France, U.S. Work Toward Saudi Navy Deals

Frigate Al Makkah

Oct. 29, 2012 - By PIERRE TRAN and CHRISTOPHER P. CAVAS Defense News

PARIS — A contract worth around 1 billion euros ($1.3 billion) to overhaul the Saudi Navy’s French-built F-2000 frigates and oilers is considered close, but there are concerns over government guarantees, sources familiar with the deal said.

If successfully negotiated, the overhaul contract would be one of several major military spending deals Saudi Arabia is considering entering into with France or the U.S.

“We’re hoping,” a French executive said at the Euronaval trade show, which closed Oct. 26.

A contract to maintain ships in the country’s western fleet is ready but needs the Saudi signature, on which the timing is uncertain, a second source confirmed.

There is, however, grave reservation in some quarters that the planned deal is a government-to-government contract with state guarantees, which could prove costly to the public purse if the program hits trouble.

The guarantee is “an off-balance sheet liability,” tying the government to risk, a source briefed on the subject said.

ODAS, a firm part-owned by France and industry, has been negotiating the life extension (LEX) maintenance contract on behalf of France. The work involves the four frigates and two oilers delivered in the mid-1980s under the Sawari 1 program.

Negotiations are also continuing with France to modernize the Crotale air defense missile, a deal estimated a few months ago to be worth 3 billion to 4 billion euros.

French naval company DCNS would be the prime contractor for the frigate and oiler maintenance. The Saudis have requested that the work be done at the Jeddah naval base on the Red Sea, using a local workforce, rather than sending the ships back to France.

DCNS conducted the previous major overhaul at its yards in France in the late 1990s. The work is understood to have cost the company money.

French negotiators had offered the LEX deal as a commercial contract, but soon after the arrival of the Socialist administration in June, they switched to a government-to-government contract and a state guarantee.

The Saudi side wanted a state-backed deal, the negotiators told the defense minister.

A government contract carries positives and negatives, an analyst said. On the plus side, a government deal brings “a state commitment and a strategic partnership,” said Jean-Pierre Maulny, deputy director of think tank Institut des Relations Internationales et Stratégiques.

On the minus side, if problems arise in execution of the contract, or if later it emerged there had been some wrongdoing, the state would be directly implicated.

Such a risk to the public purse is raising questions.

Part of the possible risk on the LEX deal stems from the need to build extensive quayside facilities and train and oversee the local workforce as it takes on a large maintenance and overhaul effort.

The scale of work in part likely prompted the request for a state guarantee alongside the requirement for local added value. But if cost overruns arise, France would be on the hook for the excess.

A state guarantee reassures the client and industry and helps with execution of the deal, the French executive said. A program control office is part of the guarantee, he added.

A lawyer with knowledge of the deal said if ODAS signs the contract, it will not strictly be government-to-government, as that requires a minister’s signature.

But the program control office, staffed by a Defense Ministry armaments engineer, would certify that the work is a standard equivalent to that of the French Navy, is at an acceptable price and meets contract requirements.

“The guarantee is not necessarily monetary,” the lawyer said.

Nonetheless, a state guarantee needs approval from the Finance Ministry, which is understood to oppose such a measure because of financial risk.

If the Defense and Finance ministries are deadlocked, the issue will go to the prime minister’s office for arbitration. A representative from the Finance Ministry was unavailable for comment.

Parliament also is required to give its approval. In past civil contracts, such as building a motorway or high-speed train line, the government had to make good on guarantees that backed private contractors, requiring “cash out” from public funds.

An arms deal is a way of buying a diplomatic and political guarantee, not simply buying weapons from a company, an analyst said.

“The Saudis want to diversify their sources of political support in the present political context, and a signature with France would provide a political and diplomatic guarantee from Paris in addition to the one from the U.S.,” said Loic Tribot La Spiere, CEO of think tank Centre d’Etude et de Prospective Stratégique. France and the U.S. have been the primary suppliers for the Saudi Navy.

“Countries in the [Arabian] Gulf want to get closer to Europe,” he said, pointing to concerns over Iran and Syria and problems emerging in the region.

“Whether you like it or not, in the present context, there is a search for strengthened relations at the state-to-state level.”

ODAS declined comment. The company is the successor to Sofresa, which negotiated arms deals with Saudi Arabia.

DCNS and the Defense Ministry declined comment.

The F-2000 frigates, dubbed the Al Madinah class, are 2,870-ton ships armed with Otomat and Crotale missiles and a 100mm gun.

Possible Eastern Fleet Deal

A possible maintenance deal for the western, Red Sea fleet stirred guarded hopes that long-sought contracts to upgrade the eastern fleet might be getting closer. Reportedly, the Saudi monarchy already has approved $23.6 billion for the eastern fleet upgrade.

Saudi concepts for the Arabian Gulf-based eastern fleet have altered over the past few years. In 2010, the Saudi Navy was intensely interested in the U.S. Navy’s littoral combat ship (LCS) designs, and both U.S. competitors produced designs for heavily armed versions of their LCS fitted with the Aegis combat system.

By 2011, the Saudis were setting their sights even higher and, driven by a desire to acquire a ballistic missile defense (BMD) capability for their Navy, they began to consider buying DDG 51 Arleigh Burke-class Aegis destroyers. Such a move would be a major leap forward for the kingdom from an operational and support standpoint. Initially, the Saudis are said to have wanted six ships, but the prospect of integrating such advanced ships with much larger crews than their existing warships proved too daunting.

According to sources here at Euronaval, the fleet now is considering the initial purchase of three Aegis destroyers with options for more, all with BMD capability.

Reportedly, the Saudis had also been considering purchasing LCS vessels to go with the larger destroyers, but that idea now seems to have been cast aside.

Sources at Euronaval said the Saudi requirements continue to change, but it now appears the need is for a class of about 20 fast missile craft to complement the Aegis destroyers.

A destroyer deal would favor Lockheed Martin, maker of the Aegis system, while the U.S. Navy would likely run a competition between shipbuilders Huntington Ingalls Industries and General Dynamics Bath Iron Works for the Saudi destroyer construction contracts.

Along with the ships, the Saudis reportedly also would buy new MH-60R helicopters, made by Sikorsky with systems from Lockheed. The R’s are replacing older B and F shipboard-based models in the U.S. Navy and can be armed with a variety of weapons.

France and the U.S. are eager for the Saudi contracts. The conclusion of a western fleet deal in France’s favor might open the door for a U.S. win in the eastern fleet, some sources here felt, while other observers saw no connection.

“We’ve been working at this for four years,” one source said. “We can keep at it. I see no connection between the eastern and western fleet deals.”

Another source was more optimistic.

“How many people do you know with $23.6 billion in their pocket?” the source said. “And they have it.”