To cope with a looming €2.2bn hole in the 2015 budget and an expected total shortfall of €5.5bn to 2019, in February France’s chief of procurement, Laurent Collet-Billion, unveiled bold proposals to sell and lease back up to six Airbus A400M airlifters and two or three FREMM multipurpose frigates.
The move is aimed at providing a direct cash influx to defence coffers, while the long-term leasing arrangements with state-owned ‘special project companies’ will ensure that the capacity of French forces remains unaffected. Announcing the innovative solution to the finance gap, he warned that "unless we change our budget mindset, we’ll run straight into the budget wall."
As Europe’s austerity measures increasingly subordinate military budgets to fund domestic need and NATO Secretary General Jens Stoltenberg calls on members to honour their defence spending commitments, France may need to do some nifty financial foot-work to both side-step that wall and retain her global position.
April 2013’s French White Paper on Defence and National Security had charted the intended course for the future. Although some programmes, notably cyber-warfare, intelligence gathering and UAV acquisition, gained a boost, in general it heralded a regime of reduction, restructuring and asset ‘reclassification’ across the three services, including additional personnel cuts of 34,000 by 2019 and a budget restricted to 1.5% of GDP.
The final shape of the defence budget for the five year period 2014-2019 was supposedly set with its formal state approval in December 2013, but by May 2014 leaked documents emerged that revealed finance ministry plans to make even more swingeing cuts to funding.
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In a move unprecedented in modern times, the country’s four top military chiefs – army General Bertrand Ract-Madoux, navy Admiral Bernard Rogel, air force General Denis Mercier and joint chief-of-staff Pierre de Villiers- responded by threatening to resign en masse if any further cuts were made. Any new reductions to the budget, they cautioned, would leave France "unable to conduct new operations abroad" – at a time when just such interventions by French forces, particularly in Mali and the Central African Republic, had proven themselves so effective.
Fast forward to the 7 January 2015, however, and events first in the Rue Nicolas-Appert and then in the following days elsewhere across Paris, would see French plans in flux once again.
A week after brutal jihadist attacks left 17 people dead, in the light of what he described as an "exceptional situation", President Hollande promised a review of the personnel cuts in an address to the armed forces aboard the carrier Charles de Gaulle ahead of its deployment to the Arabian Gulf. French Defence Minister Jean-Yves Le Drian was to present a new proposal within the week that would review the reductions, but still take the tough economic climate into account, the president said.
The upshot of that saw Hollande axe 7,500 of those planned cuts during a high-level Defence Council meeting at which plans were also discussed to add 2,680 new counter-terrorism recruits over three years, with autumn’s official review of the military budget law being brought forward to the summer to account for the changes.
While additional funding was announced for those who will work under the auspices of the interior and justice ministries, none was forthcoming for the jobs expressly in defence, which François Cornut-Gentille, spokesperson on defence spending for the Finance Committee of the National Assembly described as "worrying".
The military budget for 2015 has been set at €31.4bn, with €2.4bn of that to be found from ‘exceptional receipts’ – external funding – and although government property sales are set to make a contribution to that total, it leaves a gap to of around €2.2bn be filled.
With staff costs enjoying a higher budgetary priority than equipment, where the extra money will have to come from appears clear, but freeing it up while also allowing the armed forces’ effectiveness to remain undiminished has driven a radical rethink of financing.
Special project companies
The recently unveiled ‘special project companies’ – entities owned and funded by the state, with a possible element of private sector holding – form a central plank in the plan, buying equipment from the government, and then leasing it back to the military, with around a 1% return on investment being anticipated. Using this kind of special purpose vehicle is commonplace in the commercial world, notably for civil aviation, but it represents a major departure for French defence strategy.
The state procurement agency, direction générale de l’armement (DGA), will define the terms of the lease and agree a mechanism for exiting the arrangements, aiming to have the first of these new companies in place by the beginning of July. According to Collet-Billon, with the French Government owning them 100%, at least initially, the effective state-to-state nature of the negotiations between DGA and the newly created entities should help make meeting this timetable possible.
As originally announced, Airbus A400Ms and FREMM frigates are intended to be the first assets transferred under the proposed mechanism, but ultimately a range of other types of equipment, including the C-295 light transport aircraft fleet and military helicopters, could be subject to sale-and-lease-back.
There are no reported plans, however, to extend it to direct combat assets, such as tanks or armoured personnel carriers.
Sales boost from military exports
Sales of a rather different kind have already helped to ease some of the pressure on the defence ministry, as military exports rose to levels not seen for more than five years, to top €8bn in 2014 – up more than €1.4bn on the previous year.
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That trend is expected to continue through 2015, particularly in the light of February’s announcement of a €5bn purchase of 24 Rafale aircraft and a FREMM frigate by Egypt – marking the first international sale of Dassault’s fighter, which has struggled to find its export market since winning a major contract with India in 2012 that has been on hold ever since. Expectations are high that Qatar will also place orders for the jet in the near future.
There has been speculation in France over whether these deals will be used to help sustain military capability, or simply fund what some see as the president’s costly ego-massaging foreign interventions.
Either way, with France consistently in the top five defence spenders in the world and one of the few NATO members to keep its military expenditure consistently at or around 2% of GDP, changing that budgetary mindset will not be easy. If France’s global influence begins to slip, there will be grumbles at home – but so will there be if austerity measures bite hard elsewhere in the country.
It is scarcely a new conundrum for any leader of France, however. As Napoleon put it, "the French complain of everything, and always." Only time will tell if they have cause.