Thursday, November 09, 2006

Domestic JSF Woes In Partner Countries

Countries such as Denmark and Holland which are participating in the development of the Joint Strike Fighter are to sign a MOU concerning the production phase within the next month or so. Predictably, domestic trouble is brewing in the media before this decision -- which is a step on the way to replace the ageing F16s.

Danish Minister of Defense Søren Gade today reacted to Danish media reports that a Dutch Court of Audit publication has estimated the future price of the Joint Strike Fighter to as high as about US$180m. Mr. Gade called the reported estimate numbers utter non-sense and stuck instead to the official JSF numbers (US$45m) plus a handful of wiggling space, namely US$50m-67m. This contrasts with the official USAF cost hike announcement of a US taxpayer price of US$82m. The hike, however, is seen as not affecting export prices -- something the Danish taxpayers would appreciate a whole lot (see e.g. this cut'n paste from Defense News at dedefensa).

For sure, no one knows what the ultimate price will be -- but it is almost certain to rise. The large unknown elements in terms of timing and delivery on capability promises are exacerbated by the design of the development and production phases which are intertwined (this March '06 report from the GAO makes that point pretty clearly, pdf). Of course and traditionally, defense R&D will almost necesarily involve more slack due to the high price of being cutting edge than regular industry R&D where the first move effect can be an advantage but is not a necessity.

A more juicy angle concerns the political fallouts and dynamics from business to identity politics. These are more domestic than anything else (and replicated in each JSF collaborating country). The importance of a good and close relationship with the US is both evident for the geopolitically inclined and also the source of the single most contentious foreign policy issue in most European countries. In this context there is a whole lot of symbolics at work when considering the different aircraft contenders (What would it mean e.g. "to go with the French model"?). In the countries participating in the JSF development programme the element of inertia in general and as an expression of the national relationship-tradition strength means that the JSF will probably carry the day with the support of the national MoDs.

Two kinds of incidents could damage this perception of path dependency. First, Pentagon internal decisions might weaken the partner countries' willingness to continue the project. The most integrated partners, as the Brits e.g., will not like another attempt at cutting their per STOVL version from the first. The UK is, howver, heavily invested in the project (big subcontrcator is BAe). Second, a well honed political media storm based on a mix of concern with the lack of transparency, critiques of probable but non-admitted cost overruns might just weaken the necessary domestic consensus to either sign the MOU or -- an extreme scenario -- make the JSF a flagship agenda for a coming government. The unpredictabilities pointed out in the GAO and Dutch reports might just create the basis for that.

The business side of the JSF deal make the pricing and total cost estimates even less transparent. The political system of handing out return contracts to national defense industries serves to underpin these sensitive areas -- as it has since the creation of NATO -- since the market for and cost of gear production has outgrown the capacity of even medium size countries.

At least part of the deal here seems to be questioned if the price should end by increasing substantially: in each case the national governments will have to shell out while the industries will be recompensated. The ramification is then that Lockheed's competence (which is already somewhat dependent upon the national subcontractors) will then be determining for the level of indirect national subsidies to the subcontractors... That part looks like a recipe for moral hazard.

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