MICHAEL KNIGHTS /WASHINGTON DC
The Gulf Co-operation Council member states have revised their approach to military procurement, spending more carefully through collaborative programmes and innovative financing
With a US-led invasion of Iraq looking more likely each week, military chiefs from Saddam Hussein's Gulf neighbours will this weekend gather in Abu Dhabi to ponder their defence procurement wish lists post-Saddam.
With the six Gulf Co-operation Council (GCC) states ranging in their enthusiasm for an attack on Iraq from outright support (Kuwait) to tacit backing (Bahrain, UAE and Qatar) to outright opposition, at least publicly (Saudi Arabia), the IDEX defence show will this year have an added poignancy. With Saddam ousted, a diminished military threat from Iraq is likely to ease regional tensions. But the situation in Iran and continued concern over militant Islamic fundamentalism means any drastic reduction in defence spending is unlikely.
After Iraq's invasion of Kuwait in 1990 sparked the last Gulf War - a conflict all six GCC members, including Saudi Arabia, supported - defence spending grew fast for a few years. Since then, however, political and economic pressures have reined in some of the states' wilder defence ambitions.
While the GCC states remain the region's biggest spenders on defence, procurement patterns are changing, with more emphasis on requirements such as training rather than equipment purchases. They have slowed the rate of fleet replacement and aerospace spending in general. They have also displayed a willingness to delay major purchases, mothball large numbers of aircraft and push back retirement dates. The GCC states are more willing to break procurement commitments and delay in-service dates than order cheaper equipment with reduced capabilities. Upgrades are increasingly acceptable as an alternative to new systems. Buyers are growing intolerant of overpriced and downgraded equipment.
With consistently low oil prices hitting revenues, rapidly expanding and younger populations are placing an increasing capital expenditure burden on the states.
In an era of declining inter-state threats - the risk of a second Gulf War notwithstanding - the GCC states have recognised that they cannot maintain profligate defence spending and unaccountable procurement practices. This recognition developed in the aerospace "buyer's market" of the post-Cold War 1990s, leading to a rapid transition that saw GCC states increasingly setting new standards in capability-led smart procurement, collaborative development and innovative financing.
In raw value terms the GCC has not reduced its defence expenditure since the high spending days of the mid-1980s, although adjusted for inflation, expenditure has actually fallen. Due to constant amendment of spending plans according to the fluctuating price of oil, year-on-year growth rates are not useful in assessing GCC spending trends. A longer-term aggregation of trends shows defence spending in fiscal year 2001 at its highest since the 1990-1 peak.
While global defence spending has fallen by 33% since 1985, GCC states' expenditure decreased by only 21% during this period. As a result the GCC's share of global defence spending rose from 2.9% to 4.4%. In contrast, the states that present the clearest threat to the GCC saw their shares decrease. Iran's share of global spending fell from 0.85% to 0.57%. Iraqi outlay crashed from 1.1% of global expenditure to 0.16%.
The GCC is set to continue out spending Iran and even a rehabilitated post-Saddam Iraq.In the face of growing economic pressure, Iranian procurement is unlikely to be more than $3 billion in 2001-5. Military rearmament will be a low priority in a US-administered post-Saddam Iraq, competing against strong debt servicing and infrastructure development responsibilities.
Projections by oil industry publication Gulf States Newsletter suggest average GCC state defence spending is likely to grow by 1.6% throughout the 2001-5 five-year plan. Highest growth is likely to be seen in Kuwait and Saudi Arabia. This may not result in new procurement as states such as Saudi Arabia have recognised the need to invest realistic amounts in manpower management, training and maintenance infrastructure. Saudi Arabia looks set to defer major procurements, such as replacing its Northrop F-5E/Fs, until 2006-10, skipping a generation of aircraft to acquire a combined replacement for F-5E/Fs and Boeing F-15Cs.
Major investment
Like Saudi Arabia, Kuwait front-loaded its spending after the Gulf War, committing $12 billion to a 1991-2001 rearmament drive. Major projects were frozen during the 1996-2000 five-year plan and will be undertaken in 2001-5, using $4 billion of uncommitted funds. As well as importing and enlarging training and transport fleets, Kuwait is likely to upgrade its helicopter fleets and make a major investment in its fighter arm.
The Kuwait air force is likely to buy additional Boeing F/A-18s, either used C/Ds or new F/A-18 E/F Super Hornets, but such a purchase would depend heavily on higher oil prices. In addition, the deal is likely to be for 10-20 airframes rather than the 35 originally envisaged by fighter vendors.
Three GCC states look set to slow defence spending, with knock-on effects for aerospace procurement. After spending heavily following the 1991 Gulf War, the UAE earmarked $15 billion for rearmament in 1996-2005. Around $11.3 billion has been spent - $6.5 billion on 80 Lockheed Martin F-16C/DBlock 60s , and $3.8 billion on new Dassault Mirage 2000-9s and upgrading earlier aircraft to the same standard.
Bahrain has requirements for transport, maritime patrol and airborne early warning aircraft, but no major re-equipment plan.
Oman steadily increased spending from 1993, yet without firm commitment to a re-equipment plan. Spending was instead opportunist, remaining closely linked to the price of oil and other economic factors. Some deals, for F-16C/Ds and Westland Lynx helicopters, indicate that Oman is about to embark on a major re-equipment drive, perhaps allocating $2 billion a year.
Qatar's $1.2 billion purchase of 12 Mirage 2000-5s in 1998 made the country the world's highest per capita spender on defence for more than a year. Aside from an urgent requirement for at least two medium transports and up to 10 medium transport helicopters that can be armed for close air support missions, Doha's defence spending is likely to retrench throughout the present five-year plan.
Offset deals now focus on competitive, achievable and profitable schemes. The UAE's F-16 Block 60 purchase broke new ground in several areas, extracting a $2 billion performance bond to guarantee F-16 deliveries and a no-questions-asked $160 million advance cash offset, on top of a 60% offset arrangement. To avoid the US Department of Defense's 2.5% foreign military sales levy, the UAE was allowed to make a commercial purchase of the aircraft. Finally, the UAE received the software required to update the mission computers without US assistance. This is a new kind of relationship between the USA and any Arab nation.
Procurement practices in the Gulf states improved greatly during the late 1990s, led by the UAE and Kuwait, which both instituted significant oversight of arms deals. Tendering and selection processes are more effective and rigorous. Commission payments and the use of mediators or agents continue, but at lower levels.
As well as dominating traditional markets such as Bahrain, Kuwait and Saudi Arabia, the USA has made in roads into the UAE and Oman. The Bush administration has increased foreign military financing aid to Bahrain and Oman, and may extend aid to other states in its "war against terror". The USA continues to open markets and maintain market share by transferring surplus military equipment to GCC states, capturing future sales of parts, engines, avionics, and communications technologies.
At the other end of the technology transfer scale, the USA is relaxing restrictive export controls to win GCC business. Once one state is cleared to receive a system, breakout occurs (GCC states ordering the Raytheon AMRAAM air-to-air missile jumped from zero to four in two years). No-restrictions technology transfer was a key European and Russian/Ukrainian market differentiator in the past, but this looks likely to diminish.
Collaboration
The starkest example of increased technology transfer is in collaborative development. The UAE has made an unprecedented investment in the US defence electronics industry, becoming a core partner in some systems. The F-16 Block 60 deal included a $2.5 billion advance payment towards the development of the avionics suite, and $500 million towards the development of the Northrop Grumman APG-68 active array radar. This could mean the UAE receiving royalties from US Air Force or export sales. The UAE is also interested in involvement in advanced jet trainers and light combat aircraft having participated in elements of EADS Mako development, although this relationship appears to have ended.
Source: Flight International
