1. 1 The German defense procurement and its relation to industrial policy Andreas Glas Kingston, February 2012

2. 2 Canadian – German Cooperation

3. 3 Agenda II. Review of Defense Procurement in Germany I. Situation in Germany III. Major Weapon Systems – Current and Future Challanges IV. Contracting, Cooperation, Partnerships V. Discussion / Conclusion

4. 4 Situation: Reform of the Bundeswehr Realization of long-discussed, fundamental transformation 1 2 3 International disaster and military operations Afghanistan, Kosovo, etc. Abolishment of conscript system – towards professional army Significant reduction of the Bundeswehr

5. 5 Situation: Future Operability of the Bundeswehr The challange to do more with less PersonnelBudget Capability requirements 250.000 185.000 soldiers 76.000 55.000 public servants 328 <290 military bases Pressure to economize defense budget At maximum: Stable budgets Everything for deployed forces Level of Ambition Concentration on core competencies

6. 6 Situation: Defense Procurement in Germany International comparison – defense procurement in per cent of GDP Massive shortages after Cold War, recently slight recovery * Weltbank - Weltentwicklungsindikatoren, 2012. USA Columbia UK France Germany

7. 7 Situation: Defense Procurement as Enabler? Purchasing is the key to profits (private sector) capabilities development (defense) Total procurement volume of defense procurement in Germany: billion 10,31 (in 2009) Increase in efficiency in per cent Economies in million Equivalent to: 1,0 %103,1 Development costs for platform Eurofighter : (million 135 Mio. in 2009) * 2,0 %206,2 Shortage of military doctors: Equivalent to 69% of requird doctors (in 2010: 600; Educatoin and training 500.000/doctor) ** 3,0 %309,3 Finance of defence research and development insitute: million 275 (in 2009) * 4,0 %412,4 Civilian reconstruction in Afghanistan: (German paid means per year million 430)*** 5,0 %515,5 Development of Airbus A400M: Equivalent to 79,3% of surplus development costs (million 650 in 2010)**** * Quelle: Bundesministerium der Finanzen (2009), Einzelplan 14. ** Quelle: http://www.aerztezeitung.de/politik_gesellschaft/article/596224/motivation-keine-klaren-karrierewege-bundeswehr-aerzte-unattraktiv.html *** Quelle: Deutscher Bundestag (2010), Jahresbericht 2009. **** Quelle: http://de.reuters.com/article/domesticNews/idDEBEE62F02020100316

8. 8 Situation: Defense Industry in Germany Overview of defense industry companies and their products

9. 9 Situation: Defense Industry in Germany International comparison * Sipri 2008/2010. ** Weltbank - Weltentwicklungsindikatoren, 2012.

10. 10 Agenda II. Review of Defense Procurement in Germany I. Situation in Germany III. Major Weapon Systems – Current and Future Challanges IV. Contracting, Cooperation, Partnerships V. Discussion / Conclusion

11. 11 Defense Procurement in Germany Development and phases 1950/1960s1970/1980s1990/2000s Today 1234 Problem to buy equipment for ~300.000 soldiers. Procurement of (old) equipment from US / UK or other forces (M47 tank, F-84 jet, Destroyer Fletcher etc.) Technological problems (HS 30, Submarines etc.) Initial equipment Modernization with German equipment Peace dividendModern warfare Development of new equipment in Germany (Leopard, Marder etc.) TORNADO jet etc. Foundation of German defense industry after WWII Cold War Massive retaliation Quick armament of huge number of soldiers Cold War Flexible response Mobile forces for joint operations German reunification Bundeswehr reduction Economies in defense budget Global operations Disaster relief Peace enforcement Modern, specialized COTS equipment Sale of old / supernumerary equipment. Few new projects. Only supplementation of existing equipment. (e.g. air conditioner for ships to operate globally) Changed threats (asymmetric warfare) with new requirements E.g. protection against mines or IED; protected Transport and logistics Integrated communications and data systems etc.

12. 12 Defense Procurement in Germany Structure and responsibilities Legal procurement procedures and price law Customer Product Management (=defense acquisition process) Competitive Dialogue Open / restricted procedure Electronic procedure Frame contract Negotiated procedure Demand analysisDevelopment Procurement and implementation Usage phase Functional demand description Preferred approach of commercial available products (without development) Legal division between military user and civil procurment agency Military Civil acquisition agency Ministry Industry Art. 87a Grundgesetz (Almost) no direct communication between military and industry about acquisition projects.

13. 13 Agenda II. Review of Defense Procurement in Germany I. Situation in Germany III. Major Weapon Systems – Current and Future Challanges IV. Contracting, Cooperation, Partnerships V. Discussion / Conclusion

14. 14 Major Weapon Systems The challange of long life-cycles * Usage time estimated. ** Global Hawk with 12 years R&D in USA *** Full capability after 7 years in service.

15. 15 Major Weapon Systems The challange of long life-cycles (navy) PlatformNumberService Life Age 2012 Age 2017 Age 2022 Age 2027 T 40463018,623,628,632,3 Fregatte 12283027,332,337,342,3 Fregatte 12343016,721,726,731,7 Fregatte 1243307,712,717,722,7 Schnellboot 143A103028,733,738,742,7 Korvette 1302 (5)254,009,0014,0019,00 Submarine U212A4 (6)256,2511,2516,2521,25

16. 16 Major Weapon Systems The challange of small fleets. (Airforce)

17. 17 Major Weapon Systems The challange of small fleets. (Navy)

18. 18 Major Weapon Systems Research, development, production After-Sales-Services Long life-cycle 90-95% Building5-10%90-95% Vehicle22.500 (22,7%)76.275 (77,3%) Chopper4-7 Mio. (8-16%)45 Mio. (84-92%) Challange of life-cylce support costs Costs Zeit * Product-Life-Institute Genf

19. 19 Major Weapon Systems Case ACase B Challange of life-cycle support costs Increasing costs for weapon systems over time. Average budget overrun of 10 – 130 per cent for major platforms. Increasing costs for weapon systems over time. Average budget overrun of 10 – 130 per cent for major platforms.

20. 20 Procurement of services Great uncertainty about purchasing services Share (%) of service bundles on direct spend 25% / 20% Feeled competence while procurment process of services in contrast to goods or product-service systems (Durchschnittliche Bewertung auf 5-Punkte-Likert Skala, 5 = sehr hoch, 1 = niedrig ) *: CAPS, 2003, übersetzt und leicht modifiziert; L = Dienstleistungen; DLb. = Produkt-/Dienstleistungsbündel; Mgt. = Management; Besch.= Beschaffung

21. 21 Procurment of services While product manufacturers generally do not have contact with their customers, service providers usually shape the service together with users, who in fact, participate in the production process. (Morelli, 2002). Services are processes which exist in time only. (Shostack, 1982). Only those producers who are confident in calculating the subjective risks and reward structures will be willing to accept a PBL-Contract. (Gruneberg et al., 2008). Great uncertainty about purchasing services

22. 22 Major Weapon Systems Challange of life-cycle support costs In million At least stable means to support existing weapon systems Fear for failures At least stable means to support existing weapon systems Fear for failures

23. 23 Agenda II. Review of Defense Procurement in Germany I. Situation in Germany III. Major Weapon Systems IV. Contracting, Cooperation, Partnerships V. Discussion / Conclusion

24. 24 Contracting, Cooperation, Partnerships The range of possible forms of military-private cooperation. A transaction cost perspective. Market hybrid Hierarchy Long-term contracts (Performance-based Logistics) Public Private Partnership …

25. 25 HIL, BWI as examples for PPP Successful outsourcing to Public-private partnership organizations Concentration on military core tasks Bundeswehr 49% Rheinmetall, KMW and others 51% Responsible for maintenance and reparis of army equipment Availability of 70% New contract up to 95% (depends on vehicle) Savings of over million 200 in 5 years. Bundeswehr 49% Siemens 50,5% IBM 0,5% Responsible for domestic IT system Volume billion 7.1 (instead of former Bundeswehr personnel and (aging) IT equipment)

26. 26 PBL – Example Heeresinstandhaltungslogistik M&R for army combat vehicles Daily availability of 70% of all army combat vehicles in Germany. (Guaranteed by HIL) Optimization of planned and proactive maintenance and repairs. Maintenance levels 2 – 4. (first level is organic military support) Institutional PPP. No incentives but outcome-oriented service levels for each service. Still cost-plus-structure, but measured with performance. (PBL i.w.S.)

27. 27 First approaches towards PBL Status Quo HIL: Availability of 70% P3C-Orion: Availability of 100% in 30d EC-135: Usage fee per flight hour Raytheon: Fixed price with increasing MTBUR … (turbine availability) Law Profit formula Service contracts in defense Price law Lack of confidence in PBL Lack of training and experiance Unclear competencies No stringent process model No knowledge base BUT: Few but striking success stories (Heron 1-leasing, EC 135 etc.)

28. 28 PBL – Example radar system of Marineflieger Full Service Improvements 3F Performance development in terms of MTBUR of the radar system (flight hours) Fixed Price Contract (10 years) ~ First half of intended usage time. Internal target performance with 6sigma philosophy and new quality management approach. (changes allowed form fit function) Fixed Price of flight hour with increasing performance measure

29. 29 Agenda II. Review of Defense Procurement in Germany I. Situation in Germany III. Major Weapon Systems – Current and Future Challanges IV. Contracting, Cooperation, Partnerships V. Discussion / Conclusion

30. 30 Conclusion – Some lessons? German approach: Cooperation as key for defense procurement InsourcingCooperation Outsourcing Of military core tasks? (Efficient) support? Hitherto via public private partnership institutions Future: More and more long-term contractual agreements But requirement for knowledge database, structered learning, pro- active management

31. 31 Conclusion – Some lessons? Future? Korvette 131? (Multi-role combat ship 180) Multi-Role-Helicopter Dockship?

32. 32 Thank you for your attention Competence Network PBL Research Center for Law and Management of Public Procurement Bundeswehr University Munich, Germany Werner-Heisenberg-Weg 39 85577 Neubiberg b. München Telefon: +49 89 6004-3790 andreas.glas@unibw.de www.unibw.de/pbl Discussion

33. 33 Aviation Spare Parts First approaches towards PBL in Germany From Quality to Performance Former Procedure: Service provider managed stock (CP). Basis: INPUT: Working hours, value of stock, required stockage space etc.) Public Procurement Agency bought parts in dependency of demand. (oftentimes in very small lot sizes) Low performance, often stock outs. Trouble with obsolescences. Some parts with delivery time over 365d. Today´s Procedure: Service provider manages stock and spare parts procurement on basis of CP. BUT: Performance is measures with KPI: Delivery time. Public Procurement Agency only involved in some high-value / high-risk categories. Contractor allowed to optimize stock.

34. 34 Aviation Spare Parts First approaches towards PBL in Germany From Quality to Performance Delivery Time: 85% of all parts within 1 day. 97.5% of all parts within 3 days. 100% within 30 days. The change in the perception of performance led to a mind-shift at the contractor and customer side. Decrease of cannibalization in operating air force units. Increase of Repair turn around time with direct impact on the air force fleet availability. Nevertheless: Still a CP-Contract due to high risk of obsolescence and importance for the robustness of forces. (PBL i.w.S.)

35. 35 PBL – Example Eurocopter Parts by the hour Repair by the hour From Nose to Tail Worry-Free Customer buys guaranteed performance: Function: Guaranteed service response time (repair, maintenance etc.) Availability: Spare parts, immediate support teams, exchange turbines, helicopters … Results: Flight hours, Pilot training hours…. Benefit for the customer: Planning and cost reliability with regular payments Optimized mission readiness. Problem: Forecast of utilization profile (Which mission, when, where?) Full service possible.

36. 36 PBL – Example Eurocopter Pilot Training in the German Army From Nose to Tail Worry-Free Support of a training fleet of helicopters in a military site. Payments for flown flight hours on basis of a fixed price. Weather (abortion) risk (<24hrs) at the contractor (!) Very good feed back from both sides. Success factors: Service orientation. Enormous improvements in terms of efficiency / effectiveness cp. to CP-Contract. Fixed Price of Flight Hour PBL i.n.S. Once /year twice/ year Cyclically (monthly) When Used Managing board Controlling committee Operational Planning Team User (with IT-System)

37. 37 PBL – Example Radarsystem Full Service Improvements 3F Customer awarded a full-service-contract for the radar- module of the P3-C Orion. Key Performance Indicator: Increasing MTBUR (Reliability) over contract-terms Fixed Price Contract Contractor: Allowed to improve the radar-module without notice as far as Form Fit Function is equal to pre-improvement status. Further improvements possilbe (e.g. cables) and issue of negotiations.