Friday, December 1, 2023

LPM 2029: Can we bring together budgetary constraints and the needs of the Armed Forces? (1/2)

As is most often the case when designing a Military Programming law, two critical constraints face today between the Ministry of Finance and the Ministry of the Armed Forces in order to design the budgetary trajectory which will underpin the next Military Programming Law which will govern the French defense effort between 2023 and 2029. For the General Staff of the Armed Forces, investment needs have been estimated at around €435 billion over this entire period. period, in order to allow the French Armed Forces to regain operational capabilities compatible with the evolution of the threat, in particular in the area of ​​High Intensity engagement. For the Ministry of Finance, however, the increase in credits devoted to the defense effort cannot exceed €377 billion over the same period, in order to respect the country's commitments to contain its public deficits as well as its already sovereign debt. heavily hit by the covid crisis and the energy crisis.

In fact, it seems impossible to make these two strict constraints coexist, even though both are of an imperative and strategic nature, and the hypothesis most generally put forward in this file is based on an intermediate position, with a budget between 390 and 400 billion €, making it impossible to respond effectively to the needs of the armies without once again creating certain operational impasses, nor to preserve the sovereign debt beyond the sustainability threshold defined by Bercy. However, there is a third way, based on a change in paradigms in terms of defense industrial investment, making it possible to support a defense effort equivalent to €440 billion while spending only €375 billion over the period 2023-2029, the all without increasing the French sovereign debt: the Defense Base. In this two-part article, we will first present the 4 pillars which allow this approach to respond to this impossible equation, then its application to the armies, the Defense Industry, public finances as well as to cooperative programs within the framework of the LPM 2023-2029.

An impossible political-economic equation?

As highlighted by the various Chiefs of Staff of the French armed forces during their recent hearing by the Defense Commission of the National Assembly, the French armies today suffer from a profound deficit in capabilities and mass to respond to the new defense challenges imposed by the return of international tensions between large technologically advanced nations, in particular in the face of competition launched by Moscow and Beijing in this area. 

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Following two decades of underinvestment having significantly eroded the capabilities of our armies, the Military Programming Law 2019-2025 made it possible to restore budgetary capacity to make up for certain failures and obsolescence. However, whether it is the format of the armies defined by the LBDSN 2013 and confirmed by the RS 2017, or the schedules of programs aimed today at replacing certain major equipment such as combat tanks, fighter planes, nuclear submarines and aircraft carriers, none are able to respond to the profound and rapid evolution of the balance of power in the World, including in Europe. For many European countries, the solution lies in increasing the budget of the armed forces, or even establishing additional credits to make up for the main obsolescence in the short term. For France, however, the options are much more difficult to advance, the country being constrained by a strongly deteriorated sovereign debt and reaching 113% GDP following the Covid crisis, a public deficit already at its ceiling authorized by the stability pact of the Euro zone, and growth threatened by the resumption of inflation and the energy crisis. Under these conditions, responding to the needs for modernization and expansion of the armies imposed by the international situation is directly opposed to the socio-economic reality of the country.  

The Defense Base: a technical response with political potential

The work which gave rise to the “Socle Défense” model, begun in 2016, aimed precisely to respond to this specific problem, namely to enable the French State to quickly increase its level of investment in national defense, in particular through its industry, while respecting the legal and economic constraints of the country, in order to allow the French armies and their Leader to “ Choose our wars and win them ”, according to the formula of General de Gaulle.

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To achieve this, the Defense Base is based on 4 complementary and interdependent pillars resulting from a multidisciplinary and innovative analysis 

  • The rental of defense equipment by the armed forces through an ad hoc Public-Private Partnership structure respecting the constraints imposed by the EU so as not to be counted as sovereign debt.
  • The implementation of a savings solution specially dedicated to financing these investments
  • An industrial and technological paradigm shift to optimize the budgetary, political and social efficiency of investments
  • A new doctrine of economic analysis allowing the precise assessment of the social and economic effectiveness of these investments , as well as their sustainability through the evaluation of the Budget Balance.

Rental of defense equipment by the Armed Forces

The Armed Forces already use the rental of certain equipment. Thus, Hungary and the Czech Republic have been leasing their respective fleets of JAS-39 Gripen fighters for more than 20 years. In France, several armed services also rent certain equipment, often as part of a global service offering, such as the EALAT in Dax or the H160 helicopters of the French Navy. However, these solutions only offer a partial response to needs, and are often constrained by strict usage clauses. The Defense Base offers a global solution making it possible to replace the majority of acquisitions of major equipment with a rental model through a single adhoc structure in Public Private Partnership in order to meet all the constraints and to have at its disposal renewed investment capacities.  

The technical advantages of leasing military equipment

The use of equipment rental is a technical solution aimed above all at optimizing the bottom line of companies, by transferring investments subject to immobilization and therefore to tax, into charges which contribute to reducing the profits displayed, therefore the taxes payable. For the French state, which as a large company has its accounts audited each year by Eurostat within the framework of the Eurozone stability pact, the situation is essentially the same. As the country does not have a balanced budget, investments in defense equipment contribute to widening annual deficits, and are financed by sovereign debt, which now reaches 113% of GDP.  

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In this context, the use of a rental model would make it possible not to count these investments as a debt, and to only integrate the payment of annuities into the state budget, offering significant additional financing capacities without impacting public finances beyond annuities, and without impacting sovereign debt.

European constraints 

In order to prevent rental offers from becoming a convenient way of making disguised debt, European authorities had, at the request of France during the study of Project Companies in 2014, defined strict obligations governing the rental of military equipment:

  • A1: Financing cannot cover more than 75% of the acquisition value of the equipment
  • A2: The residual value must not be zero, and the amount of the annuities must respect the discount in value of the equipment
  • A3: The customer must contractually be able to end the rental and return the equipment for the entire duration of the rental
  • A4: The state cannot be the shareholder nor the majority financial contributor to the offer

The challenges of leasing military equipment

For the Armed Forces, the rental of defense equipment also faces 4 critical issues which, until now, have limited the use of this model:

  • B1: Rental costs are often much higher than state financing costs
  • B2: The equipment must be insured, which significantly increases rental costs, and most often prevents the use of this equipment in a combat zone.
  • B3: The evolution and modernization of rented equipment is restrictive and often very limited by rental contracts and insurance contracts
  • B4: Finally, banking and insurance companies are, to say the least, reluctant to finance military equipment of which they have bare ownership, at the risk of being called into question from a legal point of view during their use by the Armed Forces. war zone. 

These constraints explain why the rental of military equipment is limited to equipment dedicated to training or public service missions.

1st pillar: an ad hoc structure dedicated to the rental of military equipment in France

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Fabrice Wolf
Fabrice Wolf
A former French naval aeronautics pilot, Fabrice is the editor and main author of the site. His areas of expertise are military aeronautics, defense economics, air and submarine warfare, and Akita inu.

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