[A-List] EU integration struggles: defence procurement

["Michael Keaney" <michael.keaney@xxxxxx>]

A floating platform for European defence
By Alexander Nicoll
Financial Times: February 11 2003

The British government's decision to split a £3bn ($5bn) aircraft carrier
contract between the UK's BAE Systems and Thales of France smacks of a
political fudge. But it is hardly the first awkward compromise in defence
procurement, nor will it be the last. It is time to get over it and consider
the positives for Europe's defence industries.

A new alliance has been created, albeit by a customer's fiat, between BAE
and Thales. If the two groups can make this work - and they have strong
reasons to do so - the alliance may become an important factor in the next
stage of the restructuring of Europe's defence industries. It would extend
that restructuring, which has so far occurred mainly in aerospace, to naval
systems. If successful, it would raise the profile of both companies on the
world stage and make them more credible as managers of large programmes and
as partners for US companies.

The route to the compromise was certainly not the optimum one. What was the
point of a contest between BAE and Thales if a French-controlled group was
never going to be acceptable as prime contractor? This issue should have
been settled from the start, a lesson the UK Ministry of Defence claims to
have learnt for future programmes.

While armed forces simply want the best equipment at the best price, it is
unrealistic to expect politics never to be a factor in weapons procurement.
Governments are spending taxpayers' money and have domestic jobs in their
gift. They may also have to weigh strategic and foreign policy issues.
Therefore the key for civil servants and companies is to present politicians
with best-value solutions that also deal with political constraints.

The post-cold-war consolidation of defence industries means contenders for
all big programmes will be large companies with a spread of interests and
partnerships in several countries. The MoD has recognised this by re-
defining the UK's industrial base to include foreign-controlled companies.

Thus BAE, in addition to its large interests in the US, owns 20 per cent of
Airbus, 35 per cent of Saab of Sweden and 37.5 per cent of the missile group
MBDA; and has holdings in the Eurofighter Typhoon consortium and other
European ventures. Thales has substantial UK interests after buying Racal
Electronics, Pilkington Optronics, Shorts Missile Systems and Thomson
Marconi Sonar.

Still, an Anglo-French carrier alliance will be difficult to put into
practice. As happened with plans for construction of the Navy's Type 45
destroyers, the eventual shape of the contract may not be exactly as it is
now billed. It is unclear what role the MoD will play as a risk-sharing
partner alongside the two companies.

But BAE, its credibility as a project manager severely dented by cost
over-runs and delays on Nimrod maritime patrol aircraft and Astute
submarines, will want to show it has learnt lessons - especially as it needs
to persuade the Pentagon to make it a prime contractor for large US
programmes. Thales needs to show it can do well in a large UK programme in
order to justify the position as the MoD's second supplier for which it has
been groomed.

The blurring of national boundaries is the only way governments can obtain
better value for money in defence. The ships will not in fact be any less
British: they are designed for Thales in Bath by British Maritime Technology
and all the industrial work must be done in the UK. But it is a significant
step for the government to reject BAE's design and adopt a
foreign-controlled one in a landmark, UK-only shipbuilding project.

A similar outcome will result from a separate development: European
Aeronautic Defence and Space Company is to assume control over Britain's new
Skynet 5 military satellites, one of the MoD's largest privately financed
and managed projects, because BAE is opting out of the business.

These are important steps for Thales and EADS. But the sad fact for UK
companies is that their home market is the battleground for the restructured
European industry, because among larger countries only the UK is truly open
to competition. Again, the carrier programme offers an opportunity. If BAE
and Thales can forge a promising alliance, they will be the obvious team to
oversee construction of France's second aircraft carrier.

Paris has no credibility in arguing for greater European defence co-
operation - as Jacques Chirac did at last week's summit with Tony Blair -
unless it opens up procurement to non-French companies. A new spirit of
reciprocity would, in turn, make a share of the US market more accessible
for French industry - a far bigger prize, if only politics would allow.

The writer is assistant director of the International Institute for
Strategic Studies