London, England–(ENEWSPF)–12 September 2011.
Thank you for inviting me to attend the ACT Industry Day. It is really a great pleasure for me to meet with representatives of the industry and other representatives of the defence sector.
For the last 6 months, the world headlines have alternated between the crisis in our economies, and the crisis in Libya. Thanks to NATO, countless lives were saved in Libya. And Libya can now look forward to a new democratic future. But there are great challenges ahead. The same can be said about the state of the global economy .
We are in one of the most severe economic crises we have ever known. Budgets are decreasing. Prices are increasing. New players are emerging. This all has the potential to have a major impact on our Alliance. And on all of you in the defence industry.
Our Libya mission tells a positive story: about NATO and NATO nations. We are still the indispensable Alliance. And, for the first time, the European Allies and Canada took the lead, together with our partners. European Allies provided the majority of air and maritime assets. But our mission would not have been possible without the unique and essential assets provided by the United States – such as intelligence support, drones, and air-to-air refuelling.
However, Libya has also made more apparent than ever Europe’s current lack of military capabilities in certain key areas. I am concerned about what might happen tomorrow, and the day after tomorrow, if the decline in defence budgets deepens. This could have serious consequences. Interoperability could become increasingly difficult as the technological gap grows across the Atlantic.
Europe’s influence on the world stage could decline, due to a lack of critical capabilities to take on future crisis-management operations beyond its borders. And if Europe fails to play its full role, others will certainly step in. A consequence of this may be that the United States shifts ever greater interest towards those emerging powers – and deepen the Transatlantic gap. That is a scenario none of us wants. And that none of us can afford.
To carry out successful military missions, such as the one in Libya, we need to develop, deliver, and deploy modern capabilities. But when our economies are in such a parlous state, this is increasingly difficult to do. Especially with the way we currently do it.
At the moment, we are all trying to do more with the very limited budgets we have. This cannot continue. All of us need to change our approach. Nations. NATO. And industry. Because if we don’t, the Alliance and its member nations will face reduced military effectiveness. And you will face reduced business opportunities.
But if we use our money more effectively, if we combine our efforts, and if we share our capabilities, then we can do more with less. And in my remarks today, I want to explain how we can do that.
First, however, let me lay out the challenge.
Large national debt can make countries less stable, and less secure. This means that bringing down national debt burdens is not only an economic priority. It is also a security priority.
At a time when health, social and education budgets are being cut, defence must also bear its fair share of the pain. That is why I do not expect defence budgets to be increased. But we cannot afford a security deficit. The security we lose by cutting defence must not outweigh the purely fiscal benefits we gain from cutting the debt.
But declining defence spending is only one part of the challenge. Another part is rising prices. The cost of military equipment is rising faster than GDP and faster than the inflation.
Many of you are probably familiar with Augustine’s Laws. As you know Augustine was an aerospace expert. Back in 1983 he showed how the unit cost of a fighter aircraft had risen exponentially over the previous 70 years. He predicted that 70 years further on, the entire United States defence budget would be able to purchase just one aircraft.
Of course that is the absurd consequence – but just to make it clear. Another of Augustine’s laws is just as pertinent. He suggested that the last ten percent of performance creates one third of the cost and causes two-thirds of the problems. We always want the very best. That’s understandable. But this is frequently made worse by what has been called a conspiracy of optimism.
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. I know. I’ve seen it happen. With defence projects. And with other major public projects too.
But this over-optimism quickly gets you into problems. Technical difficulties lead to delays. Delays lead to increased costs. Increased costs lead to further delays to avoid budget over-runs. These delays mean the technology is out-dated so the system has to be re-designed. These further increased costs mean the number that can be procured has to be cut. And all this time, our soldiers go without the capability they urgently need.
It’s a vicious cycle. And it is currently being compounded by our high operational tempo. NATO nations are involved in many operations. And because these are expensive, there is even less money left for research and development, and for procurement of new equipment.
Taken together, this means there is now a real risk that NATO, and nations, will no longer be able to afford the modern military capabilities they need.
But there is also a real risk for you, in industry. Your sales opportunities will shrink. You will be competing with each other over a smaller market share. And you will face increasing competition from defence companies in countries such as, Brazil, India, China and South Africa.
If this is the challenge, what is then the solution? And this is my second point. It is not more money. It is money spent more effectively. It is shared defence. It is efficient defence. It is what I call Smart Defence.
How would this work?
I see three imperatives – to prioritise; to specialise, and to seek multinational solutions.
First, prioritise. At NATO’s Lisbon Summit last year, the Allies committed to focus their investment on eleven areas where we have the most critical need. Areas such as missile defence. Cyber defence. Countering roadside bombs. Medical support. Transport capacity. Command and control. Intelligence and surveillance.
Prioritising also means spending money on operations and deployable equipment, instead of on static structures. That is why we have comprehensively reformed NATO’s military command structure and our agencies. These reforms will deliver significant savings. They will reduce costs. And most importantly, they will improve our capabilities.
Next: to specialise. I know very well this is a sensitive subject, because it touches on the issue of sovereignty. But in an Alliance like NATO, we don’t need each and every country to have each and every capability. When the need arises, we can help each other out. That’s what our Alliance is for.
In 2004, my own country Denmark decided to phase out its submarine capability. This was not an easy decision, but I can tell you it was the correct one. Because it allowed investment in other, higher priority areas.
Another example: Air forces from other Allies police the air space and protect the sovereignty of our Baltic Allies. And instead of investing in expensive aircraft, these countries are able to make significant contributions to our operation in Afghanistan.
These examples show what can be done. Our only solution is to help each other. By working together, we can get better value for money.
Finally, instead of pursuing national solutions, Allies must join together and seek multinational solutions. This applies to acquisition of new equipment, and also to operations.
Again, we already have examples of successful multinational initiatives that show what can be achieved.
Perhaps the best known is the AWACs. A more recent example is our strategic air transport fleet that not only involves Allies, but also two partner nations, Finland and Sweden.
By coming together, nations have been able to achieve significant economies of scale and gain capabilities they could not afford if working alone.
But multinational projects can also be done bilaterally. The recent Anglo-French defence cooperation agreement covers a joint rapid reaction force; joint maintenance; joint training; and also joint research and development.
Of course, multinational approaches are not a panacea. Some projects are highly complicated – both technically and financially. Lengthy contract negotiations lead to uncertainty. And nations pulling out at the last minute can unbalance a whole programme.
I am aware of these concerns. But I am determined that Smart Defence will overcome them. And that it will demonstrate the real value of multinational projects. Let me explain how.
Our host today, NATO’s Allied Command Transformation, already has a dedicated team looking at potential multinational projects. It will identify the best candidates. It will work with Allies to refine common requirements. And it will then work with industry to help deliver them.
As part of our agency reform, the new Procurement Agency will have a “Smart Defence” focus to provide support to industry, and Allies.
In the coming weeks I shall appoint a Special Envoy for Smart Defence. The Special Envoy will work hand-in-hand with nations, as well as with industry, to identify where we can get more from multinational cooperation.
It is my intention, that by the time of the next NATO Summit, in Chicago, in May, we will be able to agree a package of specific multinational projects that provides better value for money. And more security for the money we invest in defence.
Finally, what is industry’s role in all this?
Well, defence markets are still far too restricted, on both sides of the Atlantic. And that has to change.
Here in Europe, new legislation is designed to make business easier for you. I know that many countries still need to write it into national law, but it is a welcome initiative. A common European market for defence would strengthen its defence industry. And it would also help European nations to develop the military capabilities they need to fully implement the Common Foreign and Security Policy.
But a single and open European market is not enough. We need equal opportunities for European and American defence companies to compete across the Atlantic. Today, the Pentagon still awards more than 90 per cent of its procurement budget to US companies. And several European countries still rely mostly on domestic suppliers.
Excessive controls on the export of military goods and technologies continue to hamper industrial collaboration. And they hinder cooperation between our troops in the field. And for these reasons, we must allow greater access to each other’s markets.
I very much welcome the work that is underway to remove these distortions in the defence market, not only in Europe, but also in the United States. The Obama Administration is working with Congress to reform America’s export licensing process. This includes reducing the number of items considered ‘sensitive’, so they would be easier to export.
More open, less restricted competition will make companies more efficient. It will lead to lower costs and greater economies of scale. And to lower prices and better margins. That’s good for industry. It’s good for the taxpayer. And it’s good for NATO.
And that’s why the NATO Summit in Chicago, next spring, will be an important rendezvous for all transatlantic defence players. It will be the moment to agree on doing business differently. I look to you, to industry, to play a full role in Smart Defence. That’s why I will appoint a Special Envoy. To gather your views. To hear your suggestions. And to take forward your ideas.
Chicago will also be an opportunity to demonstrate creativity and innovation. In concept. In design. In development. And in funding. Because we no longer face an arms race. I would say, we face an innovation race. And in today’s global market, it’s a race we must win.
Ladies and Gentlemen,
Budgets are decreasing. Prices are increasing. New players are emerging. And security risks and threats are more complex and less predictable. All in the middle of an economic crisis.
Together, these developments pose a serious challenge. To NATO. To its member nations. And to you in the defence industry.
The question is simple. Do we want to do more with less? Or less, with less? Smart Defence allows NATO and industry a unique opportunity. To cut our debts. To save our money. And to enhance our capabilities. It’s an opportunity we must seize. Together.