Sustained funding uncertainty has French, U.K. defense industry on edge

Ask defense industrialists in France and the U.K. what they want most in the absence of larger military budgets, and they will say: some certainty and a sense of direction. Ask what has been missing in the past two years, and they will say: some certainty and a sense of direction.

There are certainly ample signs in both countries that questions about long-term spending priorities will persist. French parliamentary elections first have to be resolved this month, and then the new government plans to launch a major strategic review of defense needs and priorities, followed by a revised spending plan.

In that respect London is further ahead, having completed its strategic review two years ago and its spending plan update only recently. But more steps are envisioned, and the details of what has been decided are not fully understood. In its Planning Round 12 (PR12) review, the U.K. Defense Ministry cites the difficult choices it made to bring the program into balance, without spelling out what has been cut. «We simply don’t know what has been struck out,» says Brian Burridge, vice president for strategic marketing at Finmeccanica U.K. and vice president for the defense sector at industry lobby group ADS. Some clarity could emerge soon as the government begins talks with industry leaders about possible contract adjustments.

Around September or October, the U.K. National Audit Office is also due to publish a report on the claim that PR12 represents a balanced budget. That is likely to be followed by the Defense Ministry’s long-term equipment plan in which the ministry has prom¬ised greater transparency. But industry representatives are skeptical about whether enough detail will be included.

In parallel, the U.K. is exploring a major overhaul of how it buys military equipment, potentially opting for a non-department executive body that would try to control the Defense Ministry’s appetite for costly shifts in requirements. But Burridge worries that implementing such changes could take until 2014 or 2015, creating more uncertainty.

One such source of angst for industry centers on the degree to which requirements will drive funding for future developments. The urgent operational requirement process during Iraq and Afghanistan funded many fast-track developments, says ADS’s managing director for defense, Gordon Lane, but now the question is, «What happens next?»

This concern is amplified by the fact that much of the equipment budget in the next decade—around £160 billion ($246 million)—is already allocated for maturing programs, so development spending is in relative decline. In France, where newly elected President Francois Hollande is forming a government and awaiting the mid-month outcome of parliamentary elections, the predicament is not much different.

Fresh off his success at the NATO summit in Chicago last month, Hollande is already following through on a handful of defense-related campaign promises, including plans to accelerate the withdrawal of French combat troops from Afghanistan. In a speech given shortly before his May 6 election victory, Hollande outlined his top priorities, including a call to unite European militaries under a common defense strategy. He singled out the UK., among others, as a country with which France needs a deeper relationship. He also vowed to give «special priority» to unmanned aircraft, which he said up to now «have been far too neglected.» Earlier this year, then-French President Nicolas Sarkozy and British Prime Minister David Cameron firmed up plans to support the BAE Systems/ Dassault Aviation Telemos unmanned aircraft for a future medium-extended, long-endurance system, which is due to be fielded around 2020. Included among roughly three-dozen points outlined in the Feb. 17 agreement, a plan to jointly develop a reconnaissance UAV capability showed that, despite public differences, the two nations had become more serious about military cooperation.

More recently, however, Hollande’s administration cast doubt on the future of a Franco-British commitment to jointly pursue unmanned aircraft.

In his first press conference on May 30, incoming Defense Minister Jean-Yves Le Drian announced a series of actions to be carried out in the coming months, including a revised assessment of UAVs to be completed by July 14. Le Drian had little to say about the review, stating only that he would approach it as «a clean plate, without prejudice but with pragmatism.»

More broadly, Le Drian affirmed the importance of France’s 165,000 defense industry jobs to the wider economy and French national sovereignty. But he fueled further uncertainty regarding the sector’s outlook with plans to update the French White Paper on Defense and National Security by year-end. The forthcoming rewrite of national defense strategy marks the country’s fourth since 1972. Previous iterations, including updates penned in 1994 and 2007, have corresponded to strong redirections in French defense policy.

Hollande says the review will be accelerated to allow for revisions to France’s multi-year military program law, with an eye toward presenting parliament with a firm spending plan to cover the 2014-19 period before the summer of 2013.

Hollande also says he wants to take a fresh look at whether it was wise for France, under Sarkozy, to re-enter NATO’s integrated military command structure. In his speech, Hollande noted that his administration intends to review the decision, which he asserts was made in haste, without public debate and with no apparent benefit to France.

One area of increasing importance on both sides of the Channel is exports. But there, too, industry has concerns. Bur-ridge notes that defense industrial considerations are not part of the British government’s new acquisition criteria.

«We firmly believe that exportability must be part of the value-for-money equation,» he says, because it is critical to sustaining the defense industrial base. There are also benefits to the government because overseas sales spread nonrecurring development costs over a larger production base. Exports also are key to the U.K. Defense Ministry’s goal of cementing strategic relationships with other countries, he points out.

But inserting that mind-set into government policy may take time. Burridge suggests that such a shift might have to wait until the next Strategic Defense and Security Review, which is due in 2015.

In France, Hollande says export policies should be more stringent, «constantly adapting to the realities of strategic, political, financial and even ethical factors.» He is calling for centralized control of civilian and military technology exports in an effort to promote greater accountability and transparency.

«We will be adding more efficient mechanisms for verification of materials, of intermediate parties and end-users,» he declared.

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