Debate: European defence collaboration vs. national interests

01/15/2013 Ralph M.H. Clermont - defenceiq.com

About the author

CDR RNLN Ralph Clermont joined the Royal Netherlands Navy in 1985. After graduating from the German Staff Defence College last year Clermont was promoted to commander and since August 2012 has working for the logistics department (J4) in the operations directorate of the MOD NLD. In the past he held several operational positions in ISAF HQ CJ4 LOGOPS and ISAF RC(S) CJ7, but also logistics jobs like contract manager in procurement of armament. In his current role Clermont has recently finished the Site Survey and Advance party for deploying NLD Patriot Systems in Turkey.

Introduction

The topic of armaments cooperation – military cooperation in the field of defence technology – represents an elementary subdomain of security and defence policy. It is one of the most sensitive domains of national security as it is inextricably linked to a nation’s military capabilities. Moreover, due to the interdepartmental integration with foreign and economic policy required, it represents a central element of national policy. As a result, a more global approach must be used to further explore this topic.

National priorities, as opposed to European ones, are reflected in budgets and procurement programmes. The member states of the European Union (EU) (except Denmark) spend approximately €29 billion investing in procurement. Only €6 billion are spent collaboratively, meaning around 80% of this money is invested in national-only programmes. A comparison between 27 procurement programmes for land, air and sea systems in the United State and 89 in the EU demonstrates Europe’s huge inefficiencies: about three times as many programmes are on much lower defence procurement budgets. One prominent example of this redundant spending on large systems can be found in the field of main battle tanks. While Germany produces the internationally successful Leopard-2 family, France (Leclerc), Italy (Ariete) and the United Kingdom (Challenger) procure their own systems, thereby wasting money on duplicating Research and Technology (R&T) and limiting interoperability. Another striking example is combat aircraft. Despite heavy competition from the US, Europe has developed three parallel types, namely the Swedish Gripen, the French Rafale and the German-British-Italian-Spanish-built Euro Fighter.

Objective of the study

The essential aim of this study is to identify best practice for cooperative programmes and to make a number of recommendations to improve European armaments cooperation.

Legal aspect

National procurement processes in Europe differ greatly. Several countries have used Article 346 (formerly Article 296) of the Treaty on European Union (TEU) to justify their protectionist policies within their procurement processes. Article 346 permits states to restrict their defence equipment tenders to national providers and allows governments to favour national “champions” in order to promote their own technological and industrial development.

Methodology

This study is based on personally-conducted interviews, technical literature and ministerial publications — specifically concerning the European Defence Agency (EDA), the Organisation conjointe de coopération en matière d'armement(OCCAR) and the UK National Audit Office — as well as by attending seminars and the author’s experience of six years as a contract manager in the Dutch Defence Materiel Organization. The seminars were first-year seminars conducted by the German Staff and Command College (Führungsakademie der Bundeswehr).

This study is divided into three chapters: The first chapter explains why European governments cooperate on major armaments programmes; the second chapter focuses on the observations, discussions and conclusions concerning incentives, disincentives and the key challenges for European armaments cooperation; and the third chapter contains a series of recommendations based on the key challenges for international cooperation.

1. Economic and political incentives to armaments cooperation

The EU member states collectively spend approximately half of the US’s expenditure on defence. However, they do not have nearly half of the US’ capabilities because too many defence-related EU funds are wasted on the duplication of programmes as well as on conscript troops and outdated equipment which is useless for foreign missions. Even allowing for the fact that the EU has far less global commitments than the US, that ratio is unacceptably low. No European country can afford to buy or develop every conceivable category of weaponry. Therefore, governments often have to combine their resources to develop and procure major new capabilities.

In the past, cross-border armaments cooperation was the preferred method in case one country alone did not have sufficient financial or technological resources, in case political stability was to be ensured beyond Election Day or in case there was the possibility of an advantage in terms of technology transfer. “Interoperability” in training, in missions and in terms of supply was also appreciated but it was not the real motivation for such cooperation.

For decades, armaments cooperation was a matter of course. In NATO and in the Western European Union, numerous approaches have been developed. For a variety of reasons, however, they were only partially successful. The motivation for armaments cooperation is of an economic, political, military and technological nature. The success of armaments cooperation depends on the extent of compatibility which can be achieved by the concrete results of these dimensions in the interaction of potential cooperation partners. Successful cooperation programmes have manifold benefits, including:

A. They meet a capability requirement at an affordable price (“economy of scale”). One of the most convincing examples of such advantages is the A400M military transport aircraft, shared by various nations and managed by OCCAR.

B. The most striking political advantage of collaboration — an advantage easily illustrated by the Euro Fighter — is the stability of the project.

C. Common requirements can help countries work together on international missions (“interoperability”).

D. Governments gain political benefits and are perceived to be constructive EU partners and contributors to EU defence.

E. Cooperation programmes help to maintain the EU defence industrial and technology base and help to ensure the security of supply.

F. Positive side effects may occur, including technology sharing, technology development, common standards, integrated logistics, intellectual property rights and successful exports.

All advantages of cooperative programmes depend on how well or how poorly they are managed and on whether the best-practice approach is being applied. In the same way that a cooperation programme can bring about manifold success, it can cause a variety of the problems if things go wrong. The Trigat MP programme is a good example of how a cooperative programme should not be run, as the five participating governments signed six separate Memorandums of Understanding, resulting in 114 months of delay and, in the end, the programme was cancelled. In contrast, the Franco British-Italian Aster family of surface-to-air anti-missile missiles has shown the benefits of cooperative programmes if they are managed well: despite some delays, these programmes have delivered top-of-the-range capabilities.

2. Reasons and obstacles for armaments cooperation

This chapter first describes the “presumed” advantages of multinational armaments cooperation. It then discusses the challenges that politics has to face in order to improve cooperation. Finally, it explains the steps that have been made so far to support the process of multinational armaments cooperation.

The “presumed” advantages of multinational armaments cooperation

A. “Economy of scale”

Armaments cooperation makes it possible to achieve the economic goal of meeting the military need of armed forces at an affordable price by reducing the costs per unit by means of learning curve effects and by sharing development cost among several partners. Although cost is a major issue, there is a price to pay for cooperation in terms of time and financial effort. As to the latter, the square root law seems to remain the best guess: cooperation between two partners increases system prices by 40%, between four partners the price doubles, and so on. It would be difficult to put such a “law” on an empirical basis since the same system would never be developed and procured nationally as well as within a cooperation project. But it does remain a plausible theory. As to the time dimension, there have been numerous cases of scheduling difficulties once a number of technological, military and industrial processes have to be harmonised towards a reliable overall schedule.

Take the relatively simple examples of multinational Research and Technology cooperation: the average negotiation procedure for a typical Western European Armaments Organization technology project from an early memorandum of understanding to the finalised contract has turned out to require almost two years, while national R&T projects normally follow the one-year national budget cycle. In case of the infinitely more complex development and procurement processes, cost and time overruns are notorious. A telling example is the comparison between the trilateral and later bilateral development of the Boxer armoured carrier and the Puma armoured fighting vehicle, which was a national project. The time it took from the industrial development contract to the acquisition contract was six years for the Boxer and three for the Puma. The prices of the respective systems indicate an increase of roughly 100% for the Boxer project and 10% for the Puma.

Despite the fact that cooperation leads to an increase in the effective overall cost, it has far more advantages given the avoidance of duplication in development and work, the cumulative output and possibly better chances for export of multinational products. As a result, limited financial resources can be optimally used.

B. Stability of the project

The most striking political advantage of collaboration — an advantage easily illustrated again by the Euro fighter — is the stability of the project. By committing themselves to a multinational project, governments acquire not only the burden of having to prove their reliability as negotiation partners but also the benefit of the stability of their commitment against the tides of public opinion or of finance ministers’ view on the affordability of expensive armaments projects. Budgets for cooperation projects tend to be more secure than those for national procurement projects.

C. Interoperability

From a military point of view, the procurement/standardisation of preferably identical equipment is best suited to ensure military and also cost-efficient cooperation. Particularly in the field of C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance) smooth IT-based integration is decisive for a successful conduct of military operations by multinational coalitions. Collaborative projects, such as the prospective plans to have a number of armed forces working together and fighting alongside each other, are more efficient in operational terms.

Most crisis management operations on behalf of the European Common Security and Defence Policy are and will be coalition operations. And while interoperability of forces and systems is still the slogan most often heard in this context, it is the commonality of doctrine and equipment that is to yield the biggest benefits. The proverbial “21st century soldiers” (or “infantrymen of the future” or the men and women in the “soldier modernisation programme”) of the Finnish, British, German, Dutch, Romanian, or French forces would have to fight the same war at the same time in the same distant theatre.

However, in absence of common equipment, standards or subsystems, they would have to depend on their own logistical lines, struggle with incompatible communications or fail to support each other in case of material need. To illustrate such a dire scenario: there are currently 15 different concepts of the “21st century soldier” on the drawing board for this decade. Collaboration would pay dividends.

D. Constructive partners

From a political point of view, cooperation is not only about consolidating the relations between cooperating nations but about demonstrating one’s will to be a constructive EU partner. Common action increases a nation’s identification with a commonly defined security concept and security identity. Cooperation encourages governments to align their world views. Programmes are undertaken together if a government concludes that cooperation will increase its security and the overall well-being of its citizens. Cooperation can strengthen relationships between militaries as it requires them to work together for a decade or more. Under favourable conditions, trusting friendships are established that can last for a long time, potentially facilitating future cooperation as the officials rise to more senior positions in their respective defence establishments. Cooperation prepares military forces of the participants for the deployment to future trouble spots. Working together can build credibility about the ability and motivation of others to protect technology, making it easier to support future transfers of advanced technology. Increasing Europe’s “hard power” would strengthen its ability to influence world events through the application of a balanced combination of soft and hard power. However, cooperation bears political incentives as well as deterrents. As two or more countries will invariably encounter problems (some large, some small) in the course of a typical cooperative programme, those frictions could escalate and ascend from the programme office to the political level.

E. Competition and consolidation

A final political argument in favour of collaboration arises from the undisputed fact of industrial overcapacities in the European defence sector. National procurement tends to support this or, for the matter, subsidise industrial capacities on the basis of regional politics or for the benefit of local employment strategies. Often a project is the result of efforts by politicians to please their constituencies rather than one of a dear, undisputable military requirement. To neutralise such parochial interests, collaborative projects should also be considered to be instruments of a future orientated industrial policy that avoids cementing obsolete defence technological and industrial base structures. At the same time, collaboration favours the creation of multinational, consolidated enterprises that can have a beneficial influence on the efficiency of industrial structures inherited from the past. Schematically, two paths towards technological and industrial consolidation are possible. The first one is government-led, as the government puts itself in charge of identifying strongholds and weaknesses of the different producers and selects the best ones while cutting the funds of others. The second one is business-led, as the government allows different companies to act freely and select partners and competitors. Thus, market forces select the best producers.

The danger is that further consolidation leads to less competition so that there is a real need for governments to strike a balance between consolidation and competition. Further defence industrial consolidation also needs to ensure that small but good technology providers can survive in the market, in which the players tend to become bigger and bigger. In other words, very similarly to how the European Commission polices the single market for non-defence goods to prevent monopolies of technology, one key question for the defence market in Europe is how to ensure that a variety of niche capabilities can survive moves towards greater consolidation.

There is obviously a trade-off between consolidation and competition. Competition weeds out the weaker suppliers. Consolidation often keeps weaker and sometimes even obsolete structures alive. Consolidation efforts, mostly within the respective national industrial bases, have reduced the number of suppliers, but not to the extent of creating Europe-wide monopolies.

F. Side effects

This paragraph discusses the indirect factors that have an influence on multinational armaments cooperation.

Export

Multinational cooperation has consequences for the export to markets outside Europe. While in principle cooperative projects on the global marketplace may benefit from stronger multinational support of interested governments, the autonomy of national export policies can be limited. The well-protected sovereignty of national decision-makers does not sit easily with the necessity of having to negotiate and adapt to multinational approaches in this traditionally sensitive area of foreign policy.

Development and sharing of technology

From a technological point of view, armaments cooperation requires technology sharing, the development of technology and common technological standards. In this context, the employment of state-of the-art technology and consequently the development of the best-possible product should be ensured. One aspect to be considered here is that military equipment is increasingly being based on software and electronic systems. Hence, it is foreseeable that this enables nations, which so far have not had any noteworthy defence industry to contribute considerably to cooperation projects as long as they are successful players on the civilian IT market. More efficient procurement by means of armaments cooperation can therefore contribute decisively to making the requisite modernisation efforts.

In-service support

A programme does not end once the equipment has been delivered and put into service. The duration of a programme continues until the end of an equipment’s useful life cycle (including its disposal). The cost of in-service life support can amount to over twice the acquisition cost of the programme. For example, a study conducted by the French Comité des prix de revient des fabrications d'armement shows that the cost of the French aircraft carrier Charles de Gaulle was €3.1 billion to render into service and that it is going to cost €7.7 billion over the period of its service life. Defence equipment evolves over its life cycle. Without collaboration and cooperation over the course of this evolution, the interoperability of defence materiel becomes impossible. This was the case with the Transall cooperative programme during the 1960s. The Transall was a joint effort by France and Germany, but once the Transall was put into service, the cooperation ended. It is now impossible to replace a German Transall with a French one and vice versa because the spare parts are no longer the same and the operational function of each has evolved in different ways.

There are two realities that make it difficult to extend support until the end of the in-service life. The first one is that governments tend to choose national solutions to provide support for in-service life of a cooperative programme. Secondly, in theory, support services require a long-term contract, as the life of a piece of equipment could be as long as 30 or even 40 years. For economic or legal reasons, however, some countries are not able to uphold such long-term contracts. For example, France is only able to propose a support contract for the A400M covering a few years due to French financial rules.

Intellectual property

Two aspects that should not be neglected in this context are the countries’ different approaches to intellectual property and the often diverging national principles and procedures in terms of procurement. These aspects in conjunction with individual national approval procedures represent a huge obstacle for cooperation. At the same time, an increase in time, cost and management problems is inevitable with the number of cooperation partners and the resulting increase in complexity.

Main challenges in armaments cooperation

A. Government-industry relationship

All in all, the cooperation spirit in the corridors of the European defence departments is likely to continue to face a strong current of traditional acquisition efforts within the national markets. All that can be developed and manufactured within a country’s own industrial base will often ultimately be procured nationally — notwithstanding many efforts to work with partners across borders in the earlier phases of the life cycle of such projects. The defence sector is the primary supplier of military equipment to the armed forces. Therefore, a coordination of armaments policy or armaments cooperation is strongly dependent on common military planning and harmonized requirements of the customer. NATO and the EU have defined a catalogue of desired common military capabilities. Due to many nations’ membership in both organisations and in view of an unchanged threat scenario, there are considerable convergences. Despite the very similar definition of requisite military requirements, however, there is a variety of national specifications, which may even lead to a failure of a possible cooperation. These diverging national specifications are partially due to the countries’ own industrial interests. It is a legitimate security-and economy-policy-based interest of any participant to integrate its own efficient industrial basis to the best-possible extent into a multinational programme. This is based on the different concept each country has of its strategic role in its national defence industry. It is a fact that it does not only secure jobs but also preserve defence technology.

B. Just retour

However, the development of “national champions” will be a consequence of industrial consolidation as a result of armaments cooperation. One obstacle in armaments cooperation is the demand for “just retour.” Work-share arrangements, known as “just retour” guarantee that a national defence industry must receive work worth the full amount of its government’s financial contribution to a programme.

Experience has shown that the more governments and industrial interests are involved, the more difficult the cooperation is. Just retour is possibly the only big obstacle to smoother cooperation on joint European programmes, but it would be difficult for governments to scrap just retour in the short term, despite OCCAR’s “global balance” system being an improvement on previous arrangements. Under present OCCAR rules for global balance arrangements, the defence industry of the member state must receive work worth at least 66% of its government’s financial contribution to programmes calculated over a number of years. The problem is that there are no concrete examples of how the OCCAR system works in practice, as not enough programs have been agreed based on OCCAR rules. In addition, the OCCAR system appears to mainly benefit the larger producer countries — since they can participate in more programs and their large defence industries can win significant contracts —with few incentives for smaller niche capability or consumer countries.

In view of limited defence budgets and increasing system costs the principle of just retour must take second place in the future. It impedes competition, industrial consolidation and specialisation.

C. Best value

The Joint Strike Fighter Programme represents a new model of international cooperation, as it was focused on what is called “best value” and not on “cost share equals work share, just retour” among the partner nations and their industries. All partner nations have agreed to compete for work on a “best-value” basis and have signed the Production, Sustainment and Follow-on Development Memorandum of Understanding. And, from an industrial point of view, the work share that a particular company wins will be for the entire JSF production and not only for the number of airplanes which the corresponding country has purchased. So there is strong support among the industries of partner nations.

D. Capability categories

Capability categories differ from one country to another. Generally, we can identify six categories (they are also mirrored in the Headline Goal 2010 and in NATO’s Prague Capabilities Commitments): mobility and deployability; sustainability; engagement; strategic transport; command, control and communications; intelligence and surveillance. However, despite a common recognition of required capabilities, national specifications for requirements can hamper cooperative programmes. For example, although France and the UK have discussed cooperation with regard to the procurement of aircraft carriers, differences remain as to which national specifications could hinder their interoperability.

E. History and current situation with regard to an increased transparency

There have been a number of approaches and projects of armaments cooperation in Europe, as for instance the former Western European Armaments Group (WEAG) and the Western European Armament Organization (WEAO), the armaments organisation of OCCAR and the Letter of Intent (Lol) Framework Agreement Six. The UK, France, Germany, Italy, Spain and Sweden are, collectively, the major investors in defence, accounting for approximately 95% of European defence research and technology. They joined together as Lol Framework Agreement Six in an attempt to remove obstacles to defence cooperation and trade, thereby increasing the volume and sophistication of military equipment delivered for a given level of defence investment.

Thus, all European countries are not created equal. A small subset of countries provide most of the defence spending, they provide most of the defence investment in research, development and procurement, they possess the largest defence industrial facilities and they field the most capable militaries. Therefore, when US political, military and industrial leaders look towards Europe in search of partners they most likely think of the LoI Framework Agreement Six and perhaps a few others (e.g. the Netherlands). The US defence industry, of course, considers all European countries to be potential customers but considers only the technologically more sophisticated countries as desirable partners for weapon system development projects such as the Joint Strike Fighter F-35.

In a tough and often controversial but finally successful process that had been unprecedented in the European Union, the EDA was founded in 2004. The EDA is one of three agencies reporting to the Council of the European Union and being active in the still new field of European Security and Defence Policy. Except for Denmark, all EU member states participate in the EDA. Altogether, the expectations concerning the agency are high. Its task is to promote the ESDP and support the member states to enable them to efficiently provide military capabilities. For that purpose, the agency must lead the way in the process of European integration. It is the ideal forum for cooperation in Europe.

In order to be successful, the EDA must function as a driving force, promoter, platform and sometimes even as an agent provocateur without losing the support of national ministries. In short, the EDA is responsible for bringing together and bundling national interests without losing sight of national particularities. One of the essential tasks of the EDA is to create armaments-specific economy framework conditions which allow for a free and transparent competition in the defence market. A first step towards that direction has been taken with the agency’s Intergovernmental Regime on Defence Procurement, which came into effect on 1 July 2006.

The centrepiece of this regime is the “Code of Conduct and Best Practice in the Defence Procurement.” In this document, the subscribing member states undertake to announce planned contracting activities, which are covered by Article 346 of the TEU, in a joint portal (Electronic Bulletin Board) established by the agency. The purpose of this “Code of Conduct” is to achieve a higher level of transparency and thereby encourage the member states to less often refer to Article 346 of the TEU. Another element of the “Intergovernmental Regimes” is the “Code of Best Practice in the Supply Chain,” which is to lead to more competition and transparency at the level of sub-contractors. In this code of conduct, the defence industry has undertaken on a voluntary basis to announce sub-contracting activities in the Agency’s Electronic Bulletin Board. This is to facilitate participation in the competition particularly to small- and medium-sized enterprises. However, there is one particularity about the Code of Conduct and the Code of Best Practice: both are making an exception for multinational armaments cooperation. Therefore, the two codices do not apply to armaments projects which are based on multinational cooperation.

3. Recommendations for multinational armaments cooperation

EDA lessons learned

At the end of May 2006, the EDA asked a consortium led by the Institut de Relations Internationales et Stratégiquesin Paris and including the Centre for European Reform in London, the Deutsche Gesellschaft für Auswärtige Politik in Berlin and the Istituto Affari Internazionali in Rome, to conduct a study on Cooperative Lessons Learned and Best Practice: How to launch a successful cooperative programme. The following principal recommendations have been given:

• Establish a common requirements process (discuss targets, exchange information and decide, to avoid “gilt-edged solutions”)
• Promote convergence of elements of military doctrine of participating member states (to improve interoperability)
• Involve industry from the beginning (for expertise and advice)
• Apply a “through-life approach” (in-service cost cycle)
• Exchange information on R&T planning (including cost-benefit analysis)
• Establish an R&T “Headline Goal” (a list of targets to achieve)
• Boost European defence research programs (= more budget)
• Phase out just retour (even “global balance” is seen as an improvement)
• Extend existing Lol/Framework Agreement Six for security-of-supply agreements (EU needs a legal framework to guarantee both security of supply and smoother cross-border transfer of defence goods)
• Extend EDA procurement “code of conduct” to multinational programs
• Exchange information on national budget approval procedures (EDA can facilitate)
• Use multi-annual program budgets (funds should be managed by OCCAR)
• Make upfront investments and establish risk budgets (buffer unforeseen)
• Use Integrated Project Teams (like OCCAR: with consumers, lead-nation and producer)
• Focus contracts on delivery final products (and not just meeting phases of programs)
• Prefer prime contractors and ensure transparency for sub-contractors (Code of Best Practice)
• Develop a European patent-style system for defence intellectual property rights
• Coordinate national procurement processes (including a strong financial penalty for both industry and partner in case of withdrawing or downsizing commitment by a participating country)

Lacking recommendations

I explicitly support the EDA and its efforts. It is the task of politicians to establish the framework conditions requisite for further consolidation. These include the creation of fair competition by eliminating subsidies, rejecting offset transactions and reducing state shareholding in defence companies, but topics such as supply security, harmonisation of export procedures for defence goods and protection of classified information should also be considered. The solutions are obvious. In the Lol Framework Agreement Six, it must be  determined and agreed which country is to provide R&T for each of the six identified capability categories (mobility and deployment; sustainability; engagement; strategic transport; command & control; intelligence & surveillance). These six countries cover 95% of European R&T. By doing so, expensive technical specifications can be provided without any redundancies and these specifications can be used by all EU countries to produce the requisite defence material. “Interoperability” can better be ensured if products are manufactured on the basis of equal specifications, even though minor differences could occur during the production process (e.g. in case of different manufacturers).

As long as the regime for the “Code of Conduct” and for the “Code of Best Practice” does not apply to multinational armaments cooperation, the “best-value” approach represents a much better alternative to the approaches of “just retour” or “global balance,” as it is based on a fundamental principle that is similar to the codices of conduct. By doing so, the EU takes the next step towards developing the best possible technology in the most economical manner without any redundancies while at the same time ensuring interoperability.