Government agreements on the financial framework for the JSF

How much is the Dutch government allowed to spend on the JSF? The financial arrangements made in this respect are set out in a policy document entitled In the Interests of the Netherlands. Taken together, all these various agreements are known as the financial framework. The framework imposes limits on the cost of the JSF, in terms of both investment and operating costs. The government felt that it was important to lay down certain financial limits so that it could retain control over this massive investment in defence materiel and also to ensure that it did not crowd out other Ministry of Defence investment projects. The financial framework was also an important factor for the Lower House to take into account in adopting a position on the JSF project.

The financial framework consists of five separate agreements:

1. the investment costs for the JSF are subject to a maximum limit of €4.5 billion;
2. the operating costs for the JSF are subject to a maximum limit equal to the operating costs of the F-16 in 2012. The latter have been calculated at €270 million per annum;
3. both budgets include a 10% contingency reserve;
4. both budgets are index-linked in relation to prices, but not in relation to exchange rate fluctuations;
5. the contingency reserves may not be used to hedge price or currency risks.

Our conclusion on the financial framework for the JSF

We made clear in our audit report entitled ‘Validation of the policy document In the Interests of the Netherlands’ that the financial framework was a vital means of keeping a grip on the cost of this major project. At the same time, we pointed out that certain arrangements set out in the financial framework were likely to have only a limited long-term tenability.

Agreed spending limits for the JSF

In other words, there are two key spending limits for the JSF project:

• investment costs: capped at €4.5 billion (in 2013 prices);
• operating costs: capped at €270 million per year (in 2013 prices)

Spending on the JSF has to remain within the above limits. The limits are index-linked, based on the annual rate of price inflation. This is necessary, given that prices tend to rise as a result of inflation. If the limits were not index-linked, the Ministry of Defence would see its spending power reduced, i.e. it would be able to buy less and less for the same amount of money.

Index-linked value of the spending limits

The Minister of Defence reports the index-linked value of the spending limits in the progress reports. The current spending limits are stated in the most recent progress report. The following tables show the spending limits as at September 2018.

The spending limits as at September 2018

Investment costs budget in September 2018 (in €million)	Bedrag
Investment costs budget as initially planned (in 2017 prices)	4,747.4
Adjustment for inflation in 2018	+48,4
Additional adjustments for inflation in 2016 and 2017	+67,4
Current investment costs budget (in 2018 prices)	4,863.2

Current investment costs budget (in 2018 prices)

Operating costs budget in September 2018 (in €million)	Amount
Average annual budget for operating costs as initially planned (in 2017 prices)	299.4
Adjustment for wage and price inflation in 2018	+6.5
Current average annual budget for operating costs (in 2018 prices)	305.0

How is expenditure charged to the budgets?

The budgets are not ring-fenced. The budgets, payments and statements of income and expenditure for the JSF are recorded in the Ministry’s financial accounts in the normal manner, with capital expenditure stated in budget article 6 (‘Investments in the armed forces’) and operating costs included in budget article 4 (‘Performance of air force duties’). The budgets are simply upper limits on expenditure as agreed by the cabinet. In other words, they are primarily an arithmetic construct, i.e. the Minister of Defence is required to demonstrate on a regular basis that expenditure on the JSF does not exceed these limits.

A number of these payments are payments made by the Netherlands in its capacity as a purchaser of the JSF. In addition to these payments, the Netherlands also pays contributions for its role as partner in the JSF programme.

• The payments made for the purchase of the aircraft and the related equipment are deducted from the investment costs budget for the JSF.
• Once the JSFs are operational, the operating costs are paid from the operating costs budget.
• The Ministry of Defence uses a special allocation formula for the contributions paid by the Netherlands as partner in the JSF programme:
  • The Ministry of Defence does not charge the Dutch contributions to the Concept Demonstration (CDP) Phase and the System Development and Demonstration (SDD) phase to these budgets. These contributions are not covered by the financial framework.
  • The Dutch contributions to the creation of production facilities for the JSF and a global maintenance network (as part of the PSFD phase) and to the operational test phase (IOT&E) during the years up to and including 2024 will be charged to the investment costs budget. As from 2025, they will be charged to the operating costs budget.
  • The Dutch contributions to the follow-on development of the JSF (as a part of the PSFD phase) are charged to the operating costs budget.

Revenue received in the form of remittances and royalties goes to the State of the Netherlands and is not added to the budgets. 

September 2018: “Financial framework abandoned”

Writing in the 19th progress report on the acquisition of the JSF published in September 2018, the Minister of Defence announced the scrapping of the financial framework for the JSF project. The project was to be regarded henceforth as an ordinary investment project forming part of the Ministry’s programme of investments and financed under budget article 6 (‘Investments in the armed forces’). The reason cited by the Minister for making this change was the fact that the project had now reached the operational stage. Although the Minister said that the spending limits of €4.5 billion and €270 million per annum respectively had ‘not yet been scrapped’, she said she was planning to use the contingency reserve as a hedge against the currency risk. However, she did not explain the precise consequences of the decision to dispense with the financial framework.

We drew the attention of the Lower House of the Dutch parliament to this lack of clarity in our letter of 4 October 2018.

September 2018: Ministry of Defence gets a ‘Defence materiel budget fund’

The Minister of Defence announced in the Defence budget for 2019 published in September 2018 that the government had decided to create a Defence materiel budget fund. The idea was that this would be used for funding materiel investments for the Ministry of Defence. No details were given as to how exactly the fund would operate. The creation of this new fund may result in changes being made to the budget and financial statements for the JSF.