UPDATE 3-Canada's move to buy F-35 jets flawed -watchdog
* Report on F-35 decision reveals "significant weaknesses"
* Military officials understated risks and costs of program
* Report is another blow to an already troubled defense project
* Government removes fighter project from defense ministry
By David Ljunggren
OTTAWA, April 3 (Reuters) - Canada's decision to buy F-35 fighter jets was based on bad data from officials who deliberately downplayed the costs and risks, the government's spending watchdog said on Tuesday, further tainting a project that is already delayed and well over budget.
The report by Auditor-General Michael Ferguson is an embarrassment for the Conservative government, which announced in July 2010 that it would buy 65 of the fifth generation Joint Strike Fighters made by Lockheed Martin.
Ottawa did not hold a competition for the new planes, which are due to replace Canada's ageing fleet of CF-18 fighters.
Ferguson said military officials had decided as long ago as 2006 to go with the F-35. They provided ministers and Parliamentarians with misleading information which understated the problems the program was experiencing and provided artificially low cost estimates.
"National Defence did not exercise due diligence in managing the process to replace the CF-18 jets," he said.
"There were significant weaknesses in the decision-making process used by National Defence in acquiring the F-35 ... key decisions were made without required approvals or supporting documentation."
The government of Prime Minister Stephen Harper regularly used the overly upbeat reports from the military to dismiss opposition complaints about problems with the F-35.
"The key question to the prime minister is: how could he allow Parliament to be intentionally misled on the F-35s? Either he knew, and it's unconscionable, or he didn't know, and it's incompetence. Which is it?" said Thomas Mulcair, leader of the official opposition New Democrats.
Harper replied by saying Ottawa had not yet signed a binding contact with Lockheed.
The government quickly responded to Ferguson's report by saying it would freeze the budget it had allocated for new fighters and would not sign a contract until it had reexamined the procurement process.
Ottawa also stripped the defense ministry of responsibility for the project and said it would "continue to evaluate options" for new fighters, but gave few details. Possible alternatives include Boeing Co's F-18 Super Hornet.
Canada said in 2008 it would spend C$9 billion ($9.1 billion) on a next generation of jet fighters and a further C$16 billion to operate and maintain them for 20 years. Ferguson said this might well not be enough money.
"National Defence may have to abandon or reduce some of the Canadian Force's capabilities, for example, by reducing the number of aircraft purchased or their flying hours," he said.
Military officials avoided a competition by saying the F-35 was the only plane that could meet all of Canada's requirements. They provided no documentation to back up their assertion.
Lockheed Martin said it fully supported the Canadian government's response to the report, and looked forward to supporting Canada's efforts to provide its air force with a fifth-generation fighter for future security needs.
The Pentagon's F-35 program office declined comment.
The U.S. government last week projected the total cost to develop, buy, and operate the F-35 would be a staggering $1.51 trillion over the next 55 years. The Pentagon says it plans to buy 2,443 of the new planes.
Lockheed is developing three variants for the U.S. military and eight partner nations: Britain, Canada, Italy, Turkey, Australia, Denmark, Norway and the Netherlands.
Italy said in February it would cut its planned purchase of 131 planes by 30 percent. Japan said it could cancel orders for 42 F-35 fighters if the price goes up or deliveries are delayed.
Canada took part in the three major development phases of the F-35 program in 1997, 2002 and 2006, at which point Ferguson said it was clear the military had decided it wanted the plane.
"Problems relating to development of the F-35 were not fully communicated to decision-makers, and risks presented to decision-makers did not reflect the problems the JSF Program was experiencing at the time," he wrote. "Full life-cycle costs were understated in the estimates provided to support the government's decision in 2010 to buy the F-35."
Canada - which has committed $710 million to help develop the F-35 - said one reason for choosing the fighter was that it could provide good business for Canadian companies later on.
Ferguson said officials had overstated the potential benefits of taking part in the F-35 program and did not make clear to the government that the military's close involvement with Lockheed would make running a fair competition difficult.
"Many of the steps and documents used to support the government's 2010 decision were of little consequence because the key questions of whether to procure the F-35 and whether to run a competition were effectively determined by decisions taken much earlier, calling onto question the integrity of the process," he said.
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