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defence industry

By Adam Dempsey, Research Associate, UK Defence Forum

On the 8th June 2010 Serbia continued their international rehabilitation by signing a military cooperation deal with Croatia. After the bitter ethnic wars of the 1990s both sides agreed that the deal demonstrates a commitment to the normalisation of relations within the Balkans. A core component of the agreement opens up the possibility of cooperation between each state's military industries. According to Croatia's Minister of Defence, Branko Vukelic, as both state's defence sectors are 'quite complementary' it is possible that they will cooperate in the global marketplace.

Over the past year Serbia's defence industry has seen a revival in its fortunes. According to Serbia's Defence Minister, Dragan Sutanovac, in 2009 Belgrade approached a level of military sales comparable with the former Yugoslavia twenty years earlier. Belgrade estimates that Serbia will export between $500 million to $1 billion worth of military equipment and services in 2010. Serbia's best customers are states identified with the Non-Aligned Movement, an organisation in which Yugoslavia was a leading light. Iraq accounted for more than a third of Serbia's arms exports in 2009. These included a $305 million contract for the supply of twenty Lasta training aircraft. Belgrade's military academy has also begun training Iraqi officers and medical personnel.

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By Gerrard Cowan

One of Europe's largest ever defence projects, the A400M military transport aircraft, finally flew on December 11th, five years and billions of pounds over target. As they gathered in Seville, the leaders of the continent's defence industry would have seen the take-off as an all-too-rare bright spot in a year that saw major programmes cancelled or postponed, funding reduced and procurement ambitions curtailed.

Cutbacks to already-small budgets have many consequences: most obviously, they raise serious security concerns, particularly at a time when many European nations are committed to the war on terror and fighting hard in its Afghan hub. But for the continent's defence industrial base, it is the structural effects of underinvestment that poses the greatest threat.

Italy, France and Germany have announced budgets below their 2009 level. The UK's decision to procure 22 Boeing CH-47 Chinook heavylift helicopters for Afghanistan was funded through an extensive package of cuts to equipment programmes, including the cancellation of plans to acquire around 50 medium support helicopters, worth £3 billion; and Spain's Ministry of Defence (MoD) said it would cut training exercises following three consecutive reductions to its 2009 budget.

Beyond the traditional big spenders, things were perhaps even worse. Senior figures in the Austrian military warned that the army was "dying" due to underfunding; the Slovakian MoD was told to enact cuts of 10 %

Estonia postponed the procurement of ammunition and trucks;Poland called an end to its military presence in Lebanon Syria and Chad/Central African Republic for financial reasons; and Lithuania said it would refrain from new procurement projects.

It is obvious that lower budgets will see less money going to European companies, who will be forced to increase their focus on international expansion; this itself may be threatened in a climate when non-European countries will be aiming to support their own industries, making them less keen on European hardware. This is likely to be particularly true of the US.

Not only are European budgets falling; there are also questions over what they are being spent on. In 2008 just five NATO members met or exceeded the target of spending 2 % of GDP on defence: the UK, US, France, Greece and Bulgaria. But France spent the majority of its investment – 56.9 % on troops and just 21.7 % on equipment. Bulgaria's spend was even more slanted in favour of its personnel, at 58.9 % with 21.4 % on equipment, while Greece spent the highest proportion of all on its personnel – 74.1 % compared to 16.4 % on equipment. The US and UK, unsurprisingly given their contribution to the Afghan war, spent the least on personnel and the most on equipment. The US spent 27.3 % of its budget on equipment, and 29.8 % on personnel; for the UK it was 40.7 % on personnel and 23 % on equipment.

Referring to these stark figures, Peter Flory, NATO's assistant secretary general for defence investment, said on 17 December that the alliance was now "dealing with its highest-ever operational tempo combined with a need to make long-term strategic decisions. Yet only five of the 28 allies meet the NATO's 2 percent [of GDP] spending guideline [for defence expenditures].  The overall average may be 1.7 percent, but many allies are far below that. Thus, the first problem is that we do not enough money, and within the budget the allies do have there is not enough spent on investment on capability and equipment."

In a broad sense, defence spending could actually serve as an economic stimulus at a time of severe recession; however, this will only work if there is a degree of cooperation across European states. In a speech in December before NATO's Parliamentary Assembly, Dr Adrian Kendry, NATO's Senior Defence Economist, said that "a big disparity" was beginning to emerge between EU nations and the US and Canada and that while the European emphasis on domestic defence investment was a natural response to the economic crisis, it was "good for the local economy but not the best use of funds...we have to think about collaborative defence expenditure". Echoing these comments, Canadian parliamentarian Leon Benoit said that if European budgets were proportionately 40% lower than the US, then due to the fragmentation of the European market, it would only be 20 % as effective as US investment.

"We cannot continue with the way things are now," he said.

Falling budgets have led to increased calls for European collaboration. In a December speech on Europe's naval defence technological industrial base (DTIB), European Defence Agency chief executive Alexander Weis said that "innovation does not come from the export but from the domestic market...the current naval DTIB is characterised by overcapacities, fragmentation and redundant structures".

To illustrate his point, Weis said that despite a far inferior defence spend, Europe has 7.2 naval systems, overall, for each US naval system; the continent has seven different types of diesel submarines and 11 different frigates; and most starkly of all, there are 25 naval prime contractors, many of which encompass more than one shipyard.

>He outlined three scenarios which can be applied to the defence industrial base as a whole. In a worst case scenario, industry would continue in its current form, with no consolidation or cooperation; operating profits and costs would come under increasing strain and yards would eventually be unable to compete with cheaper equipment from Asian yards.

A 'single European market scenario' would see consolidation of demand and the creation of EADS-type companies in the naval sector. However, none of the major European shipbuilding countries would abandon their national capacities, making such a scenario unrealistic.

A third, 'realistic scenario' would see the launch of major co-operative projects, such as a logistics ship in the mid term and even an aircraft carrier project in the long term.

"On this basis the European naval industry increases project-oriented co-operation aiming at specialisation while avoiding duplication of capacities and technological capacities," Weis said.

The coming year will certainly see European countries cut their defence budgets even further. More optimistically, however, it could present a unique opportunity. The parlous state of the global economy could lead to more co-operation, less duplication and more rationalisation: a money-saving goal long cherished by many in the industry. With budgetary pressures also weighing heavily in Washington, there is also the potential for more transatlantic industrial co-operation.

"Out of crisis comes opportunity," Professor Kendry said. "This may encourage a more comprehensive approach to addressing problems and challenges. How do we engage effectively, where are there synergies to spend more wisely and effectively? If we could only take time to review how we use this crisis, it might go some way to dealing with the challenges of investing in defence."

Gerrard Cowan has been Europe Editor of Jane's Defence Weekly since February 2009 and was previously a reporter for Jane's Defence Industry. He has a BA in History and English Literature from Trinity College, Dublin and an MA in International Relations from King's College, London.

 

Matthew Zlatnik and Guy Ben-Ari

"For innovation success," wrote MIT researcher Michael Schrage, "do not follow the money." He argued that while we can easily measure inputs such as research and development (R&D) spending, outputs and outcomes, such as R&D productivity or customers won or retained, tell us much more about the ability to innovate successfully.

He's right, of course. In 2007, European aerospace and defence companies spent relatively more on research and development and invested relatively more in capital equipment, according to a recent European study. But this spending does

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For many, France is the old enemy (that is after discounting the Scots. And  the Welsh. And the Irish). For me, from a line of centuries of agricultural peasant the thought that my Saxon ancestors had it all taken away from them after the Norman French invasion of 1066 is an interesting diversion. What Englishman's blood does not quicken at the mention of Agincourt, Crecy, Poitiers?

But the reality is that once the upstart Napoleon got his comeuppance enshrined in the Treaty of Vienna in 1815, France and Britain have become natural allies - Crimea; two World Wars; Suez; NATO.

The Entente Cordiale of 1905 ; Churchill's 1940 offer of pooled nations; the St. Malo Declaration; all underpin joint actions. But the ingrate General Charles de Gaulle, with his rejection of Britain's first attempt to join the European Common Market, put things in a proper perspective. Nations have permanent interests. Their alliances and friendships may be more transient in nature . And a friendship may put the frights under the neighbours - witness Germany's concerns about encirclement which had an impact twice in the last century and which even today underpin their willingness to be the European Union paymaster.

All of this is rehearsed by way of introducing the topic of defence collaboration with France. Should we - and equally importantly, could we?

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By Deba R. Mohanty

The time to unveil India's new Defence Procurement Procedure (DPP – 2010), an official document on procedural aspects of defence procurement guidelines, is round the corner once again. While the MoD mandarins are engaged in giving final touches to the document by taking inputs from stakeholders from within the government as well as outside (like FICCI, CII, and others), it is time for an informed debate on what is considered as one of the most complex issues that the Indian defence sector has been facing from time to time.

Efforts to streamline the otherwise cumbersome defence procurement process have been going on especially since the Indian defence sector opened up for private participation in 2002. Consider this: the DPP has been revised six times, including an addendum officially announced in late October 2009, in the last eight years. The Defence Minister periodically reminds us that this is still an evolving document. Even though the review of DPP is to be taken up every two years as envisaged (No. 76, DPP-2008, p. 21), it appears that 'change' has become 'constant' at the cost of practicable inputs being injected into the document, where as it should have actually been other way round.

Autopsies of the previous DPPs have brought out some interesting insights. First, despite tall claims to reduce the time frame of acquisition process, the MoD has neither been able to reduce the number of stages of evaluation process (eleven in total, from laying down services quality requirements to post-contract management) nor do any thing that can entail positive impacts. Although specific timelines have been earmarked for each stage of the process, scope for delay has also been provided under special conditions which the vendors can take advantage of. The on-going acquisition process for 126 medium multi-role fighters (MMRCA) serves as a case in point.

Second, the central objectives of DPP revolve round ensuring expeditious procurement, sticking to prescribed time frame, demonstrating highest degree of accountability, transparency and fair competition (No. 2, DPP-2008, p. 1). Let's pick two key words 'transparency' and 'fair competition' from the text and pit them vis-à-vis available evidences. At least four major defence deals, including the multi-billion dollar 197 helicopters, have been cancelled in recent times, causing negative consequences for the ongoing military modernization programme. Official explanations often times point to 'technical reasons' in cancellation of such deals. Last two years have also witnessed close to half a dozen defence deals with a single country (read the US) through what is known as 'inter-government agreements' facilitated through Foreign Military Sales (FMS) route. At least USD 9 billion worth of weapons, including big ticket items like C-130J Hercules, P-8I maritime aircraft and the most recently agreed Javelin anti-tank guided missiles (ATGMs), have not only surpassed competitive bidding route but being purchased with little or no benefit to the Indian industry. While adequate explanations to the Indian Parliament must be treated as a norm to ensure transparency in defence acquisitions, 'fast track' or even single vendor situations in defence deals must also be explained to the Indian public and perhaps a clause to lay down norms for 'competition' must be framed to discourage 'single vendor' situation. 'Strategic considerations' (No. 73, DPP-2008, p. 21) clause at the same time must be carefully used to suit Indian interests.

Third, inclusion of new features like offsets including banking, ToT conditions, 'buy and make' (Indian) and FDI have been propagated, especially by the bureaucrats and grudgingly supported by the industry, as beneficial to the Indian industry are increasingly been proved ill-thought-out and impractical. Braggart assertion by the MoD that offsets have brought nearly Rs 8,000 crore worth of work to India with Rs 48,000 crore in pipeline are in paper only and one does not know the real value of offsets as details are beyond the reach of any analyst. ToT conditions are yet to be defined properly, forget their future worth. Buy and make procedure has thus far not benefited the Indian industry in any manner, even the Raksha Udyog Ratnas are yet to be officially announced while the DPP still has a section devoted to selection of the same (Appendix C, DPP-2008, pp 164 – 75)! Increase in FDI in defence from 26 to 74 as proposed by a discussion paper prepared by the DIPP, Ministry of Commerce, has found support without credible justifications from most quarters, except for FICCI which wants it to remain at 26 percent.

In sum, most of the new features seem to have been added without much homework and the results are there for all to see. Many more issues need to be debated, however, suffice to add the end note here: its time to change the 'constant' with cosmetic changes and inject pragmatic ideas instead.

The author is a Senior Fellow in Security Studies at Observer Research Foundation.

 

Extracts from a submission for the Strategic Defence and Security Review by Oliver Covile MP. Mr Colvile is MP for Plymouth Sutton and Devonport and chairs the Royal Marines group within the All Party Parliamentary Group for the Armed Forces.


The Strategic Defence and Security Review is being conducted in the context of a much wider public expenditure review. Public expenditure needs to fall as a proportion of national income to stabilise the public finances and to reduce the crowding out effects that public spending has on private sector economic activity.


Nevertheless, this paper argues for establishing the priority given to defence spending within public spending and national income as a whole.


The previous Labour Government's Green Paper (February 2010) assumed that defence should be planned within the current level of spending or less. I believe that this assumption needs to be explicitly abandoned by the Coalition Government. Defence of the Realm and its interests are a fundamental duty of any Government and a core belief amongst Conservatives.


Defence spending within overall public spending and national income

While it was right to reduce defence spending as a share of GDP after the end of the Cold War from around 5 per cent of GDP, the peace dividend sought in the early 1990s was too great.

The Options for Change White Paper went too far in reducing defence spending in relation to the international risks UK has to recognise and prepare to meet in terms of properly funded defence capabilities.

Having reduced the share of GDP devoted to defence to less than 3 per cent, defence spending after 1997 was subject to a further squeeze that pushed it slightly below 2.5 per cent of GDP in the mid 2000s, despite increased spending resulting from extensive overseas operations.

In my judgement this is an unrealistic basis for defence and foreign policy planning. Historically it is a very low level indeed, apparently lower than the previously lowest recorded proportion of national income spent on defence in 1930 when it was 2.6 per cent.

Not only has defence spending fallen as a share of national income but also as a proportion of total government expenditure. The ONS study in 2009 on public sector output productivity between 1997 and 2007 among other things exemplifies how public expenditure priorities have been changed.

The weight given to defence within General Government Expenditure by sector weight, fell from 15.1 per cent to 11 per cent. What this shows is that during a period when there was increased international risk and with more than two major protracted operations in Afghanistan and Iraq, at a time when public spending was rising rapidly, the priority given to defence was reduced.

In my judgment this priority need to be reversed. It is not a question of affordability but priority within public spending.
The proportion of public expenditure devoted to defence should return to a position that is at least comparable to that in 1997. I believe that the ratio of GDP spent on defence should return to a more realistic level closer to 3 per cent of GDP.

The principle issue about the level of defence spending is not one of affordability, but rather one of deciding political priorities.

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By Adam Dempsey, Research Associate in Residence, UK Defence Forum

Russia's search an alternative buyer for S-300 air-defence missile batteries originally earmarked for Iran appears to have been hastily resolved. On 18th October Venezuela's President Hugo Chavez announced to journalists in Kiev, Ukraine, that his country intends to purchase five S-300s. The deal is expected to cost Venezuela $800 million. Russia's compliance with United Nations Resolution 1929 vindicates international consensus that Iran would use the S-300s to protect nuclear facilities. As it is highly unlikely that Venezuela has a similar nuclear programme the sale of the S-300s to Caracas should be comparatively easy. Yet why would Venezuela need to make such a purchase?

An overview of the S-300 suggests that Venezuela will be purchasing one of the most formidable air-defence systems currently available. The S-300 is capable of engaging six incoming targets simultaneously at ranges of up to 300km. According to the Federation of American Scientists the S-300 is also able to counter intensive air raids at low-to-high altitudes. The system can also be used to target low altitude objects such as cruise missiles and possibly to intercept strategic ballistic missiles.

Should Iran have completed the purchase of the S-300s the dynamics of the Middle East security environment would also have changed. As Iran's outdated air defences remain in place both the United States and Israel can retain the option of a pre-emptive strike on Tehran's nuclear facilities. Whilst the deployment of S-300s would do little to deter a larger-scale American bombardment it is likely that Tel Aviv would reassess its options. Yet this makes Chavez's decision to purchase the S-300s all the more mystifying.

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