Ministry of Defence estimates

Dutch source data

Every year, all the JSF partner countries pass on their 'order series' to the JSF Program Office (JPO). This information states how many JSF aircraft they wish to order and in which year. The same applies to the Netherlands, which submits its JSF plans to the JPO every year. The information sent by the Netherlands includes the number of aircraft, the delivery dates, the expected number of flying hours per aircraft, the base where they are to be stationed, etc. This is known as a 'bed-down plan’.

JPO estimates

Every year, the JPO prepares estimates of the investment costs and operating costs for the JSF. These are intended primarily for the US administration and are published by the US Congress in the form of a Selected Acquisition Report (SAR). Based as it is on the US situation, an SAR is of limited value for the Netherlands. However, the JPO also produces estimates for each partner country, based on its own estimates in conjunction with the partner countries’ bed-down plans. The JPO produces these individual estimates in the form of a ‘bilateral sheet’ (or ‘bilat sheet’).

A bilat sheet states the cost for a specific country, as calculated by the JPO, for the period up to 2053. In addition to taking account of changes in the order series, the JPO also calculates the costs resulting from: 

• the expected prices of raw materials or JSF parts;
• likely changes in manufacturers’ wage bills;
• the likely unit price of the JSF;
• new information on JSF fuel consumption;
• new information on the frequency of maintenance and repairs. 

Dutch projection model

The Dutch Ministry of Defence then adjust the US estimate by: 

• using Dutch cost information based on the situation in the Netherlands;
• replacing certain US data with more specific Dutch data, on the grounds that the estimate will otherwise unintentionally produce an outcome that is either too high or too low. For example, ground crew labour costs in the Netherlands differ from those in the other partner countries;
• using its own inflation data.

By feeding the adjusted data into the projection model developed in conjunction with TNO, the Ministry of Defence is able to build up its own estimates for the entire period up to the year 2053, i.e. the end of the period in which the Dutch government expects the JSF to remain in operation.

Discrepancies between estimates from year to year

The estimates tend to differ from year to year. There are a number of reasons for this:

• Prices: the estimates produced by the Ministry of Defence are based on prices in the year in which the estimate is made. In other words, an estimate produced in 2015 assumes that 2015 prices will apply to all cost items throughout the entire duration of the project, i.e. until 2053. An estimate made in 2016, on the other hand, is based on prices in 2016. In other words, the estimates are index-linked every year, in accordance with the price index produced by Statistics Netherlands.
  The prices of all the various JSF cost items are unlikely to remain constant until 2053. This is not a problem, however, given that the spending limits within which the estimate is required to remain are also index-linked every year, by the same percentage as that by which the estimate is adjusted. This allows the Ministry of Defence to make sure that the estimates remain within the appropriate spending limits.
• Planning dollar exchange rate: many of the items in the estimates are expressed in US dollars, despite the fact that the estimates are originally produced in euros. This is a problem, given that the dollar-euro exchange rate changes from one day to another. The Ministry of Defence has found a practical solution to this problem in the form of what is known as a ‘planning dollar exchange rate’, i.e. a rate of exchange used specially for the estimates. A change in the planning dollar exchange rate may result in the next estimate being considerably higher – or lower – than the previous one. The impression created is that the level of cost is much higher than expected – or, in the opposite case, of a windfall gain for the Ministry. However, these are merely paper losses and gains. In practice, a higher or lower estimate proves correct only if the actual dollar exchange rate at the time when the relevant payment is made is the same as the planning rate on which the estimate was based.
  The Ministry of Defence has used different planning dollar exchange rates over the years, which is why it is important to know which particular exchange rate was used in a specific case: 
  • Up to and including the annual report for 2010, the Ministry of Defence used a fixed planning dollar exchange rate of USD 1 = €0.83.
  • During the following years, the Ministry based its estimates on the dollar exchange rate in the Central Economic Plan published each March by the Dutch Bureau for Economic Policy Analysis.
  • Since September 2016, the Ministry has used a planning dollar exchange rate that is fixed for a period of five years.
• Changes in the breakdown of costs: an estimate may also change because the Ministry of Defence decides to break down the costs in a different way. This is what happened, for example, in relation to the operating costs in 2014. This makes it difficult to compare the estimates for the years before and after 2014.
  There is another reason why it is difficult to compare the figures for the years before and after 2014. This was the year in which the Ministry of Defence decided to present the operating costs for each year rather than for the entire service life of the aircraft, on the grounds that the budget also applies on an annual basis.
• Other factors, such as a change in the number of aircraft or in the VAT percentage. Although the estimates are affected by such changes, they do not say anything about the efficiency of the JSF programme.
• Technical changes that are likely to be to the project may also result in changes being made to the estimates. This is the case, for example, if the JPO negotiates lower prices with the manufacturers, if the production process becomes more efficient, or if there is a change in the maintenance model.

In other words, it is important to know the reason for any rise of fall in the Dutch cost estimates. Has the planning dollar exchange rate been adjusted by the Ministry of Defence? Or has there been a rise in the price of the aircraft and the related equipment that the Netherlands is planning to order from the US? Or does the Netherlands wish to order more of them? In short, the key issue, when comparing estimates, is to know exactly what you are looking for.

Spending and cost estimates in reports presented to the Lower House

The regular progress reports on the replacement of the F-16 and the acquisition of the JSF.  include estimates of the investment and operating costs of the JSF, and also state the amounts actually spent in practice. Both the estimates and the actual spending figures are set against the maximum limits in the financial framework.