c Military uses Up in the air

Military uses

Mar 29th 2014 | The Economist

AMERICA’S DECADE OF misbegotten war in the early 21st century will be remembered for many things, but when it comes to technology, the rise of the drone will stand out. When America invaded Iraq in 2003, it had a couple of hundred; by the time it left, it had almost 10,000.

Pilotless aircraft had been around for decades. What was new was that, thanks to the Global Positioning System (GPS), they knew where they were, and thanks to better satellite and other communications links they could send back copious data. That allowed them to feed intelligence, surveillance and reconnaissance (ISR) to all levels of America’s increasingly information-hungry armed forces. A platoon of soldiers wanting to look beyond the building in front of them; an intelligence agency tracking a target; a general staff trying to understand what was going on across a broad area: today there is a drone for them all.

Throughout this entire period no drone, or indeed any other robot, was put through the full qualification process usually required for any new American weapons. They were sent into the field in various stages of unreadiness by people who saw a need for them. On the ground that need was dealing with bombs; in the air it was almost entirely ISR.

A very small number were used for launching attacks, both on the battlefield and off it, often in countries—Pakistan, Yemen, Somalia—with which America was not at war. Most of these attacks were carried out by the CIA, which is not new to killing people it has identified as enemies; its Operation Phoenix was responsible for the death of tens of thousands in South Vietnam in the 1970s. But drones allowed such tactics to be employed much farther away from any logistical support, and allowed decisions on whom to kill to be made far higher up the tree.

A small number of drones designed to fire missiles thus allowed new strategies to be adopted in the “global war on terror”—an example of how a relatively minor technological advance can have big consequences. Military drones, after all, are no cleverer than doornail-dumb earthbound robots; many are dumber still. They can do more because they operate in a much less difficult environment, with few obstacles in the way and most of the tasks achieved by pointing a camera or a missile in the right direction. The smart ones can follow commands such as “stay where you are,” “follow this flight plan” or “come home and land”; if their communications are cut off, some will return to the place where they last received a command. But humans are always involved in any tricky or lethal decisions.

That may change. Some military planners see a big future for drones—and for robots both on land and at sea—which will do a lot more than just provide ISR. The more drones that the armed forces deploy, the greater the pressure for autonomy becomes. One reason is cost: a drone that needs minimal supervision is a lot cheaper to operate than one that needs detailed attention. The other is safety. The greater your reliance on drones, the more your enemies will want to attack them. The drones’ command, control and communications network will become an important target. More autonomous drones are less vulnerable to such attack.

Many people are alarmed by the idea that new forms of warfare will lead to increasingly deadly autonomous weapons, not just drones but also smart undersea systems. Various human-rights organisations have banded together in a “Campaign to Stop Killer Robots” which seeks to ban fully autonomous weapons systems. The Convention on Certain Conventional Weapons, responsible for previous bans on laser blinding weapons and some types of explosives, will begin discussing such a ban in Geneva in May.

Some military lawyers claim that most of what the campaigners hope a ban would outlaw is in fact already illegal under existing rules of war, which forbid indiscriminate attacks; and for some purposes, such as defending ships against missile attacks, autonomous systems are both necessary (because of their speed of response) and legally and morally unproblematic, since they operate in areas where no civilians, and possibly no enemy combatants either, will be affected.

Once again, responses to robots reflect broader worries about technology. The idea that technology makes war too easy and removes its reliance on soldierly virtues goes far beyond concerns about the specific roles that robots might play. It is shared by a significant number of military men, who consider killing people a serious matter. Many would be deeply uneasy about delegating it. They have no problem with robots that may save the lives of their comrades—working on bomb disposal, looking round a corner into the unknown and perhaps in future evacuating the wounded from the battlefield. But robots that might replace those comrades (or, in an enemy’s hands, threaten them directly) are seen as much more troubling.

That may be one reason why, surprisingly, the Pentagon’s robot budget is currently shrinking. In its 2014 budget request unmanned systems’ funding was down by a third on the previous year. With ever fewer soldiers in combat zones, there is less need for bomb disposal and the like; but the money for both buying drones and developing better ones is scarce, too. Some, especially in the air force, never much cared for them anyway and are happy to make them a lower priority. And other programmes—most notably the extraordinarily expensive F-35 fighter plane—have far more effective champions in the military-industrial-congressional complex than drones do. At a recent meeting on autonomous weapons, a retired American colonel suggested that for the next decade or so there is no need to worry about America getting new drone capabilities because it will not get any new drones, period.

Mark Gunzinger, another retired colonel, now at CBSA, a Washington think-tank, worries about that. By not developing newer, better drones, he says, the armed forces risk missing opportunities for big improvements in their capabilities. Take aircraft carriers, whose ability to project force is fundamental to America’s global military strategy. Close to the coast of a sophisticated adversary, they are increasingly at risk of missile attack. If they had bomb- and missile-carrying drones on board, they might be able to strike from greater distances. An experimental American drone, the X47B, has shown that it can take off from and, more impressively, land on carriers. But there is currently no programme to develop that capability to allow carriers to attack well-defended targets on land from a safe distance at sea. That would require drones to be able to overcome enemy defences, which the present generation cannot do.

A deeper worry is that potential adversaries will themselves push ahead with drones, perhaps finding entirely new ways of using them en masse. Low-cost computing power has especially benefited drones that use a number of rotor blades for their lift; co-ordinating many rotors takes quite a lot of computing, but makes take-off and landing much easier. “Quadcopters” with a range of 10-20km and a battery life of half an hour are now mass-produced and can cost less than $1,000. A recent report on “War in 20YY” by CNAS, another think-tank, points out that the ability to blacken a town’s sky with a swarm of such gadgets, or send a wave of them across a sea, could produce completely new tactical possibilities; it might be the sort of technological development which changes how wars are won.

Drones will get cheaper still, in part because markets for them are opening up quickly. In America there is as yet no legal framework permitting their commercial use; elsewhere they are being used by journalists, for safety checks and—as in America—for fun. The Federal Aviation Administration is drawing up a regime for commercial use in the country’s air space from 2015.

Most of those uses, to begin with, will probably be in the civilian equivalent of ISR, both by government bodies such as police departments (of which America has 20,000) and by private entities. Chris Anderson, a former writer on this newspaper and now the boss of 3D Robotics, which makes drones, says they supply that fashionable commodity, big data, to fields where it is otherwise hard to come by, such as agriculture. Mr Anderson’s company, along with others, wants to enable “alpha farmers”—free-spending, tech-friendly innovators committed to coming up with the highest-quality produce—to keep an eye on their crops more or less plant by plant and hour by hour. When they have worked out what to do with such data, the rest of the industry may follow. Another use could be checking up on infrastructure such as roads, pipelines and transmission lines.

Peter Singer of the Brookings Institution in Washington, DC, who has written extensively on drone warfare, draws an analogy with military aviation to show how far drones have yet to go. At the beginning of the first world war, military aviation was largely concerned with reconnaissance. It grew quickly, taking on new roles with specialised bombers and fighters, and by 1918 there were tens of thousands of warplanes. Men like Billy Mitchell, Hugh Trenchard and Giulio Douhet started to argue that aircraft could fundamentally change warfare. The planes went on to do so, though not quite in the way that those air-power visionaries imagined.

For Mr Singer, the interesting part is what military aircraft in the first world war did not do. None of the planes was used for transmitting messages, moving cargo and people or spraying crops—the uses to which aircraft would be put in their hundreds of thousands over the next few decades. Today’s military drones are a little more diversified. Whereas most of them look and some kill, others are used for logistics or communications. But as they become more capable and the rules are relaxed, those other capabilities will come into their own beyond the battlefield.

2d

The defence industry

Guns and sugar

More governments are insisting that weapons-sellers invest in side deals to help them develop their industries. This is a bad idea

May 25th 2013 | From the print edition of the Economist

The practice came of age in the 1950s, when Dwight Eisenhower forced West Germany to buy American-made defence gear to compensate for the costs of stationing troops in Europe. Since then it has grown steadily and is now accepted practice in 120 countries. It has its own industry newsletter and feeds a lively conference circuit. The latest jamboree, hosted by the Global Offset and Countertrade Association, was held this week in Florida. Defence executives, officials and middlemen gathered there amid forecasts that the industry could double in size over the next few years. Yet its very structure serves to mask a build-up in the unrecognised financial liabilities of companies. It also, critics argue, fosters corruption, especially in poorer parts of the world.

Avascent, a consultancy, reckons that defence and aerospace contractors’ accrued offset “obligations”—investments they have promised but not yet made—are about $250 billion today and could be almost $450 billion by 2016. The industry’s own estimates are lower, but all agree the trajectory is upward.

Offsets come in two types. Direct offsets require investment in or partnerships with local defence firms. The idea is to develop self-sufficiency. Turkey, for instance, now meets half its own defence needs thanks to such arrangements. Indirect (non-defence) offsets include everything from backing new technologies or business parks to building hotels, donating to universities and even supporting condom-makers. Here the stated intention is to achieve more general economic or social goals.

Obscuring a dark art

Both types of offset are controversial. Economists view offsets as market-distorting. The World Trade Organisation bans their use as a criterion for contract evaluation in all industries except defence. Anti-corruption groups see them as a clever way to channel bribes. Even if many offset deals are clean, they are widely seen as a “dark art”, admits an industry executive. “Offset” has become a dirty word; the industry now prefers the euphemistic “industrial participation”.

The practice is frowned upon in some advanced economies. The European Commission is trying to impose a ban on all offsets in EU-to-EU contracts, and on indirect offsets when the supplier is from outside the union. Its reading of the relevant European directives is “a Taliban interpretation”, since they don’t mention offsets specifically, argues Lindsey Shanson, editor of Countertrade & Offset, the industry bible. A few countries, led by Poland, are pushing back. But none seems keen to have its opposition tested in court. No more than five EU countries are trying to get away with requiring offsets these days, says Christian Sylvain of ECCO, the European offset association. Shrinking defence budgets mean they are not buying much anyway.

America has long been officially against offsets, though it practises something similar at home under the Buy American Act of 1933, which requires foreign arms-makers to source much of the work locally. (Some circumvent the rules by forming partnerships with American contractors in order to qualify as domestic suppliers.) And as embassy cables published by WikiLeaks make clear, America’s diplomats are sometimes closely involved in its firms’ discussions with foreign governments, including even squeaky-clean Norway’s, over proposed offsets.

In less developed countries, where defence spending is generally rising, offsets are booming. One appeal is that they can be recorded as foreign direct investment, boosting the government’s economic-management credentials. The two biggest arms-buyers in the Gulf, Saudi Arabia and the United Arab Emirates, have long-standing, sophisticated offset programmes. The UAE awards “credits” to cancel out contractors’ obligations on a sliding scale linked to the profitability of their offset projects. (The contractors generally do not share in those profits.) Brazil and India are catching up, though with some teething troubles: India’s offset rules have been rewritten since it embraced offsets in 2005, but remain confusing.

This growth is fuelling a thriving offsets industry. At one end are dozens of small brokers who hawk ideas for offset projects to arms-makers and their clients. With the right contacts in government and the armed forces, even small outfits can service the largest defence firms. Take Dolin International Trade & Capital, a one-man operation run by Dov Hyman from his home in suburban New York. Mr Hyman cut his teeth as a textile trader in Nigeria. Today he advises African governments looking to use offsets while helping multinationals craft offset packages.

Further up the chain are a few sophisticated outfits that structure complex deals and arrange financing. The best known is London-based Blenheim Capital. These are assembling ever more creative packages, including, for instance, helping procuring countries to use contractors’ offset obligations as collateral for loans, backed by the “performance bonds” that firms set aside to cover unfulfilled obligations.

These middlemen are offsets’ most vocal defenders. Mr Hyman cites reams of examples of deals that he believes brought great benefits for purchasing countries’ economies. The best of them are “beautiful solutions”: for instance when arms-sellers satisfy offset obligations by guaranteeing credit lines for local manufacturers, thus reducing their financing costs. Using a multinational’s good standing in this way is “an efficient means of making possible transactions that otherwise wouldn’t be viable,” he argues.

Missiles, radars and seafood

However, some projects take contractors disconcertingly far away from their core competence. Take the shrimp farm set up in Saudi Arabia in 2006 with backing from Raytheon, a maker of radar systems and missiles. Praised at first as a model offset, it reportedly struggled to keep its pools properly maintained in searing temperatures and eventually went bust.

Moreover, the academic literature on offsets suggests that the promised benefits are elusive. There are some technology-transfer success stories: for instance, China has boosted its defence-manufacturing capability by requiring offsets when buying kit from Russia. However, research by Paul Dunne of Bristol Business School and Jurgen Brauer of Augusta State University has found that such deals are generally pricier than “off-the-shelf” arms purchases and create little new or sustainable employment. The offsets associated with the giant South African arms purchases of the late 1990s have created 28,000 direct jobs, claims the country’s government. Even if true, it is well below the 65,000 first envisaged. India’s auditor-general recently concluded that some offsets have produced no value for the country.

Judging performance is hard because of a lack of openness. Asked for confirmation of the fate of the shrimp farm, the Saudi offset authority said it kept “minimum information” on projects after their founding and suggested contacting its commercial backers. Raytheon declined to comment and suggested contacting the Saudis. DevCorp, another backer, did not respond. A study published in February by Transparency International, an anti-graft group, found that a third of governments that use offsets neither audit them nor impose due-diligence requirements on contractors.

Worse, accounting rulemakers have failed to impose any requirement to disclose offset liabilities. Companies can thus choose how, or whether, to put them on the balance-sheet. Defence firms have lobbied successfully for offsets to remain classified as “proprietary”, so they do not have to disclose their obligations. In some ways things have got worse: the Commerce Department’s annual report on American contractors’ offsets no longer even breaks out the numbers country-by-country.

This murkiness makes it hard to determine who really pays for offsets. On the face of it, the defence companies do. But Shana Marshall, an offsets-watcher at George Washington University, believes that they build the cost into their bids. Politicians and officials in procuring countries know that they are paying the bill through padded prices, but they accept this because offsets give them some grand projects to trumpet and sometimes provide palm-greasing opportunities.

A study in Belgium found that the country ended up paying 20-30% more for military gear when offsets were factored in. If the costs are largely borne by taxpayers, the benefits accrue to individuals and institutions chosen by the procuring government. This make offsets a good way to conceal delivery of public subsidies to interest groups, according to Ms Marshall.

A number of deals have been exposed as, or are suspected of being, corrupt. A commission has been set up to look into South African contracts dating back to 1999; the government has already conceded that offset credits changed hands at inflated prices. Since 2006 prosecutors in Portugal have been investigating offsets connected with a €1 billion ($1.3 billion) submarine contract with Germany’s Ferrostaal, HDW and ThyssenKrupp. Three Ferrostaal board members and seven Portuguese businessmen are on trial, charged with fraud and falsifying documents.

EADS, a large European contractor, is facing multiple inquiries over its sale of 15 Eurofighter planes to Austria. Prosecutors in Vienna and Munich are looking into allegations that millions of euros in kickbacks flowed through a web of offshore firms and side-deals, linked to offset agreements worth €3.5 billion, twice the value of the main contract. (In other words, EADS was supposed to generate €2 of business for Austrian firms for every euro it received for the planes—an unusually high ratio even in fiercely bid contracts.) Tom Enders, EADS’s chief executive, told Der Spiegel, a German magazine, that he “knew nothing about the shadowy world of dubious firms allegedly behind this.” The company says it is co-operating fully with prosecutors and that an internal investigation has so far found no evidence of punishable activity.

Prosecutors are also looking into whether AgustaWestland, part of Finmeccanica, an Italian defence firm, paid bribes to secure the sale of 12 helicopters to India in 2010. Finmeccanica’s former chief executive and the former head of AgustaWestland are due to go on trial next month. According to Italian court filings, suspicious payments allegedly flowed through a sham offset contract for software with help from a Swiss-based consultant. The helicopter-maker and the charged individuals deny wrongdoing.

Industry figures point out that all but the Indian case are at least five years old. They argue that corruption is harder to get away with today because of stricter anti-bribery laws and enforcement in America and Europe. Companies’ general counsels pay much more attention to offsets than they did a decade ago, says Grant Rogan, the head of Blenheim Capital.

Even if graft really is on the wane, offsets’ complexities make it hard to measure the true cost of defence deals. Procuring governments may apply generous “multipliers” to give extra credit to projects they deem exceptionally beneficial, especially if they are keen to buy the kit in question. As a result, defence contractors often find their liabilities turn out to be a lot less than their nominal obligations. A $5 billion sale of military kit might come with, say, $4 billion of gross offset requirements, but after multipliers it might only cost $500m to fulfil. A book on the arms trade, “The Shadow World”, by Andrew Feinstein, describes a contract Saab won in South Africa: to receive more than $200m in credits all the planemaker was required to do, the book says, was to spend $3m upgrading pools in Port Elizabeth and marketing the town to Swedish tourists. Saab says the tourism project cost much more, and suggested that it was up to the authorities to decide what value they put on what it achieved.

This sleight-of-hand helps to explain why industry executives are better disposed towards offsets in private than in public, says Ms Marshall. They say they could happily live without them, but they do not lobby to have them banned. Indeed, some big contractors see their ability to craft a package of attractive offsets as a “source of competitive advantage”, as Boeing’s boss, Jim McNerney, puts it.

The largest such firms will employ dozens of offset specialists to give them an edge in bidding. Lockheed, another American contractor, has about 40. As long ago as 2005 the firm was touting its leadership in offsets to win Thai contracts, according to a leaked diplomatic cable.

A downside for the companies is that dealing with national offset agencies can be frustrating. And though the companies’ offset liabilities are smaller in reality than on paper, they can still be daunting: one American contractor, for instance, has $10 billion of nominal obligations in a single Gulf state that will cost $1 billion-2 billion to fulfil, according to a consultant (who will not say which firm or country).

These liabilities will grow as purchasing countries become stricter in applying non-performance penalties, which in the past were easily rolled over. More countries are asking firms to put up performance bonds (which do have to go on the balance-sheet). These can be reduced over time as obligations are fulfilled. In some countries, contractors with good records can get away with a letter of guarantee instead, avoiding having to record a liability.

How long can the offsets boom last? Some analysts think they will eventually peak as developing countries become more self-sufficient in defence equipment. But in the shorter term, their growth will be fuelled by American and European contractors’ intensifying efforts to sell outside their shrinking home markets, to big developing countries whose defence budgets are growing.

Furthermore, governments are requiring offsets on ever smaller contracts, says Jon Barney of Avascent. Remarkably, offsets are now said to be the main criterion in contract evaluation in Turkey and some Asian countries—more important than the price or the technical capability of the defence equipment itself. Offsets may be little-noticed side deals, negotiated in the shadows, but when it comes to weighing up bids they are at the front of decision-makers’ minds.