Defence procurement cost estimates often contain “eye-watering” program costs that can create confusion about where taxpayers’ money is going and what it is buying. This is because of government policy that requires cost estimates to include lifetime expenses well beyond anything ordinary citizens would consider in making a large purchase. Specifically, they include the price of not only the purchase itself but also the full life-cycle cost of ownership, including estimates for future upgrades and annual operating costs for fuel, maintenance, personnel salaries and many other things. These ongoing operations and sustainment costs typically dwarf the acquisition price tag, representing perhaps two-thirds to three-quarters of the total program cost.
The whole-life costing approach may make good sense in principle, but there are drawbacks in terms of the picture it paints. First, while the factors that go into estimating acquisition costs are readily identifiable and can, as the planning process matures, be predicted with reasonable accuracy, lifetime operations and sustainment cost estimates can never be more than notional numbers based on many assumptions that may or may not prove accurate. For example, the Parliamentary Budget Office (PBO) calculations for the lifetime costs of the Canadian Surface Combatant assume a service life of thirty years, but the Royal Canadian Navy’s current Halifax Class ships will likely be in service for nearly fifty years before being retired. Also, the PBO calculations assume that the pace of operational use will follow the navy’s current long-range planning estimates, but history shows that these plans evolve over time in response to events. For example, in order to cope with the significant defence budget cuts in the 1990s, sea days for the navy’s ships (among many other things) were drastically cut back to reduce operations and sustainment spending. On the other hand, future regional and global events may cause the government to direct the navy to increase operational tempos – driving expenditures higher. This illustrates why estimates of lifetime operations and maintenance costs for any system are rarely more than “best guess” rough approximations.
There are two further problems. First, this whole-life cost estimating process does not provide a reliable basis for citizens to understand the relative costs of different options, since future operations and sustainment costs are not only fuzzy estimates but also may not differ much between competing systems. Given that they typically represent such a large proportion of the total cost the government publishes, these numbers tend to cloud the cost comparison. Second, as the Parliamentary Budget Officer has acknowledged, these estimates do not consider the costs of NOT having the right capabilities for the nation’s needs, because they can’t be quantified in accounting terms. These costs, however, can be no less real in terms value for money when it comes to assuring the country’s ability to guarantee its security and protect and further its national interests.
None of these limitations mean that estimating total life-cycle costs has no value. It is useful to defence planners and Parliamentarians overseeing government spending plans as it provides a reasonable approximation of the total future funding requirement for the system, and its long-term affordability within the defence budget envelope. However, the operations and sustainment costs in particular can’t be taken as definitive numbers that won’t change. Also, the defence budget has to cover the cost of acquiring and operating a broad range of capabilities and their associated human and material elements, so the costs associated with any one of them provides only a very limited perspective. Funds can be, and often are, shifted between capabilities depending on near-term priorities and changes in long-term plans.
The bottom-line message for citizens is not to get overly concerned about the big numbers contained in government whole-life cost estimates, as they can be misleading. Instead, look at the acquisition in terms more similar to how you would consider your own purchase of something like a vehicle or home. There will normally be a quite well-defined price of acquisition, and perhaps a good initial idea of many of the ownership costs such as insurance, energy and associated taxes and permits. However, you won’t know the rate at which these latter will increase over time. Further, there are many other less predictable costs you can expect to incur over time – think home or vehicle maintenance and repairs, property improvements, and so on. These will likely add up to quite a sum over the period you own it. These less certain future expenses typically don’t scare people off from making their own purchase decisions, and nor should they deter the nation when it comes to decisions on investments in defence capabilities.
