Why does the price of the JSF go up all the time?
You often hear people saying that the price of the JSF just seems to go up and up. This impression is not entirely accurate, however, at least not in relation to the Netherlands. As we explain below.
As a partner in the JSF programme, the Netherlands contributes to the cost of the development and production of the JSF. And as a purchaser of the JSF, the Netherlands pay the purchase price for the aircraft.
The Netherlands is not affected by higher development or production costs
There has been a sharp rise in the development and production costs of the JSF, particularly during the period up to 2010. Under US law, the US Department of Defense is obliged to inform Congress about any significant cost overruns on defence materiel projects. If the cost overruns the amount budgeted by 50% or more, the Department of Defense is under a legal obligation to restructure the project in question and Congress is required to give fresh approval to the restructured project. At the beginning of 2010, it became apparent that the JSF programme would cross this critical threshold. The Department of Defense therefore restructured the programme between 2010 and 2012: the development phase was extended by two years and various other steps were taken to limit the development costs and thus to keep both the unit price and the operating costs for future purchasers as low as possible.
The Netherlands is not affected by higher development or production costs. This is because the Dutch government imposed a maximum ceiling on its contributions in the MoUs. This means that the US is required to pay for any budget overshoots in relation to the development costs. Thanks to its role in the programme, the US is in a better position to control the level of cost.
Unit price expressed in US dollars has been falling in recent years
The amount paid by the Netherlands as a purchaser of the JSF and all the related equipment and materials is referred to as the investment costs. The unit price of the aircraft accounts for only part of the investment costs.
The unit price is difficult to pin down, as it depends on what is included in it. The meaning of this term is explained elsewhere in this web dosser.
When the Netherlands joined the development phase of the JSF programme in 2002, the Americans expected the unit price of the aircraft to work out at USD 37 million. By 2013, however, the unit price had already risen to USD 86.1 million. Of course, part of this increase was due to inflation, but the main cause of the price rise is a combination of overoptimistic projections and the ever stricter demands that the JSF is required to meet. At the same time, it is very common, when new products are developed, for the unit price to be high at the outset and then to gradually decline. At the start of a project, production still needs to come on stream, there may be all sorts of teething problems and the production volume tends to be relatively low. Once production gets off the ground and the volume rises, the unit price starts to fall.
The unit price also differs from one country to another, as each country makes its own arrangements and partners in the JSF programme may be eligible for special discounts, for example.
Exchange-rate fluctuations may push up unit price in euros
During the period up to the end of 2017, there was in fact a sharp rise in the average unit price expressed in euros. This was the result of fluctuations in the rate of the euro against the US dollar.
The Minister of Defence keeps a record of the average unit price that the Netherlands is required to pay, and reports on this in the progress reports.
The average unit price that the Netherlands has paid for the JSF, expressed as an annual price in US dollars, has fallen since 2013 to a level of USD 76.5 million in 2018. This may be due to the fact that production has now come on stream. However, the decrease may also be the result of the restructuring measures taken by the Americans since 2010.
Measures taken against cost rises resulting from inflation and exchange-rate fluctuations
Inflation and exchange-rate fluctuations are both factors that are beyond the control of the Dutch Ministry of Defence. Nonetheless, the Minister can take certain measures to contain their consequences.
The Ministry of Defence is entitled to offset any cost rises caused by inflation from the price adjustment it receives from the Ministry of Finance. US inflation has at times been higher than inflation in the Netherlands, a situation that has prompted the Ministry of Defence to try and set aside additional reserves to cover the cost of the JSF. In our letter of 10 February 2015 to the Lower House of the Dutch parliament, we drew the House’s attention to the fact that this could have the effect of crowding out other investment plans.
The Minister of Defence can take out forward exchange contracts to counter the effects of exchange-rate fluctuations. Under a forward exchange contact, also known as a currency swap, dollars are bought at a specified date in the future, but at a preset exchange rate. Theoretically, this eliminates the currency risk. However, our audit report entitled Lessons learned from the JSF project shows that currency swaps have certain limitations.