like Lockheed to build the particular planes. These contracts will often specify that they are for lot 9 aircraft: “£140 million in March 2014, granted to Lockheed to provide long-term parts for lot 9 aircraft.” Given that we also know how many and which variants of aircraft are being built in lot 9, you can make a broad estimate of the total cost by adding up all the contracts—the retrofits, the helmets, the spares, everything that has lot 9 within the description—and dividing by the total number of aircraft. That gives an average F-35 aircraft cost. Given that we also know that the F-35B and F-35C command a roughly 30% premium on the F-35A, we can then factor that in to determine the average cost of a B variant.70
77.Mr Mostrous stressed that this was, by its very nature, an estimate. It was an attempt to say “we already know that the fly-away costs do not represent the full costs of the aircraft, because Lockheed Martin and the US Government accept that they do not include retrofit costs”, and therefore to “determine the rough overall cost” of those extras.71
78.Asked about the MoD’s claim that the project remained on budget, he replied that it was, and “has always been”, very unclear what the MoD actually means by “on budget [ … ] at no point have they said, “we are spending x on this aircraft and y on retrofitting it.”72 At the heart of this question of costs is a fundamental problem, according to Alexi Mostrous–that of transparency: “we just don’t know [about the costs and the potential overrun]”.73
79.When he was asked about The Times’s estimates of the cost of an average F-35 produced this year, once retrofits and upgrades are included, Mr Bronk said £130–155 million was “probably a fair figure in terms of what you would end up parting with, to get a representative squadron, per aircraft of F-35s produced this year, counting the necessary spares, consumables, infrastructure, set-up costs and so on”.74
80.However, he warned that it was “very difficult to know” how many of the costs identified in the earlier production lots are “one-off set-up costs, or at least early set-up costs, and how many are integral to the jet and what you require to buy it”.75
Calculating the cost of the F-35
81.Both Lockheed Martin and the MoD insisted that the programme was within budget. However, neither could provide firm costings, pointing instead to the unit recurring flyaway (URF) costs of the jets (this is the basic cost of the aircraft, not including any country specific requirements, retrofits, software updates, spares or logistical support). For example, Jeff Babione highlighted that this cost has been “going down year over year” and, for an F-35B purchased in Lot 9 (the latest production lot), was $131 million—a reduction of 25% from the first lot from which UK bought planes (Lot 3).76 According to Mr Babione the unit recurring flyaway costs of the programme to date, for the UK, are:
Unit flyaway costs for lots where UK has purchased, or is due to purchase, F-35s
|
Production lot |
Unit recurring flyaway cost |
Number of UK aircraft |
|
Lot 3 |
$161 million |
2 |
|
Lot 4 |
$139 million |
1 |
|
Lot 7 |
$137 million |
1 |
|
Lot 8 |
$134 million |
4 |
|
Lot 9 |
$131 million |
6 |
|
Lot 10 (the next Lot to enter production) |
$122.3 million |
3 |
|
Lot 11 |
TBC |
1 |
|
Lot 12 |
TBC |
3 |
|
Lot 13 |
TBC |
6 |
|
Lot 14 |
TBC |
8 |
Source: Q95; PRO0001
The figures, however, do not include the cost of retrofits, add-ons or software upgrades.
The aircraft procurement cycle: a process of lot-by-lot negotiation
82.One of the difficulties in costing—or even producing a firm estimate for—the F-35 programme is the way in which the procurement cycles operate for the aircraft and for spares and logistics. Mr Babione explained that Lockheed Martin aggregates the purchase of aircraft into lots “to afford economies of scale”, as the lots grow bigger, with production increasing, this should “bring the unit cost down for all of the airplanes, including the B model”.77 Rather than there being one overall negotiation for the entire purchase of the 138 jets, each of the lots is negotiated independently between the manufacturers and the Joint Programme Office. This means that there is neither a fixed ceiling, nor a floor for the price of the jet, but the cost is determined on a lot-by-lot process of negotiation.78
83.This does not mean that there are no price targets for the programme. As mentioned in the last paragraph, the grouping of purchases into lots is designed to achieve economies of scale that should, as production increases, see costs per unit decline. Mr Babione told us that, at the request of the JPO, Lockheed Martin will be aggregating Lots 12, 13 and 14 into what they called a “block buy and an economic order quantity opportunity” of approximately 445 airplanes. He also explained that Lockheed Martin’s cost target was for the price of the B model to be $105 million by the end of that block buy ($80 million for the A model).79
84.Tony Douglas, the Chief Executive of Defence Equipment and Support (DE&S), told us that, ahead of the block buy opportunity, the Government’s target cost per aircraft was around $105 million.80 When asked what would happen if that target could not be met, Mr Douglas claimed that they would “not sign the contract unless we can back it off against that price”.81
Procurement of spares and logistics
85.As Mr Babione explained to the Committee, procurement of spares and logistics, including those supplied by Lockheed Martin, is conducted separately from the production of the aircraft. He stated that these contracts are “aggregated over a longer period of time” which makes it more difficult to generate a cost per unit.82 When pressed on this, Mr Babione conceded that if Lockheed Martin were asked “specifically on a given scenario—a certain number of spares for a certain number of airplanes—we would be able to generate an estimate”. However, he repeated that this was “not the way that the customers procure from us [ … ] they buy these spares in aggregate [ … ] over about a three-year period”. As a result, each contract differed and would increase as the size of the fleet rose.83
86.Steve Over added that the types of equipment supplied by Lockheed Martin, in terms of facilities and infrastructure, were “probably more site specific” and thus not easily split on a per-aircraft basis. For example, “you will buy a pool of spares, a number of training devices and an ALIS system as you stand up each specific site of F-35s”. For that reason, and because other sustainment costs such as personnel and fuel were borne by the client nations, Mr Over suggested that the MoD “would probably be in a better position” to help the Committee understand the costs of the programme.84
87.Since then, Lockheed Martin has provided more details to the Committee in a supplementary evidence submission.85 This document outlines three elements to the cost of the F-35 programme: 1) unit recurring flyaway (URF) costs; 2) aircraft modification costs; and 3) sustainment costs. The costs for the first category are outlined in paragraph 89 above. As for the second aspect, Lockheed Martin’s supplementary evidence suggested that the UK is spending at least 3% of the original URF costs on aircraft modification (they could not provide figures on engine and weapons system modification). With regard to sustainment, Lockheed Martin told the Committee that these break down into three categories:
i)“Infrastructure such as logistics facilities, training environments, and maintenance, repair and overhaul facilities”. Lockheed Martin is contracted with the MoD to supply a package of facilities at RAF Marham, “including the construction and fit out of a logistics operations centre, integrated training centre and maintenance and final finishes building”. According to Lockheed Martin, the value of these contracts with the MoD totals £142 million;
ii)“A global pool of spare parts that are unique to F-35, support equipment to operate the aircraft, equipment to train pilots and maintainers, and Information Technology systems that enable aircraft operation and sustainment.” Customers deal directly with the JPO for these items, the cost of which is based on a cost-sharing formula that pools resources at the JPO level and then a negotiation between the JPO and Lockheed Martin and other providers, e.g. Pratt and Whitney for the propulsion system; and
iii)“Other generic costs outside the scope of the Programme, such as personnel and fuel costs”.
Lockheed Martin also informed the Committee that following the completion of the SDD phase, the partner nations in the programme “are committed to developing enhancements to in-service aircraft through ‘Continuous Capability Development and Delivery (C2/D2)”. According to Lockheed Martin, they expect the UK to “pay approximately 4.5% of the total cost to develop and integrate new capabilities into the F-35”.86
The MoD and the cost of the F-35 programme
88.We asked the Minister for Defence Procurement and her MoD colleagues several times about the cost to the UK taxpayer of the F-35 programme. Pressed on the total cost per aircraft, once support and spares are included, Mrs Baldwin and her colleagues did not answer directly, pointing instead to a recent NAO report which put the total cost of the programme through to 2026, at £9.1 billion, a sum that includes the first 48 aircraft, spares, support, training and the investment in infrastructure at RAF Marham and elsewhere.87
89.When asked how the £9.1 billion figure equated to a cost per-aircraft, particularly in light of the MoD’s criticism of The Times’s estimate of £130–155 million per aircraft, MoD Permanent Secretary Stephen Lovegrove attacked that estimate as an “extraordinarily crude and misleading calculation” which, he suggested, was arrived at by taking £7.3 billion from the £9.1 billion (this £7.3 billion figure covers the production, sustainment and follow-on phase of the programme to 2026) and dividing it by 48.88 It should be noted that this is not the calculation process outlined by Alexi Mostrous during his appearance before the Committee (see paras 76–77 of this report).
90.According to Mr Lovegrove, it is not possible accurately to divide the £9.1 billion cost on a unit-by-unit basis due to the inclusion, within that figure, of training and infrastructure costs and additional costs “associated with the design and total concept of the aircraft”.89 Instead, he suggested that one would have to “do a very complicated sum at the end of the life of the programme [the mid-2030s] and divide it by 138. Then you might be able to do it”.90
91.The Department was also unable to provide details of the total cost of the F-35 procurement programme, again pointing to the published costs for the programme up to 2026.91 The Minister told us that the MoD “have not gone” beyond those costings. Mr Lovegrove, however, suggested that the MoD had “rough orders of magnitude” for the possible costs beyond 2026/7, but which are not published for two principal reasons:
One is that they are rough orders of magnitude, and who knows exactly what the world will look like in 10 years’ time? In fact, there are no private enterprises that estimate their costs 10 years out with the accuracy that we do, or to the level of fidelity that we do. Secondly, even the last 17 or 19 F-35s within the first 48 are still under negotiation. To reveal publicly how much we think we might be prepared to pay for those would obviously be compromising our negotiating position and compromising taxpayers’ money, so we will not be doing that.92
92.The Committee views the MoD’s failure to provide adequate cost estimates, either on an overall programme basis or on a per-aircraft basis, as wholly unsatisfactory. It amounts to an open-ended financial commitment which can be quantified only in retrospect.
93.We understand that the Lot-by-Lot procurement process for the aircraft, allied with the separate processes for procuring parts and spares and logistical support, make it difficult to calculate the total cost whether on a per-aircraft or on a programme-as-a-whole basis. However, it is simply not acceptable for the Ministry of Defence to refuse to disclose to Parliament and the public its estimates for the total cost of the programme, and to suggest instead that we must wait until the mid-2030s (when all 138 F-35 have been procured) to be able to work out a full unit cost for each aircraft, once spares and upgrades are included.
94.The lack of transparency over the costs of the F-35 is unacceptable and risks undermining public confidence in the programme. The Department should provide us with the ‘rough orders of magnitude’ it claims to possess for the total costs of the F-35 programme beyond 2026/7.
68 Alexi Mostrous (17 July 2017), Upgrades and extras push up flyaway costs, The Times, https://www.thetimes.co.uk/article/upgrades-and-extras-push-up-flyaway-costs-t2jhslw6d
69 Alexi Mostrous and Deborah Haynes (17 July 2017), Britain spends billions on flawed F-35s, The Times, https://www.thetimes.co.uk/article/britain-spends-billions-on-flawed-fighter-jets-qrtj95kvh
70 Q16
71 Q16
72 Q17
73 Q17–21
74 Q62
75 Q62
76 Qq73, 91
77 Q91
78 Q100
79 Q96
80 Q210
81 Q211
82 Q105
83 Q107
84 Q107
85 PRO0001
86 PRO0001
87 Qq183, 194
88 Q195
89 Qq195–197
90 Q196
91 Q190
92 Q194
18 December 2017