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Conclusions for the New NATO Members from the UK

Experience in Defence Research and Development

(with reductions)*
Ventzislav Atanassov, MSc in Ec., MCSc


Introduction

The new NATO members meet some challenges and difficulties on the way of transformation of their defense industrial base according to NATO standards and requirements which could be overcome using the experience of other NATO countries. The UK with its strong defense industrial base, and tradition in  research and development (R&D) policy could be good example how to succeed on the way of defense industrial transformation. The main goal of this article is to be investigated the causes of UK’s defense industrial achievements and especially in UK’s defence research and development, to be reached some conclusions and recommendations for the new NATO member how to organize their defense R&D.

UK R&D Policy and Organizational Transformations During the Last Decade

The UK Ministry of Defense (MoD) requires new and better weapons to meet potential treads. Production of such weapons requires research and development. Research  precedes development and generates new technical knowledge, which is then applied  to the development of new equipment. Development involves engineering design, manufacture and testing, which  might result in the eventual production of the equipment for the Armed Forces. Even where equipment is purchased off-the-shelf, some research is needed for informed procurement decisions [1].

On the basis of its defence research. MoD then has to decide whether to proceed to the development of a new weapon. Development work is undertaken by industry either in the UK or overseas. Strategic Defence Reviews are corner stones which define the framework of research and development in the next coming years. In its 1998 Strategic Defence Review, the British Government confirmed  its commitment to maintaining a “strong British defence industry” providing jobs, exports and ability “to continue to procure the right equipment for UK Armed Forces at competitive prices”. For 1998/99, over 70% of MoDs procurement spending was with UK industry; 13 % was spent on co-operative programs; and the remaining 16% was spent on imported equipment.

There is a  reduction in the level of real defence R&D spending since 1980. During the 1990s, both real defence spending and defence R&D fell by similar percentages, so that R&D retained a relatively stable share of the total defence budget. However within the R&D budget, the share allocated to defence research increased during the 1990s.

Inevitably, with limited defence budgets, MoD cannot afford to be at the forefront of research in all defence technologies. These are technologies which are viewed by MoD as “so critical that loss of access to them would seriously degrade the UK defence capability and thus maintaining access to them  is of overriding importance”. Access does not mean  that the technologies have to be retained within the UK or within MoD control. “Only a few defence technologies are considered so critical and sensitive that they must be retained within the UK”.

R&D policy is tightly related with technology strategy [1]. Recently, UK MoD has been developing its technology strategy. Through the Technology Foresight programme, industry has also been developing a national strategy for defence and aerospace technologies. The aim is to combine the MoD and industry strategies to produce a joint national  strategy identifying areas in which technological excellence might best be concentrated and developed in “Towers of Excellence”. These “towers” are envisaged as long-term partnering arrangements between Government, industry and independent laboratories (eg. Universities) with agreements about funding and sharing of intellectual property. There are expected to be a number of “towers” (eg. around 100) and MoD expects the Towers of Excellence model to enable it to make defence technology choices by being selective in a rational way and making the necessary choices in partnership with industry.

The Towers of Excellence model aims to develop world class defence technology capabilities in selected areas. Elsewhere, MoD recognizes that providing  UK forces with modern equipment will require buying technology or equipment from overseas, usually form USA. This has already occurred. Imports of defence equipment, mostly aerospace systems from the USA, accounted for 3% of total MoD equipment spending in 1980, with  the figures rising to 7.1 % in 1990, almost 17% in 1996, 19% in 1998 and about 15% in 1999. Typically, MoD requires offsets against US imports which raises critical questions about the benefits and costs of offsets.

Faced with budgets pressures, MoD policy has been to continue to search for value for money from its defence R&D expenditure. This has been involved three strands of policy. First, the 1998 Smart Procurement Initiative (now known as Smart Acquisition) introduced a new acquisition procedure with more time taken for early concept and assessment phases, exploring options and reducing risks by testing technology (typically up to 15% of costs) resulting in incremental acquisition (where a less ambitions initial capability is upgraded in lower risk steps). Smart Procurement also introduced improved incentives for contractors aimed at “beating defence inflation”.
Second, efforts to promote the transfer of technology from defence research (DERA) to both defence and civil industries, leading in 1999 to the formation of Defence Diversification Agency within DERA.
Third, there were changes in the organization and ownership of defence research. The 1998 Strategic Defense Review’s proposed Public Private Partnership for DERA was expected to lead to further improvements in value for money from defence research in terms of both cost and quality of output [2].

DERA has an annual turnover of some 1 billion Pounds sterling and employs over 11500 staff in the UK. During 2001, the organization and ownership of DERA was changed and two new units were formed, namely, the Defence Science and Technology Laboratory (DSTL)  and “New DERA” (the Core Competence model). DSTL employed under 3000 staff and remained as a trading fund under Government ownership with MoD. It undertook those elements of former DERA business that had to be carried out in government and which could not easily be transferred to the private sector. These included “sensitive” research work (eg. chemical and biological), relationships with other governments (eg. international collaboration) and the need for MoD to have “in-house” impartial advice (eg. Centre for Defence Analysis).

As part of Government ‘s Public Private Partnership policy (PPP), New DERA became a private sector company, comprising about three-quarter of the current DERA. MoD claims that PPP is not being used as a way of meeting shortfalls in the defence budget. Instead, the main aims of this PPP include improved opportunities for exploiting technology “locked up” in DERA; improving access to technologies from the civil sector for military application; introducing private capital to meet  DERA’s investment needs and exposing the Agency to private sector disciplines; and providing increased freedoms for DERA (eg. pay and conditions for staff; ability to increase commercial business. The fall in defence research funds and “fast moving technology” leading to changes in the environment in which DERA operates provide the background for New DERA.

Initially, New DERA continued to be the MoD’s main supplier of defence research work. However, to ensure a level playing field, an increasing proportion of MoD’s research programme was opened to competition allowing industry access to projects from which it was previously excluded. Similarly, New DERA could broaden its markets which involves competing with industry.

MoD retained a special share in New DERA enabling it to control shareholdings in the new company. There are plans MoD controls over ownerships to exclude defence industries, those with conflicts of interest and “undesirable parties” as well as an MoD veto over work with third parties.

Economists contributed to the debate about planned privatization of DERA. One feature of PPP appears attractive but needs addressing, namely, the desire of governments to transfer expenditures from the public budget to the private sector (to introduce private capital into DERA). Simply transferring resources from the public to the private sector has no effect on the efficiency of resiource allocation if identical resources are used.

Government-funded defence R&D has direct benefits in contributing to defence forces and equipment for national security and indirect benefits in providing technology for the rest of the UK economy (technology transfer or spill-overs). Whilst a privately-owned DERA will have profit incentives to exploit ots defence technology, it will lack incentive to promote the transfer of such technology to the rest of the UK economy. There is also the issue of property rights in any marketable technology resulting from MoD-funded research. Under privatization, MoD might introduce profit-sharing arrangements into research contracts with New DERA based on any commercial exploitation of government-funded technology (eg. variable commercial exploitation levies).

Whilst MoD claims that the PPP for DERA is not being used to meet shortfalls in the defence budget, it accepts that it is part of the general efficiency programme. Here, questions arise about the likely financial contribution from the privatization of New DERA and who are the likely gainers and losers from the policy. Possible gainers include senior managers in New DERA and the institutions advising on the privatization. Possible losers include staff who suffer job losses and experience changes in their terms and conditions of employment and promotions prospects as well as the rest of UK industry which might experience a loss of technology transfer from MoD-funded research.

Collaboration requires the UK to choose between Europe and the USA with different implications for UK defence R&D policy and the national defence industrial base. European collaboration allows the UK to be a major partner in high technology defence projects with corresponding implications for UK defense R&D expenditure. For example, on Eurofighter, the UK share of development costs is estimated at 4.6 billion Pounds (1999/2000 prices). Alternatively. Collaboration with the USA might be based on the Joint Strike Fighter (JSF) model where the UK is a full collaborative partner contributing 10% of total development costs (estimated 1.7 billion Pounds for the UK over 10 years). JSF is attractive in that if offers the UK Aerospace industry the prospect of involvent in a large-scale, next generation combat aircraft with potential share of both high technology development work ans a share of large-scale production programme (estimated at 5000 units, including exports).

Buying equipment off-the-shelf from the USA is another procurement option. Cost and budget pressures mean that this option is likely to become more important for the UK. Typically, defence equipment imports form the USA are associated with an industrial offset (Industrial participation) [3]. Offsets appear attractive, but appearances are deceptive. Questions arise to how much of the offset represents genuinely new business, how much high technology is involved and what are the implications for the future competitiveness of the UK defence industries?

In the context of the need for difficult choices by the UK defence policy-makers, the debate about the privatization of New DERA is a relatively minor issue. It represents almost the final privatization in the UK defence industrial base (DSTL remains in the public sector). However, there are major issues surrounding the future of UK defence R&D policy, particularly the impact on the UK defence industrial base and the rest of the UK economy of further reductions in defense R&D spending.

Conclusions for the new NATO members

As it is seem the basement of right R&D process is proper defined in the guidance documents R&D policy. Such are the White Papers as result of Strategic Defence Reviews. This proper R&D policy must be supported by respective organizational structures as R&D agencies, scientific research institutes, evaluation agencies etc. There must be and continuation of this policy from one government to another. The process should be reluctant to political changes in the country. For the small countries most of the new military equipment would be bought overseas, but there still is a need of institutions to provide R&D, testing of new equipment and competent scientific advice to decision makers.

The other cornerstone for the successful R&D policy is ability to expose these R&D structures to influence of market economy and competition, to incorporate market principles in management of R&D projects and to introduce principles of  Public Private Partnership (PPP).

Defined R&D policy must be supported by the framework of R&D regulations and standards. They must define clear process of Research and development, testing, procurement and acquisition of military equipment and armament, how to define requirements follow the operational needs and treads for national security.

The R&D policy must be supported by clearly defined Towers of Excellence for the national defence industrial  base, which should follow specialization of the country as NATO member and capabilities of national industrial defence industrial base. Of course they cannot be 100 as for the UK, but there could be several up to 10 for Bulgaria, for example.

Following restricted capabilities of smaller countries the impact should be placed on the international collaboration in R&D and  introducing of offsets programs which would stimulate transfer of technological know-how for the national defence industrial base and public civil sector of economy.

The percentage of defence  R&D budget as a part of the whole defence budget should be big enough. For the UK it is 9-10% of the total defence budget. Each country determines alone this share but it should be not less than 4-5% of the total defence budget.

Another discussion arise about the share of procurement spending with national defence industry, the share spent on co-operative programs and the share of imported equipment. This should be defined by the national R&D policy.

There is a need of search for value for money from defence R&D exependiture, because of restricted defence budget. Introduced by the UK principles of Smart Procurement Initiative as more time for early concept and assessment phases, exploring options and reducing risks by testing technology resulting in incremental acquisition (where a less ambitious initial capability is upgraded in lower risk steps, should be adopted by the new NATO members, also.

The other step is privatization of parts of defence R&D, but not cut and destroying these parts.

Closing remarks

The main conclusion is that there is a lot that the new NATO members could learn by the experience of the UK in defence R&D. Transformation of defence R&D is the process which is actual for all NATO members and it is good to exchange experience and to adopt ideas and good practices that are already proven. The UK is a country with big experience in the area of transformation of defence R&D and there is what the new NATO members to learn from it.

References

1. Prof. Keith Hartley, “UK Defence R&D Policy”,  Centre for Defence Economics, University of York, 2001.
2. Peter Gareh, “UK`s Experience of Defence Reviews”, International Workshop on Defence Expenditures and Economic Development, Proceedings pg. 56-61, Sofia, 2006.
3. Prof. Keith Hartley, "Study of the Economic and Industrial Consequences for the UK Economy of the US and UK Governments' Decision on the FCBA Requirement", Centre for Defence Economics, University of York, June 2000.

*The whole text of the publication could be found in  the Proceedings of International Conference "Policy and Models for R&D Management in Support of Defence Industrial Transformation", University of World and National Economics, 28-29 June 2007, Sofia, Bulgaria.