Military cargo plane maintenance contract sealed after bitter talks: sources

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OTTAWA - After months of haggling, Ottawa is close to a multibillion-dollar agreement to maintain a fleet of military cargo planes - but the pending contract with Lockheed Martin has left a sour taste for many in the defence industry and government.
The deal is expected to be announced in early February, say defence and industry sources who spoke to The Canadian Press on Tuesday.
A team of federal officials is currently at Lockheed Martin's plant in Marietta, Ga., ironing out last-minute details.
"We're in great shape," said one defence insider. "You'll see an announcement very, very shortly. We're there."
Seventeen state-of-the-art C-130J Hercules transports are being acquired under a sole-source arrangement with Lockheed Martin, a deal announced almost two years ago with fanfare by Defence Minister Peter MacKay.
But unlike other big-ticket deals, the $1.4-billion purchase came without a signed long-term maintenance contract.
The Defence Department set aside an additional $1.7 billion for 20 years of in-service support, but that plan quickly went off the rails when the aircraft-maker delivered a cost-estimate that was reportedly 50 per cent higher than the budget.
A federal official played down the surprise, saying it was only a projection and original proposals "are always higher than what you initially estimate."
To get a compromise "it takes hard work and tough negotiation," the official added, on condition of anonymity.
Sources insist both the purchase and the service program will be delivered for less than the Conservative government's nearly $3.2-billion program budget.
But to do that the federal government may have had to drastically reduce the length of the service deal.
Sources said what was intended to be a 20-year support agreement has now shrunk to seven years, with renewal options down the road to cover the life of the aircraft.
Public Works Canada, which is in charge of contract negotiation, declined to comment Tuesday on the specifics of the arrangement.
Lockheed Martin will be directly in charge of the overall support deal during the first phase, with sub-contracts to Canadian companies for specific work and parts, sources said.
Defence observers are wondering what kind of deal the government has struck, given that the first seven years of an aircraft's life are the least maintenance-intensive.
"It's like a car," said Liberal Senator Colin Kenny, who chaired the Senate security and defence committee before Parliament was prorogued. "The cost of maintenance rises over time. The government seems to have a deal that covers the cheapest time frame."
He said the big cost of maintaining the planes is being pushed off on future governments.
The new Hercules are replacing existing transports that in some cases are over 30 years old. The first pair of new turbo-prop four engine planes - dubbed the workhorses of the air force - are due to be delivered later this year.
There are also questions about how much benefit Canadian companies will receive from the aircraft giant.
At first, the federal government demanded the U.S. corporation deliver direct, industrial participation with Canadian companies either building parts or contributing to the maintenance.
But last year the government quietly dropped its direct benefit demand and replaced it with something called a "near-direct benefit" up to 75 per cent of the contract value.
Political sources say Lockheed Martin executives often played hard-ball with federal officials during negotiations - something that apparently irked cabinet members, particularly Industry Minister Tony Clement.
The aircraft-maker is hoping to sell its highly advanced F-35 Lightning stealth fighter to Canada's air force, starting in 2015, replacing the fleet of CF-18s. The bruising negotiations have apparently not endeared the corporation to the federal cabinet, which held a heated debate about the transport plane in early December, said one source.
Instead of spending money on the C-130J in Canada, Lockheed Martin will be required to buy equivalent defence contracts and services elsewhere in the country.
Keeping big-ticket military purchases within budget has been a challenge for the Conservatives, who vowed to rebuild the Armed Forces after years of budget cuts under the Liberals.
In 2008, the government shelved an order for three military supply ships because of higher-than-expected costs, and watered down the capabilities of six planned Arctic patrol ships in order to keep them within budget.

Organizations: Lockheed Martin, Canadian Press, Defence Department Conservatives

Geographic location: OTTAWA, Marietta, Ga., Canada U.S. Arctic

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