War Games

By bne IntelliNews September 30, 2011

Nicholas Watson in Prague -

The Czech cabinet will receive "in several weeks" a report from the defence ministry that will propose the parameters for a tender to buy around 14 supersonic fighter jets, with the government aiming to launch the process by the end of March, according to a top-ranking government source.

The Czech tender is one of eight that should take place in Emerging Europe over the next decade, which the defence industry expects to generate sales of up to 260 jets. With the global crisis squeezing defence budgets, these tenders are regarded as crucial for an industry suffering from cost cuts and job losses. On September 27, BAE Systems, the lead partner in the Eurofighter consortium, announced a gap in orders for its fighter jets will necessitate job cuts of around 3,000. "There is a shift towards looking at the bottom line, especially since the crisis, because defence budgets are being cut across the board," Daniel Boestad, vice president for Central and Eastern Europe for Saab, which makes the Gripen fighter jet that the Czech Air Force currently uses, tells bne.

Indeed, this point was hammered home by Nato Secretary General Anders Fogh Rasmussen in September, who told a gathering in London that at a time of declining defence spending, the cost of military equipment is rising faster than GDP and faster than the inflation, and that needs to change. "Defence officials and defence industry often present an over-optimistic picture of the capability, the cost, and the time-scale of procurement. And then they push the politicians for a quick decision. But this over-optimism quickly gets you into problems," Rasmussen said.

The solution, he said, is what he calls "smart defence" - to prioritise, to specialise, and to seek multinational solutions. And as part of Nato's reform efforts, the new Procurement Agency will have a "Smart Defence" focus to provide support to industry and the allied nations.

Get smart, not dirty

No country needs such "smart defence" more than the Czech Republic, which has over the years been rocked by a series of defence-related corruption scandals. The latest batch of cables released by Wikileaks in September contained some sent from the American Embassy in Prague that highlighted "significant challenges in the defense procurement arena," primarily due to a unique law in Europe that required any foreign defence contractor selling to the Czech government to work through an intermediary - an open invitation to corruption and one that hasn't disappointed.

Case in point was the 2002 tender to replace the Czech Air Force's aged Russian MIG-21s, which ended with a proposed CZK60bn (then worth about €1.7bn) deal to buy 24 Gripens from the Anglo-Swedish consortium formed by the UK's BAE Systems and Sweden's Saab. However, this deal struck by the Social Democrat (CSSD) government of the time fell through when the Czech parliament voted it down amid a welter of corruption allegations, the reverberations of which are still being felt today.

Ironically, the consequent deal signed in 2004 to lease 14 Gripen fighters for 10 years for CZK19.6bn proved to be an ideal solution. The jets were delivered in 11 months, unheard of in an industry that normally takes two to three years to start supplying product, and were operational within a year. "At the time it was a good solution," the commander of the Czech Air Force, General Jiri Verner, tells bne. "We've had no serious problems, the pilots love this plane and as an air force we are very satisfied - so far, so good."

Flight leader

Unsurprisingly, then, Saab is odds-on favourite for this new tender for when the lease runs out in 2015, because for several reasons its Gripen fighter is the most economic choice, which will be the paramount parameter.

All the logistics, support and training are already in place, and the plane itself fits the operational role the country has for its supersonic capability. "The Czechs need the capability to protect their own sovereignty and the capability to deploy with Nato when required, like in another Libya, and the most cost-effective plane for that is the Gripen," says Paul Beaver, a defence analyst.

In addition, the Swedes have proved very innovative with their financing and "offset" agreements - those lucrative industrial and commercial benefits, such as technology transfers, that are legally attached to defence and aerospace procurements. As of December 2010, Saab says the cumulative value of offsets to the Czech Republic had reached almost €1bn. Sources say the tender parameters will have as many options as possible to encourage bidders to be creative with pricing and the spreading out of the pricing.

Analysts describe the Typhoon built by the Eurofighter consortium (made up of EADS Deutschland, Spain's EADS Casa, BAE Systems and Italy's Alenia Aeronautica) as probably the best fighter jet on the market today, but simply too big, both in terms of operational ability and price, for the Czechs. Eurofighter spokesman Marco Valerio Bonelli counters that by pointing to its 2003 deal with the Austrian Air force, a country of comparable size to the Czech Republic, to supply 15 Typhoons for €1.6bn. He says savings for the Czechs are possible by the sharing of training and other items with neighbours Austria or Germany, while all the money spent will go toward supporting EU industry, including Czech companies.

Even so, the Czech government source says the MoD knows exactly how much the cost of one flying hour is over the 10-year lease of the Gripens, "and we will be looking for much less." The flight hour rate is a notoriously unreliable measure of cost, since it varies widely depending on what items are included. Even so, the difference between the Swedish Air Force's €4,000/hour rate with its Gripens and the €50,000/hour rate provided in July by Brigadier General Rupert Stadlhofer, commander of the Austrian Air Defence Forces, for the Typhoon makes it unlikely Eurofighter can meet the Czech government's "much less" requirement.

The Americans' position over the tender is less clear. They were conspicuously absent from Nato's annual two-day airshow in Ostrava, the Czech Republic in September, with sources saying they prefer to wait until the tender parameters are issued before committing money to what is, after all, a small deal of only 14 planes. The Americans worry that the tender parameters will be weighted toward the Gripen.

The F-16 currently on offer from Lockheed Martin - "yesterday's plane", say competitors, who spend an inordinate amount of time disparaging the products of others in this cutthroat business - is regarded as a long shot. It's expensive to maintain and operate, so while the cost of acquisition might be low, the cost of support is high, as Poland, which bought 48 of the F16s in 2003 for €3.1bn, has found.

However, some industry insiders say there is a US plan to mount a regional push for placing used F-16s in the Czech Republic, Croatia, Bulgaria and Romania, with Poland being touted as the training and maintenance base. Through this, the US is looking to lock in customers to sell them further down the line the new F-35 Lightning II - a fifth generation multi-role fighter under development by Lockheed that has stealth capability. Unfortunately, the Czech tender comes several years too soon to sell this plane to them, as it won't be until 2017-18 that its price and availability will be feasible for the Czechs (the US and Israel are the main advance procurers so far). Perhaps an extension of the current lease on the Gripens will be suggested in the US bid, followed by an offer to buy a limited number of the F-35.

What the Americans have going for them is something none of the others can match - political leverage. "My view is that it'll be a straight fight between the Gripen and the F-16, and the Gripen is more affordable than the F-16. But at the end of day, the Czechs may be persuaded by heavy breathing down the telephone from the US president," says Beaver.

Both Prime Minister Petr Necas and Defence Minister Alexandr Vondra are known to be pro-American in their political outlook.

A bad smell that won't go away

So it would seem that this tender is probably Saab's to lose. Unfortunately for the Swedes, while corruption may not be an issue with this tender - the law on using intermediaries was amended in September to make using such middlemen no longer an obligation and an international consultancy may be included to oversee the tender process - its prevalence in the last one still casts a long shadow.

The current coalition government, led by the centre-right Civic Democrats (ODS), appears determined to get to the bottom of the scandal - probably to gain political leverage over politicians suspected of involvement - and in August said it had received documents from the UK's Serious Fraud Office (SFO) relating to the British investigation into international corruption cases centring on BAE Systems. Those documents are now with the Supreme State Prosecutor and there is no official word yet on what they contain, but the SFO focused on the infamous £40bn Al Yamamah arms contract to Saudi Arabia that's political sensitivity forced the Labour government of Tony Blair to drop the probe, as well as the alleged use of middlemen in Central Europe who paid bribes to win contracts for Gripen.

Saab sticks to the line that several investigations have cleared the Swedes of wrongdoing and any alleged corruption occurred at the marketing subsidiary created with BAE Systems to sell the planes. However, given the subsidiary was jointly owned by the two sides, many in the government, media and industry find it scarcely credible that the Swedes did not have some inkling of what was happening. To force the Swedes to reveal everything they know about the affair, sources say this latest tender could contain anti-corruption provisions that will need to met in order to qualify to take part.

Defence tenders in Europe may be getting cleaner, but they certainly won't be free of grubby politics and dirty tactics.

War Games

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