Of MiGs and Offsets

Economic News

22 Jul 2010
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With its long-awaited accession to NATO slated for the spring of 2004, Bulgaria is now running a major military upgrade programme. Due to spend around USD1bn over the next five years on its armed forces, Sofia is currently playing host to many world-renowned defence contractors. Meanwhile, critics have been asking just how fair the defence procurement process has been, despite the progress made in modernising the country's Warsaw Pact-era military.

Many of the arms manufacturers and specialists taking an interest recently have been from the UK and the US, with Oxford Business Group speaking last week to Mark Stevens, Systems Director overseeing Bulgaria, Romania and Hungary for BAE Systems, on the defence procurement question.

"Bulgaria has become a very interesting market for us recently," he said. "Our overall intention is to maintain a 10-20 year vision in this country, taking advantage of new-found opportunities in the competitive field of defence that have emerged as Bulgaria pushes forward in its accession to join the expensive military alliance, NATO."

At present, BAE Systems is focusing a great deal of energy and resources on securing a contract to upgrade Bulgaria's archaic fleet of some 30 Soviet-made Mi-17 and Mi-24 helicopter gun ships. As a means of improving its chances significantly, the company has upped the ante by considering participation in a "sustainable joint venture" with an appropriate local defence subcontractor. This would involve carrying out a significant portion of the helicopter upgrade in country, as well as bringing in a software company to lend its expertise to re-working the army's obsolete field communications systems. This will be vital for the special operations units likely to be required in future NATO operations.

This prospective deal is of particular importance largely because it would be the first under Bulgaria's experiment with 'offset' transactions. Inspired by the success of other Eastern European NATO aspirants, under the terms of Bulgaria's offset plan, major government defence contracts have been closely linked to obligations by the winning bidder to tangibly invest in the local economy.

Earlier this year, the Ministry of Defence (MOD) and the Bulgaria Foreign Investment Agency (BFIA), two organisations at the forefront of the offset debate, released a white paper outlining the key principles of their country's offset strategy.

The proposed 'obligations' on the part of interested foreign investors have been defined as "increasing the possibilities of the national manufacturing and technological base", particularly with respect to Bulgarian defence contractors seeking partnership opportunities with internationally renowned defence companies. They are also to be implemented for procurement contracts "valued at more than BGL5m".

Defence contractors could benefit greatly from joint venture arrangements with local partners. During the Cold War era, the Bulgaria defence industry had made a strong name for itself within the communist bloc for being a world-class producer of small arms, light weapons, ammunition rockets, bombs and missiles. Military hardware of this type has since gained added significance with US Secretary of Defence, Donald Rumsfeld's plans for doing away with conventional forces in favour of lighter, more agile expeditionary forces that can effective deal with a 'War on Terrorism' on multiple fronts. Moreover, it is interesting to note that in the field of heavy industry, which forms the core of arms production, the Bulgarian defence industry has also gained invaluable expertise in the forging and casting of metal parts, the manufacturing of mechanical engineering products and optical components.

However, not everyone is inclined to sing the praises of offset. Local defence analysts, particularly those working for the broad assortment of Sofia-based pro-NATO think-tanks, are critical of what they regard as the MOD's "opaque" and "poorly orchestrated" offset selection process and its tendency to get bogged down in its attempts to reach consensus amongst competing government bodies. In turn, because of Bulgaria's geopolitical re-orientation towards the West, local defence analysts are convinced that both US and British defence contractors are more likely to win highly-coveted defence tenders than former Warsaw Pact ones.

The offset issue has also captured the attention of the Bulgarian business community. This past summer, the American Chamber of Commerce, a key force in corporate lobbying, hosted a conference dealing primarily with the modernisation of Bulgaria's defence industry and the future role of offset. Entitled "Bulgaria's NATO Accession: Trade and Investment Opportunities" the conference saw leading defence industry heavyweights - such as Lockheed Martin, Global Defence and Space Group, Cisco Systems, General Dynamics and IBM Global Services - make the trip to Sofia.

In addition, there were a number of high-ranking Bulgarian military officials present, including Minister of Defence Nikolay Svinarov and the Army's Chief of Staff, General Nikola Kolev. BFIA chief Pavel Ezekiev, one of the conference's keynote speakers, used this opportunity to highlight the offset strategy's future role in bolstering the local economy, describing it as "an exact science that must be mastered in time if it is to succeed".

Ezekiev is not alone in extolling the macroeconomic benefits of offset. Efrem Radev, Bulgaria's Senior Military Representative to Bulgaria's mission to NATO from 1996-99, was eager to point out in an interview with OBG last week that if done properly, offset "could served serve as the long-awaited engine for economic growth, largely because of its proven ability to develop local expertise to appropriate levels while simultaneously providing a degree of clarity to Bulgaria's less than transparent internal investment climate."

However, if past examples are to provide any guidance, Bulgarians should be wary of high stakes defence deals. Witness the current debacle concerning the Russian company RSK MiG's reneging on the deal it made with the MOD to upgrade 21 MiG 29 jet fighters in line with NATO requirements. According to the stipulations of the deal concluded in March 2002, Bulgaria contracted the Russian company to undertake the necessary work. As offset, RSK MiG agreed to subcontract 45% of the upgrade works to the Plovdiv-based plant of Terem, a leading Bulgaria defence contractor. In an ironic twist, the German magazine 'Stern' revealed that even as late as 2001, Terem had been exporting tank engines to Saddam Hussein's forces. More than a year and a half later the, upgrade has not begun in earnest, forcing the MOD in early December to publicly express its frustration with its Russian partners.

In a statement released to the local press, the MOD said it was "not satisfied with the implementation of the contract so far", adding that it was seriously considering "cancelling said deal by the end of December" if RSK MiG did not finish the project in time.

To date, Bulgaria has made considerable progress in its accelerated efforts to modernise its forces. It has reduced its once bloated army from 65,000-45,000 troops in a short period of time, while decommissioning many of its obsolete planes, tanks and other hardware. It has also placed a high priority on improving essential air defence/surveillance systems, all in accordance with NATO standards.

In an interview with OBG two weeks ago, Svinarov said that, "Apart from the difficulties we have faced in making the appropriate reforms, we have achieved very positive results and we have managed to incorporate a number of constructive elements."

He then drew a distinct relationship between his country's increased involvement in international peacekeeping missions and the role his military reforms have played.

"For the past two years Bulgaria has multiplied its participation in international missions/operations tenfold," he said. "Our partners appreciate our role and this has helped us in turn to secure NATO membership in 2004."

With its close proximity to the battlefields of the 'War on Terrorism', Bulgaria may stand to gain, both economically and diplomatically, from our increasingly risky world.

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