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EUROPEAN DEFENCE EQUIPMENT MARKET. Keith Hartley Centre for Defence Economics University of York. Seminar on European Defence Procurement, Bucharest, 13-14 November 2007. OVERVIEW. Background Defence Economics Problem Inefficiency in EU Defence Markets Improving Efficiency EU Scenarios - PowerPoint PPT Presentation
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U EUROPEAN DEFENCE EUROPEAN DEFENCE EQUIPMENT MARKETEQUIPMENT MARKET
Keith Hartley
Centre for Defence Economics
University of York
Seminar on European Defence Procurement, Bucharest, 13-14 November 2007
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OVERVIEWOVERVIEW
Background Defence Economics Problem Inefficiency in EU Defence Markets Improving Efficiency EU Scenarios Case study of Typhoon Offsets UK DIS
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BACKGROUNDBACKGROUND
OCCAR: F;G;It;UK;Sp;Belg: armaments agency for European collaborative projects
Industrial Restructuring: EADS; Thales; AgustaWestland; MBDA
Collaborative Projects: Typhoon; A400M; Meteor missile; JSF/F-35
EDA (2004): EDEM; EDTIB; Offsets (?)
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POLICY ISSUESPOLICY ISSUES EU as inefficient defence market: both
Armed Forces and Equipment Markets Economic Principles for Improving
Efficiency Role for EDA: beyond a voluntary code USA-Europe Arms Trade: both
protected markets: US DoD awarded $78 billion of defence contracts to US suppliers; and $1.9 Bn to foreign suppliers (2005)
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UDEFENCE ECONOMICS DEFENCE ECONOMICS
PROBLEMPROBLEM
Constant/falling national defence budgets (real terms)
Rising INPUT costs: -Equipment: 10% pa in real terms
= smaller numbers - Military personnel: costs of AVFRESULT:Difficult Defence Choices Cannot be
Avoided
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UDefence Economics Defence Economics
Problem: New DimensionsProblem: New Dimensions
End of Cold War has made no difference-
unit cost escalation has continued
Example 1. UK cannot afford successor to Typhoon
Example 2. By time UAVs are as capable as manned aircraft, they will be equally as expensive: hence just as unaffordable
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UDEFENCE ECONOMICS DEFENCE ECONOMICS
PROBLEMPROBLEM
Solutions1. Equal Misery: gradual reduction
in force effectiveness2. Major Defence Review3. Increased efficiency4. EU Defence Policy
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UINEFFICIENCY OF EXISTING EU INEFFICIENCY OF EXISTING EU
DEFENCE MARKETSDEFENCE MARKETS
EU defence markets INEFFICIENT in providing:
Armed Forces
Defence Equipment Criteria: US model Compared with USA = EU lacks:
Single EU Army, Navy, Air Force
Large Single EU market for defence equipment
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UINEFFICIENT DEFENCE INEFFICIENT DEFENCE
MARKETSMARKETS
Duplication of costly R&D programmes Small-scale production for small
national markets Protectionism Cost-based non-competitive
contracts Domestic monopolies – some state-
owned
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UAn Efficient EU Defence An Efficient EU Defence
Industrial PolicyIndustrial Policy
APPLY ECONOMIC PRINCIPLES:
1. Rising equipment costs = independence and duplication of R&D are costly
2. Gains from Free Trade – based on comparative advantage
3. Gains from scale and learning economies
4. Gains from competition
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URULES FOR AN EFFICIENT EU RULES FOR AN EFFICIENT EU DEFENCE INDUSTRIAL POLICYDEFENCE INDUSTRIAL POLICY
Gains from Trade = 10-25% savings
Gains from scale and learning = 15% - 25%
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Single EU Market ScenariosSingle EU Market Scenarios
Scenarios Annual cost savings
EU Only Open to RoW
1. Competitive Market 9% 11%
2. Single EU Proc Agency 15% 17%
3. Twin Track 11% 14%
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COSTS OF SINGLE MARKETCOSTS OF SINGLE MARKET
Change is not costless Winners and losers Losers will oppose change Lobby for fair/managed competition Juste Retour Protection Fear = cartels/collusive tendering
RESULT: Inefficient EDTIB ?
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UCollaboration as EU Defence Collaboration as EU Defence Industrial Policy: TYPHOONIndustrial Policy: TYPHOON
Economic Benefits Jobs = 100,000 Technology/spin-offs = carbon
fibre technology; civil aircraft/engines; cars/F-1; supply chains
Exports: Saudi Arabia (72); Austria (15)
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CRITIQUECRITIQUE
Opportunity cost question= alternative use value of resources?
Spin-offs = market value?
Are Markets Failing?
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OTHER POLICY ISSUESOTHER POLICY ISSUES
EDA study of OFFSETS: what do we know/do not know and need to know for sensible policy formulation?
EU and UK Defence Industrial Strategy = EU moving to open markets (?) whilst UK DIS = guaranteed/protected markets
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EDA and OFFSETSEDA and OFFSETS
EDA View
OFS are INEFFICIENT
OFS illegal under Article 296 (at least for civil OFS)
EDA AIM:
Harmonise and eventually remove OFS
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OFFSETSOFFSETS (Contd) (Contd)
PROBLEMS OFS – why do nations favour OFS –
benefits? OFS are Market Distorting BUT:
They reflect major distortions caused by Article 296 and Buy US Act and
Govts are major market distortions
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OFS: Next Steps?OFS: Next Steps?
Collect a decent data base on OFS in EU
Harmonisation of OFS requirements (eg at max of 100%)?
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UUK DIS and EUUK DIS and EU
Possible conflicts between DIS and:
EDEM with focus on open markets
EDTIB with an EU view of the DIB, including an appropriate regional balance.
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FUTURE DEFENCE FIRM ?FUTURE DEFENCE FIRM ?
Future defence firm will be different
- Todays defence firms differ from those of 1950 and 1900
- In 1900, Boeing did not exist
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Future Defence FirmFuture Defence Firm
Future = global defence firms
- international supplier network
- suppliers= larger groups undertaking R&D for primes
- Electronics firms as primes
- Primes as systems integrators and not metal bashers
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CONCLUSIONCONCLUSION EU defence policy is topical and
dominated by politics – But economists can make sensible contributions to the policy debate
Existing EU defence markets are highly inefficient
Efficiency improvements mean benefits to Armed Forces and taxpayers but costs for EU’s inefficient defence industries
