: From a few days ago. Basically a post criticizing one of my closest allies for having a state-owned defense industry. Enjoy!]
Why Belfras should privatize BAU Systems and BMS, and how owning them is hurting the ailing Belfrasian military Privatization could only lead to advantages for the stagnant Belfrasian defense industry Preston Arbor (Warren Special Contributor)
February 27, 2015 10:21 pm
A Belfrasian Parmenio tank, produced by the state-owned body Belfrasian Military Systems (BMS), fires during a demonstration in 2009. The BMS Parmenio is a staple of the Belfrasian defense industry for several years, serving as a modern tank with similar capabilities to the U.R. M9 Hunter. Photo courtesy of the Belfrasian Ministry of Defence's Defence Imagery Database Editor's note: Preston Arbor is a defense analyst, author, former member of the Board of Directors for Altman Urbauer, and a current fellow at the Institute for Strategic Studies, Pardes's most prominent defense policy think tank. He has over 20 years of experience in analyzing defense acquisition and industrial policies for the United Republic government and defense industry. This op-ed was first published in a major Belfrasian newspaper; it has been reprinted here as a showcase of the argument for privatization. Every country handles its defense acquisition needs differently. The Free Pardes model of a competitive private industry competing for government contracts is renowned as an effective, refined system that is constantly being fine-tuned.
And yet Belfras, a stalwart of Free Pardes democracy, operates on a completely different basis that presents a contradiction between the neoliberal atmosphere of its allies. Virtually the entire domestic Belfrasian defense industry is wholly government-owned under a the state-owned enterprises BAU Systems and Belfrasian Military Systems (BMS). The two hold numerous contracts with the Belfrasian government (of course) as well as contracts with governments across the world, but fundamentally, their government ownership gives them unique advantages inside Belfras and their products distinct deficiencies that hurt its international competitiveness.
What is wrong with state ownership?Many argue that state ownership of the defense industry is one of the Belfrasian system's strong suits. Their primary concern covers the sensitivity of defense equipment and its susceptibility to fall into the wrong hands. After all, nobody wants to develop technologically advanced equipment (read: equipment designed explicitly to kill enemies) only to see their enemies get their hands on it. Distrust on the international stage, particularly in regards to national security and defense, is rampant, and nothing illustrates this fact better than the defense industrial climate of Belfras.
That climate is present and existent in the renowned United Republic defense industry, too. Only some countries are allowed to request contracts directly from Emmerian defense companies. The rest have to negotiate their contracts through the government's Defense Security Assistance Agency (DSAA), which serves as an intermediary. Arms export laws are notoriously strict; in one instance, the government rejected a proposal to sell
F-10 Scorpion fighter jets, a design almost 40 years old, to Tule, despite the fact that an Emmerian company, Altman Urbauer, would profit significantly from the purchase. For sophisticated technologies, special Transfer of Technology protocols limit how much information about the technology's inner workings can be provided to the end buyer, thereby limiting the buyer's belief in the commitment of the seller as well as restraining the buyer's ability to maintain and repair the complex equipment.
The defense industry is naturally nationalistic, but there are limits to that nationalism that, if ignored, can hurt the defense industry as a whole.
The fact of the matter is that to get stronger, you have to lift the weights. In market terms, this means that without competition, you'll become stagnant. Competitiveness breeds innovation: it forces suppliers to find new ways to reduce costs or improve quality. When they gain these competitive advantages, other suppliers are forced to innovate or risk losing their revenue. Competition makes the market riskier for businesses, but strengthens the quality of the products in the market as a whole.
Look at the Belfrasian system. BAU Systems and BMS face virtually no competition domestically. Belfrasian lawmakers naturally prefer to fund Belfrasian-built equipment over foreign equipment. Plus BAU's and BMS's global operations bring in government revenue, thereby lining the politicians' pockets. BAU Systems doesn't have to be better than everybody else, because nobody else can challenge it in the domestic arena. Same with BMS.
Now let's look at the Emmerian system. Again, lawmakers naturally prefer to fund Emmerian-built equipment over imported equipment. But the key difference is that there's no government-owned monopoly over the defense industry. When a contract goes out,
several companies companies respond with their proposals, each with unique advantages and disadvantages, all vying for the winning contract by producing the best possible system. Foreign companies often team up with Emmerian companies (or compete independently), adding to the competitiveness that is the Emmerian defense acquisition process.
Defense industry globalization and how Belfras has reactedSince the 1990s, the defense industry - particularly in Free Pardes - has rapidly globalized. The large traditional U.R. defense companies have consolidated into a small number of big firms. This has happened in Belfras, too: the Belfrasian Motor Industry (BMI), a ground vehicle company, merged with BAU Systems in 2002. Because of the presence of these big firms, companies have looked elsewhere to expand; for the U.R. defense industry, the export market is widely touted as one example of a sustainable income source for many systems. At the same time, the U.R. Department of Defense has opened up to incorporating non-Emmerian equipment and selecting the best possible system from the world market, inducing large-scale global competitiveness as numerous worldwide contractors have attempted entering the Emmerian defense industry.
The U.R. defense industry's openness to foreign contractors is still limited in many ways. Contractors are strongest when they are Emmerian companies. No foreign company has excelled in this model better than the Belhavian
UAE Systems. UAE's success in landing contracts with the United Republic government has comprised a simple formula: its wholly owned subsidiary, UAE Systems Emmeria, Inc. The largest UAE Systems subsidiary, UAE Systems Emmeria is operated at the local level by Emmerian people and, functionally under law, is considered an Emmerian company. Through this subsidiary, UAE Systems is a huge player in the Emmerian defense acquisition process, earning contracts for the development and production of a number of vital defense systems.
The U.R. market is, of course, very lucrative. The United Republic Department of Defense base budget is $795 billion annually. An additional $121 billion is authorized as discretionary funding. When combined with national security programs, intelligence agency projected budgets, and veteran's benefits, most estimates place total defense and national security expenditure at anywhere from $1 trillion to $1.5 trillion annually, based on the exact criteria used. The U.R. also has the highest percentage of its military budgets going into research and development in the world, which makes it a great market for advanced technology companies.
And yet with the heavily populated U.R. defense industry, entering the market is tough. It became easier during the consolidation of the 1990s, when big-time mergers and acquisitions meant there were less suppliers available, and defense contracts seeking diverse suppliers would incorporate foreign companies. That market opening is rapidly closing, and BAU Systems and BMS have a golden opportunity to cash into the most lucrative and competitive defense industry in the world.
But they're state-owned.
The fact of the matter is that BAU Systems and BMS are state-owned enterprises, which means their primary goal is national defense, not profit. For most defense contractors, national defense is their objective, but it's executed through profit; this is not the case for BAU or BMS, so the world standard for incentive for innovation is completely absent. Their response to globalization has been, fittingly, a microcosm of the Belfrasian military itself adapting to changing world trends. BAU and BMS don't compete and innovate against other contractors for Belfrasian military contracts. Instead, the Belfrasian military decides what it needs based on its natural competition with the rest of the world's militaries, and it tasks BAU or BMS to produce that equipment.
The problem is that the Belfrasian military has no idea if it's getting the best possible equipment. The lack of competition that arises from a state-owned enterprise's influence is exactly what leads to design stagnation. And this is why the Belfrasian defense industry is lagging behind. Yes, by trying to preserve the sanctity of its defense industry by centering its emphasis on a state-owned enterprise, the Belfrasian government has instead hurt what has long had the potential for a globally dominant military industry.
As long as they remain state-owned, BAU Systems or BMS won't be competitive in global contracts in much of Free Pardes. They surely wouldn't be able to be a major player in the U.R. defense industry, where "state ownership" of an involved contractor would be seen as a reason not to select it (though BAU has participated in a couple programs, notably the F-29 fighter development - but that's because the Royal Air Force helped fund it). That climate varies by country. The relative independence of defense contractors from their government in the Free Pardes market means countries don't have to deal as much with international politics when making defense acquisitions; however, BAU's and BMS's nature as companies intricately tied to the Belfrasian government acts as a leash that holds it back from the level of acceptance and competition enjoyed by other contractors.
But don't state-owned enterprises work?Yes, they do.
Rodarion owns virtually its entire defense industry. As does Estovakiva. These countries produce massive volumes of advanced and sophisticated defense materiel through their state-owned enterprises.
And their systems work exactly like the Belfrasian system: innovation comes from the military adapting to other militaries, not the contractor adapting to other contractors.
The issue is that throughout Free Pardes, the defense market is naturally open. The sheer globalization of the defense industry means countries actively want to issue contracts competitively trialing equipment from countless international companies. This may not be the case for most of the RCO, or several independent powers, but Free Pardes operates in this manner at a fundamental level. Belfras does not.
An illustrative example of the difference here is this. When an international arms sale occurs between RCO nations, it's the Rodarian government selling fighter planes to Estovakiva. But when there is an international arms sale between nations in Free Pardes, it is, say, the Eaglelander government purchasing fighter planes from Altman Urbauer after trialing them against comparable planes from Arthuristan Dynamics or UAE Systems. There may be political
pressure from allied governments - U.R. officials meeting with the host country on behalf of the Emmerian contractors - but national origin is of little overall importance in this wide-open market, where performance, innovation, and cost effectiveness reign supreme.
The arrival of this all-competitive international defense industry promises to revolutionize security and defense across the world. There's more competition, more innovation, more interoperability, and more mutual political trust. Belfras is missing out from all of it.
The case for privatizationThe elephant in the room is how privatization could solve this issue. Wouldn't Belfrasian lawmakers still prefer to support BAU Systems or BMS, and other private Belfrasian contractors would struggle to compete with their dominance domestically?
Well, the key here is globalization. No Belfrasian lawmaker would prefer, say, the Belhavian UAE Systems over a company owned by the Belfrasian government (and therefore gaining revenue that, in part, pays said lawmaker's salary). And that applies even if UAE Systems has a successful Belfrasian subsidiary like they do in Emmeria. But if BAU is privatized, it no longer has a role in raising money to pay the lawmaker's salary. In that circumstance, the lawmakers would prefer any Belfrasian company - not just BAU or BMS - to produce the equipment. And if at a local level, international contractors also operate as Belfrasian companies, a wider, more open market is possible.
Belfras has the potential to be a highly competitive defense industry mirroring the United Republic in its market forces. Switching to this model would mean doing exactly what the rest of Free Pardes did decades ago.
The only problem is that such a move would mean betraying BAU Systems and BMS, whose senior officials have very, very close ties to upper-level Belfrasian government authorities. It would mean breaking open a market that right now sends all its money to BAU and BMS. It would mean sending countless Belfrasian engineers working for BAU and BMS home from their jobs (though they'd likely be re-hired by non-Belfrasian companies seeking to open operations in Belfras).
It is no laughing matter that billions of dollars are on the line here. The Belfrasian government, in owning its defense industry, has held itself back as the rest of Free Pardes innovates and competes. Privatization is all that can revive it and bring Belfrasian engineers, technicians, and defense industrial experts back into global relevance.
MORE IN OPINION- Opinion: Why Estovakiva is the most oppressive country in the world [ 5243 ]
- Opinion: In reality, Tippercommon is ailing [ 9429 ]
- Opinion: Rebel victories in Bogoria mean they're a legitimate power now [ 1375 ]
- Opinion: Why the rebels are backed by the Rodarian military [ 872 ]
MORE FROM WARREN- Opinion: State-owned enterprises fair poorly in free markets [ 1824 ]
- Bogorian government surrenders in Gryzgawa as rebels ramp up military operations [ 2782 ]
- Tippercommoner defense ministry declares local defense militia terrorists in wake of attacks [ 1003 ]
- Prestonia pleas for peaceful Bogoria solution; DP makes outlandish comments criticizing Vaziri [ 193 ]
Comments [ 5871 ]
E-mail
© Warren 2014
5871 comments STAR THIS DISCUSSION