Dutch Government to Industry: See You in Court over JSF
The Netherlands is a notable player in the multinational F-35 program, as one of only two Tier 2 program partners, and the future site of a European maintenance hub. The government is still deciding whether it will join the Joint Strike Fighter’s IOTE (Initial Operational Test & Evaluation) phase and purchase 2 aircraft. Meanwhile, what was once a slam-dunk to replace RNLAF F-16s has now become a competition of sorts involving Saab’s JAS-39NG Gripen. To this point, the Dutch have invested over EUR 850 million in the F-35’s development phases.
The financing arrangements involved are highly unusual. They have now become a subject of possible legal action, as the government insists that industry players owe it more than EUR 300 million…
- From Fokker’s Crash to the Joint Strike Fighter
- Dutch Treat: Tier 2 – With a Twist
- The Present Dispute: Updates and Key Events
From Fokker’s Crash to the Joint Strike Fighter
The saga actually begins in 1996 with the bankruptcy of Fokker, an aviation firm that had been founded in 1912. The firm’s entire saga had been worthy of an opera, and the squeeze between Boeing and Airbus in the single-aisle passenger jet market forced a 212 million guilder government bailout in 1987. That bailout was linked to an injunction to find a foreign partner; unfortunately, the partner was Daimler-Benz subsidiary DASA, in 1992. The Dutch airline KLM had been an important customer for the Fokker 100, but it did not pick up the Fokker 70, and disappointing sales of that plane led to financial difficulties. In 1996, the Daimler-Benz Board of Directors to cut ties with Fokker, in order to focus on its core automotive business.
The crash of Fokker and its breakup caused a great deal of political controversy in The Netherlands. This political pressure, coupled with the government’s own desire to keep an “aerospace cluster” in the country, eventually led them to a strategic conclusion – and to 2 projects.
The strategic conclusion was one of retreat to an industrial strategy built around components and contracting, rather than complete planes. That conclusion, in turn, led the Dutch in 2 directions. One was participation in the civilian Airbus A380 project. The other was to position Dutch industry for participation in the USA’s Joint Strike Fighter program. JSF was seen as the industrial and operational follow-on to the hugely successful F-16, which Fokker had assembled for several European air forces at its plant near Woensdrecht.
Dutch Treat: Tier 2 – With a Twist
In June of 1999, the Dutch government took an inventory of the country’s quasi-collapsed aerospace cluster and put together a program, in order to ready the industry for work on the Joint Strike Fighter project. In September 1999, the Economic Affairs (EZ) ministry committed 100 million guilders, and the Defense ministry (MvD) committed another 50 million, to be overseen by a joint steering committee. By 2000, 40 industrial projects worth 149 million guilders had been approved, and an extra 30 million guilders from the Dutch EZ allowed steering committee to subsidize 11 more R&D/manufacturing upgrade projects. At the present value of the Euro, that amounts to a total of EUR 70-75 million.
By 2002, crunch time had come, and the government was pushed to make a decision on joining the F-35 Joint Strike Fighter project. A 2003 report by the American Department of Defense [PDF] quoted Rini Goos, of the Netherlands’ Ministry of Economic Affairs:
“SDD is for the benefit of industry. The Netherlands could have just bought JSF in 2012.”
That isn’t entirely true, as those who are familiar with the Dutch political scene can attest. Nevertheless, the minister is correct in saying that participation in the System Design and Development (SDD) phase was undertaken to supporting Dutch aerospace development. As part of that process, Lockheed Martin and Pratt & Whitney, in conjunction with the Dutch government, had surveyed Dutch industrial capabilities before the government made its investment decision. They concluded that the Netherlands would likely have a high level of success in JSF SDD competitions, and Pratt & Whitney actually guaranteed that the Netherlands would receive a share of the F135 program proportionate to any Dutch purchase of the F135 engine.
With that comfort level established, the Dutch government and 50 industrial members of NIFARP (Netherlands Industry Fighter Aircraft Replacement Platform) created a public-private partnership, and made the Level II investment of $800 million ($750 million paid directly to the Joint Project Office, and an additional $50 million bilaterally co-controlled between the JPO and the Dutch government) at a time when the Euro traded below the American dollar. Industry’s PPP participation would include repayment of the contribution over time, via a special tax on industry earnings from JSF-related contracts. The exact taxation amount would be adjusted by the end of 2008, but 3.5% was the initial figure discussed.
In making that decision, The Netherlands turned away program participation offers from the Eurofighter consortium and from Dassault, who reportedly tried to sweeten the deal by offering a fixed price for their Rafale fighters. Flug Revue reported at the time:
“But ultimately it seems that the attractions of the potentially huge numbers of F-35’s to be built won the day, as JSF partners participate in the production of all the aircraft. Thus the Stork group (Fokker) can look forward to revenue of US-$ 5 billion over a period of 25 years. The company hopes to develop all the wiring and various composite parts (e.g. flaps and control surfaces). Another major beneficiary will be Royal Philips Electronics.
The first task, however, will be to sort out the “admission ticket”. According to Wim Kok, the price of SDD participation as a Level 1 partner will be Euro 920 million. This amount has to be raised partly by the defence and economic affairs ministries, and partly by industry. The latter will pay a levy of 3.5% on the value of JSF orders back to the state in the production phase from 2006.”
At this point, optimism was high on all sides. The 2003 US Department of Defense industrial survey estimated that the annually-compounded return from the partners’ SDD investments ranged from 25% to over 100%. The Netherlands’ return was pegged at 38.1%, with estimates of just over $5.7 billion in JSF-related contracts from 2002 – 2026.
None of this was guaranteed, of course, and the JSF program’s “best value acquisition” model made that perfectly clear to all concerned. Dutch optimism also extended over into the NIFARP PPP’s repayment provisions. The 2003 US DoD report added that:
“Although many Dutch firms and the Dutch government do not believe that the tax will impair their ability to win production work, in a highly competitive environment a 3.5% levy will be reflected in a bid price premium that could well affect their competitiveness. However, many NIFARP members seem confident that the 3.5% taxation scheme will be relaxed or perhaps repealed when PPP is reviewed in 2008 prior to the letting of the affected production contracts.”
That optimism would not be justified. By 2008, the F-35 program was behind schedule, and a number of countries were looking at significant cuts to their planned F-35 purchases. The program might make that up over time, if the plane became a strong export success and showed the ability to maintain its competitiveness via upgrades. In the near term, however, the situation meant tough slogging for Lockheed Martin, as it tried to bring initial lot prices down by closing a large enough set of firm commitments from the original partners. It also meant less work for Dutch industry.
As for the tax, it was not repealed. Instead, it was tripled – to 10.3%.
The Present Dispute: Updates and Key Events
Dec 4/08: Economic affairs minister Maria van der Hoeven (CDA party) reports to Parliament. She declares that she had assessed industry objections and denied them, and that negotiations are at an end. By the ministry’s October 2008 calculations, industry is EUR 308 million short on its promised public-private partnership commitment toward the EUR 858 million spent on F-35 development.
This figure might be explained by something as simple as currency variations, since F-35 related contracts have all been denominated in dollars. On June 15/02, near the time the Dutch Tier 2 commitment was made, $800 million was about EUR 845 million. Current reports place the Dutch JSF contribution at EUR 858 million, a total that amounts to about $1.13 billion today at about EUR 1 = $1.30 – a figure that has dropped from recent highs above $1.55. The government’s shortfall is about $35.9%, and the currency differential is very close to explaining that figure. DID stresses, however, that the exact means by which this “shortfall” figure was determined remains an enigma to DID, and to our Dutch correspondents.
As one might expect, the aerospace industry disputes this figure, and says the PPP investment will be earned back by 2052 without any additional contributions from them over and above previous agreements. Minister van der Hoeven responded by saying that under Article 8.5 of the joint financing agreement, Dec 15/08 is the arbitration deadline if industry continues to disagree with the ministry’s calculations. Dutch News | Ministry of Economic Affairs: Dec 4/08 brief to Parliament [in Dutch]
July 7/08: Aviation Week reports:
“The Netherlands government is locked in a head-to-head fight with the country’s aerospace and defense industry over its decision that Dutch industry should pay 10.3 percent of all revenues from F-35 Joint Strike Fighter (JSF)-related orders through 2053 to the state. The revised percentage was announced July 1 by Dutch Minister of Economic Affairs Maria van der Hoeven, replacing the preliminary figure of 3.5 percent that was agreed to in 2002.”
The increase is partly blamed on the fall of the Euro versus the American dollar, which lowers the value of dollar-denominated orders for the F-35. Even so, as an act of economic policy, a 10.3% levy is likely to make Dutch suppliers uncompetitive when bidding under the JSF program’s “best value” model. That would severely depress revenues from the F-35 program, which of course goes on to lower government revenues, while leaving industry with far fewer industrial benefits.
The industry now has one month time to study the calculations of the Minister. In August 2008, all partners will convene and negotiate. The firms and 2 key unions have sent a letter to the minister, on behalf of NIFARP and the FNV and CNV branch trade unions. The letter stated their collective dismay that the government has avoided all dialogue on the JSF deal in recent months. See also: Trouw report [in Dutch].
May 27/08: De nieuwe Rotterdamsche Courant (NRC) offers a feature [in Dutch | Google semi-translation] that answers 3 common questions about the Dutch JSF program: (1) Why did the Netherlands get involved at such an early, and risky, stage?; (2) Wouldn’t it have been cheaper to just buy the planes “off the shelf” in 2012?; (3) What are the financial risks of the JSF project? That 3rd section refers to the PPP arrangements. Roughly translated, the key excerpt reads:
“Minister Zalm promised in 2002 that public investment in the development phase of the JSF would flow back into the public purse. In return for an investment of 858 million euros the return would include discounts on the purchase of JSFs – and ‘royalties’ (bonuses) as the JSF was sold to non-partners. The keystone of this ingenious “business case” for the JSF was business. If there was any shortfall, it was agreed in 2002 that it would be covered by industry. In 2002 the ‘hole’ in the business case was estimated at 191 million euros. Internal calculations of Defense now reveal it to be 225 million. Because the whole business case is set to expire by the year 2052, many are still not entirely clear [what the real final proceeds will be].”
- DID FOCUS – F-35 Joint Strike Fighter: Events & Contracts 2007-08 (updated)
- DID (Dec 6/07) – Dutch Rekenkamer Issues F-35 JSF Program Reports
- DID (Nov 16/06) – Dutch Sign F-35 Production MoU, But Political Challenges Remain
- US Office of the Deputy Undersecretary of Defense, Industrial Policy (June 2003) – [F-35] International Industrial Participation: A Study of Country Approaches and Financial Impacts on Foreign Suppliers [PDF]
- Flug Revue (#4/ 2002) – More Partners for JSF
- DID thanks our Dutch subscribers who assisted us with this article, esp. VNCCC editor-in-chief VHJM van Neerven and David Vandenberghe. This article would not have been possible without them.