The Harper government is scrambling to salvage its reputation for sound fiscal management after the Auditor-General tore into its multibillion-dollar plan for stealth fighter jets, a project that the Conservatives have championed since coming to power in 2006.
The watchdog's scathing report is forcing the Conservatives to effectively relaunch the process of buying the F-35s – a plane this government until recently firmly embraced despite frustrating cost overruns and technical problems encountered by its U.S. manufacturer.
Tuesday was the first time since the Tories took office that the government has been forced to take responsibility for such a serious financial stewardship blunder. The project to buy 65 stealth F-35 Lightning fighter bombers is one of the single most expensive military procurements in Canadian history.
In his first report as Auditor-General, Michael Ferguson said the Department of National Defence gambled on the F-35 fighter jet without running a fair competition, while lacking cost certainty or any guarantee the plane could replace the current fleet of CF-18s by the end of the decade.
He said the plan to buy new jets was conducted in an unco-ordinated fashion among federal departments, with key data hidden from decision makers and parliamentarians.
Mr. Ferguson singled out Defence bureaucrats for withholding information.
"In briefing materials from 2006 through 2010 that we have reviewed, neither the minister nor decision makers in National Defence and central agencies were kept informed of these problems and the associated risks of relying on the F-35 to replace the CF-18," he said.
The government responded quickly to the bad-news audit, but stopped short of sacking anyone in cabinet or the bureaucracy over the matter. Conservative officials could not name anyone who would be demoted, fired or reassigned, and at National Defence, deputy minister Robert Fonberg refused comment when asked if any employees were being held responsible.
No ministers took blame for the blunders Tuesday but the government effectively signalled it no longer trusts the Department of National Defence to provide it unbiased information on F-35s.
It handed full management for the project to the Department of Public Works, establishing a secretariat to manage the file – one that will now be overseen by a committee of deputy ministers, the bureaucracy's senior executives.
"The Auditor-General has identified a need for greater independence and supervision over some of the activities of the Department of National Defence," said Prime Minister Stephen Harper. "The government will put that supervision in place before we proceed."
One key player who was noticeably quiet Tuesday was Defence Minister Peter MacKay, despite the fact he's been the senior Conservative politician in charge of the military since August 2007.
The Conservatives vowed a more transparent and rigorous process for keeping a lid on costs in the fighter purchase, saying they would conduct an independent review of the F-35's purchase and support costs and make this public.
The Harper government also promised a freeze on spending for the $9-billion set aside to buy the planes, a largely symbolic move given it has not yet signed a contract for the jets.
It also pledged annual updates on the progress toward buying the F-35, planes that Ottawa is not scheduled to take delivery of until 2017 or later.
In recent weeks, the government has deliberately wavered on Canada's commitment to the F-35 – a move that aims to put distance between itself and an increasingly expensive procurement. The Tories are eager to create enough wiggle room so that they're not wedded to the plane if the procurement goes even more badly awry.
It's a dramatic change from July, 2010, when Mr. MacKay stood beside a scale model of an F-35 and announced the government was acquiring the plane, calling it "the best aircraft we can provide our men and women in uniform to face and defeat the challenges of the 21st century."
In Tuesday's report, Mr. Ferguson suggested the government misled Parliament on the file by using a $15-billion price tag for the acquisition and maintenance of fighter jets over a 20-year period. Internal government documents, he noted, showed a total price-tag of $25-billion over the same period, once fixed costs are included.
Much of the difference between $15-billion and $25-billion is operating costs – including National Defence personnel salaries – that are largely fixed and would be incurred regardless of what fighter plane Canada was flying.
The opposition jumped on the Auditor-General's findings, saying they show the Conservative government misled Parliament on the full cost of the risky military technology.
"The Auditor-General's report on the F-35 is a litany of poor public administration, bad decision making and lack of accountability by Conservative ministers," NDP Leader Thomas Mulcair said.
In his report, Mr. Ferguson said that the department of National Defence, which has bought a number of troubled technologies over the years, has been "overly confident" in the F-35. He said the acquisition has been mismanaged since 2006, when DND signed a deal with the Joint Strike Fighter Program that is led by Lockheed-Martin in the United States.
While the memorandum of understanding did not constitute a contract, it nonetheless meant that Canada agreed to acquire the jets without going through a distinct competition with other manufacturers, he said.
"There were problems throughout the whole decision-making process, and the financial information that was brought forward should have been better," Mr. Ferguson said at a news conference.
The Auditor-General also raised concerns that National Defence has no contingency plans if the F-35 is not ready at the end of this decade to replace the aging CF-18s.
A big factor in major military purchases in Canada is the potential for regional industrial benefits as Canadian companies win the right to help manufacture the hardware. However, in this case, the government was only told of "the most optimistic scenario" involving the F-35 program, leaving doubts about the actual benefits that will flow to Canadian companies, Mr. Ferguson said.
Auditor-General Michael Ferguson on the F-35 program
Acquisition plan: "Fundamentally, we found that the process did not work, and it needed to be a better process."
Price tag: "National Defence likely underestimated the full life-cycle costs of the F-35."
Going to tenders: "Holding a balanced competition among contender aircraft would be exceedingly difficult, in part because of Canada's long-standing partnership in the development of the F-35."
Regional benefits: "Briefing materials prepared for decision makers did not explain the basis for and limitations of projections of industrial benefits to Canadian companies."