KIVI position paper in response to the Defence Paper 2022 and the upcoming decision on replacement of submarines and frigates for the Royal Netherlands Navy
Utility and necessity of naval construction in the Netherlands
This Position Paper has been prepared by our Defence and Security Department (DV) in cooperation with the Council for Science, Technology and Society (RWTM). The content covers technological or related aspects only.
Download a PDF of this position paper here
SUMMARY
Defence policy demands a technologically advanced armed force, with innovation being one of its spearheads. Its aim is to achieve effective strike power to win. The European Commission's Strategic Compass also demands, among other things, "high-end naval platforms...with next generation systems full of disruptive and other innovative technologies".
This challenge requires a strong European naval construction sector, with a very good connection to innovation in maritime and military technology. The Netherlands has such a sector and should retain it.
Retained, on the one hand because this is the only sector where the Netherlands is able to develop and build complete military systems. On the other hand, because the Dutch construction method is demonstrably cheaper and more innovative than that of our allies. Moreover, launching customership gives a clear boost to our national economy. The cost-benefit analysis should also include the value of safety.
However, this requires something. To start with, a self-creating eco-system (of industry, government and knowledge institutes), which requires the design and integration knowledge of subsystems. To cope with strong competition with industry in other European countries, a demonstrable and clear confidence of the national government in the sector is required.
Moreover, as long as the Netherlands is still responsible for the requirement definition, procurement and management of naval vessels, it is very effective to be able to give direction to innovation, design, integration, construction and maintenance yourself. This is also demonstrably 30% cheaper and creates a technological lead over other countries in the EU and NATO.
This position paper therefore unequivocally advocates maintaining and, where necessary, strengthening the naval construction sector in the Netherlands. Particularly the "system design and integration" aspect, which does not differ that much in character whether it concerns frigates, minehunters or submarines. The question arises here whether the assumption has been correct, that Dutch industry can no longer act as a prime contractor for design and construction of submarines.
The Netherlands has excelled in various forms of naval construction for many years and should form a European naval construction "valley", where naval ships are developed, built and equipped with systems and subsystems from various European and NATO countries.
Finally, we note the other forms of financing common in the economy for large capital investments. It would be advisable to explore the same for large defence projects. Then other important projects would also not have to be immediately postponed when slightly more money is needed, as is happening again now with the replacement of submarines.
The paper highlights a large number of relevant sub-aspects and provides recommendations. The most important are the preservation of knowledge and expertise, intensive involvement of the Royal Navy, an experienced national shipyard and the realisation that naval ships are never serial products.
Some aspects, such as the importance of knowledge, recur in several paragraphs for the sake of completeness and clarity.
I. INTRODUCTION
Military assets in the maritime domain are important for the protection of maritime supply lines and commercial routes by sea and ships under the Dutch flag. Both aspects have great relevance to the size and nature of naval forces. Now and in the future.
Protecting the external borders and territorial integrity of the Kingdom (including the Caribbean parts), NATO and the EU is essential in this respect. The importance of this first main task of Defence has been greatly increased by Russia's war in Ukraine and the developing threat from China. At sea, that task includes deterrence and missile defence.
In the third main task lies the protection of national vital infrastructure, such as the port of Rotterdam and underwater cable networks, gas and oil pipelines, wind farms, drilling and production platforms for oil and gas extraction.
These maritime military capabilities require the construction and maintenance of ships. What is required is that they fully meet current and future military requirements and are as technically advanced as possible. after all, they must be able to be deployed operationally for at least 30 years after delivery. "In world history, wars are usually won with innovation," David van Weel, Assistant Secretary General of NATO told Elsevier recently.
With outdated systems, you lose the war, was proven again recently. In the conflict between Russia and Ukraine, the Russian flagship Moskva was sunk with modern missiles. The 40-year-old ship had neither an adequate self-defence system, nor the required level of platform system automation, to fight fire and explosion effectively.
Also, a valuable lesson from the Russian invasion is that Ukraine's lack of an effective navy led to rapid cut-off of supplies of aid by sea. Ukraine possessed only 1 frigate and no submarines.
The requirements of various European Union and NATO member states for these assets are different. This is because national units must be well matched to the expected deployment. Global or local, in ice or in the tropics, independent or protected by other units, high or low on the violence spectrum. A standard ship that can do everything is too big and too costly. Therefore, each navy looks for an optimum that suits its own objectives. This saves high costs for unused parts and makes the ships more effective. Especially in shipbuilding, this has advantages because series are very small. Economies of scale can only be achieved by standardising subsystems. For example, radars, cannons, ammunition and missiles, as well as many auxiliary systems, pumps, propulsion components, etc., etc., etc.. On every ship, there are hundreds of them! Shipbuilding by assembling and integrating more-or-less standard components into a complete, complex maritime capability is called "self-creation".
Shipbuilding is self-creating if the client, the building yard and the supplying companies are able to design, build, deliver and maintain the ship during its lifetime themselves. In doing so, the client can tailor the design and the subsystems used in it precisely to military requirements. We call this Asynchronous Systems Development. As long as all European countries equip their own armed forces, those requirements will vary from country to country. For example, the Netherlands requires the smallest possible crew, far-reaching automation to match the rest of the fleet, and on-board systems and armament tailored to the expected deployment. If acquisition were more community-based in the future, differences in requirements would remain. A naval ship capable of performing every conceivable task would become too big, too heavy and too expensive.
Self-creating shipbuilding requires a different approach than a one-off order through competitive tendering. Whereas in a tender, all requirements are specified in detail by the client in advance, in self-creating construction, the client and contractor work closely together to match requirements and technical possibilities as closely as possible. A methodology that is successfully followed in many complex and unique development and construction processes worldwide and can prevent cost overruns.
In addition to the naval design of the hull, this requires the definition and technical integration of the ship's (sub-)systems required for propulsion and weapon systems. The design must be optimally aligned with operational requirements, NATO and national doctrines, current and future technical capabilities and also in the least costly way possible. To make that possible, detailed knowledge of all those hundreds of (sub)systems and their interrelationships is required. Over the past hundreds of years, the Netherlands has led the way in top technical/operational designs, which have also been very cost-effective.
Sea-going vessels are almost always unique or small series. Series size has relatively little impact on costs. Precise matching of specific requirements to technical capabilities makes such a unique product better and cheaper than foreign ships. Moreover, it provides the politically desired strategic autonomy. Not only for construction, but also for maintenance and the knowledge required for this.
II. ANALYSIS
In the paragraphs below, a large number of independent aspects of naval construction, the knowledge required for it, technology, procurement methods policy aspects, etc., etc., are covered. These lead to conclusions and recommendations in Chapter III.
For completeness and coherence, some sub-aspects are covered in several paragraphs.
II.1 Cheaper and better
Several studies have shown that self-creating naval construction leads to a cheaper and better product. See, among others, study commissioned by MINEZK of June 2018: 'Economic effects naval construction cluster'. Around 30% cheaper because risks are partly borne by the client. The client can bear those risks because they are also heavily involved in the design, have full insight into it and can match the design to technical possibilities.
Self-creating construction also produces a better product, because the client's requirements can be translated more effectively and accurately into an affordable design. Especially when designing complex weapon systems such as naval ships, it is very important to precisely match the hundreds of subsystems.
This effect also occurs in the longer term. The design can be precisely tailored to the Royal Navy's operations. This allows, among other things, higher availability and the ability to sail with a smaller crew.
The Netherlands has built the bulk of its current naval vessels in this way in cooperation with industry (both OEM and SMEs), knowledge institutes and Defence. Within radar development, this has led to the Netherlands Radarland partnership, which has been successful for 20 years. In this partnership, technological opportunities for further development of systems are examined and it is determined in consultation how this development can be realised and financed. Sometimes this involves a company's own investments, sometimes government target funding for TNO and sometimes a development order from Defence or a foreign client.
For platform systems, the Dutch Naval Design (DND) partnership was established last year with the same aim. As medium-sized and small companies are more often active in platform systems than in radar systems, the focus of DND is more on SMEs.
II.2. Competitive tendering and shelf-buying
In regular competitive tendering, all requirements are set in advance by the client. This is difficult if the desired product is complex and technological developments are desired to realise the product. For very complex products, the methodology of "competitive dialogue" is therefore sometimes used. According to this method, several companies work out the requirements and wishes in consultation with the client, after which one of the participating companies is chosen as supplier through a competitive tender. Usually for limited payment. Reasonable for the work done. See also the Pianoo site. Rijkswaterstaat often uses this method. For example, for complex tunnel sections.
In this method, it is not easy to include completely new technology in the project, the possibilities and limitations of which are still unknown during the "dialogue phase". After all, the companies involved cannot yet guarantee specifications or calculate a reasonable price for this. Often, these new developments are so competition-sensitive that even the concept cannot be shared with competitors during the dialogue phase, and therefore cannot be included in the dialogue.
For a naval vessel, and certainly a submarine as its most complex form, those top innovations are precisely what are of ultimate importance. David van Weel (Assistant Secretary General at NATO) said in an interview with Elseviers Weekblad: "In world history, wars are usually won by innovations. Whether it's by hiding people in the Trojan horse, using gunpowder for the first time, deploying guns and later tanks - that's how it works." After 10-15 years of development and construction of a ship, it has to rely on those innovations operationally for at least 30 years.
So buy-from-the-shelf, a policy line of the Ministry of Defence, is usually not possible for naval ships. This is partly because naval vessels are always unique and partly because application of the latest innovations is required to keep the generally very complex naval vessels effectively deployable 30 years after delivery. After all, naval ships are one of the most complex engineering systems. More complex than complicated aircraft, such as the Airbus A380.
II.3. Self-creating procurement
In self-creating construction, the client and contractor work closely together to best align requirements and technical capabilities. Ideas can be shared and opportunities to apply them discussed. This methodology is often followed worldwide in very complex and unique development and construction processes.
This methodology does require a different contractual relationship, as it is impossible for a client to draw up a fully detailed programme of requirements in advance if major innovations are required. Nor is it possible for the industry to draw up a binding technical offer, which cannot be changed. The construction site can execute the order only in cooperation with the client. It can be adjusted by mutual agreement on the basis of clear technical arguments.
Another price control mechanism is also necessary. Open book calculation is the best known of these. In this, the contractor provides full insight into its costs, the client can adjust where necessary and the contractor is awarded a pre-negotiated reasonable profit. The US Pentagon also uses similar systematics for development projects whose requirements cannot be properly determined in advance.
Here, the client bears greater responsibility and risk. This is acceptable because it also has the power, insight and opportunities to make timely adjustments. This does require that both the client and the executor have in-depth technical knowledge of all technical aspects of the vessels.
II.4. National strategic autonomy
The Dutch government wishes to stand to some extent on its own feet and not to depend too much on foreign countries. This became clear again in the corona crisis. Supplies from China were suddenly uncertain and in the early stages even our European neighbours closed their borders.
The armed forces must therefore have access to military knowledge, skills and resources (e.g. vessels), preferably without depending on foreign manufacturers and suppliers. This means that the Ministry of Defence must be able to (have) its military vessels developed, produced and maintained at an innovative, autonomous and reliable maritime sector in the Netherlands.
Defence and the Royal Netherlands Navy have been very successful with this in recent decades, as evidenced by the international appreciation in NATO and the interest in Dutch vessels on the second-hand market. S.G. Nooteboom' s 2001 book Deugdelijke Schepen over de Marinescheepsbouw van 1945-1995 discusses this in detail.
It is also important to maintain control over intellectual property rights, knowledge, data and for fleet maintenance. With ownership of equipment usage data, Defence is better able to organise this maintenance 'smartly' (Smart maintenance). It is also more possible to reach agreements nationally than with a foreign party, which, as a rule, always gives priority to its own national Defence.
Strategic autonomy is thus relevant for ship design, construction, deployment and maintenance. Until the beginning of the last century, it was self-evident for almost all armed forces assets. Ever more rapidly developing technology, more complex systems and smaller numbers have made it impossible for flying and land-based systems for decades. These can be built more effectively in larger series. In Europe, the United States or elsewhere.
Even for naval ships, this strategic autonomy is still limited in the 21st century. Even in the last century, a large number of subsystems came from abroad. Think of gas turbines, cannons, missiles, etc. For naval ships, however, it is the cohesion of all these systems and effective integration that determines effectiveness. Because the Netherlands masters that aspect very well, it can give direction to new developments.
In this respect, the Royal Netherlands Navy's software house, established in the 1970s, has proved essential. The in-house development of operational software brings individual subsystems and operational deployment together into a fully coordinated system. This makes a good naval ship a winner.
II.5. Cooperation in Europe
Self-creating naval construction in the Netherlands does not stand in the way of cooperation within Europe. Because Dutch naval vessels are better and cheaper, they are also interesting products for export. Naval construction in southern European countries can only be competitive against Dutch ships through state support.
Without such support, our industry is perfectly capable of winning tenders, as Damen Naval demonstrated two years ago by winning the contract for the four (possibly now six) large German naval ships (MKS180 / F126). This design includes many aspects that emerged from Dutch national partnerships. Among others, Thales Netherlands supplies a large part of the radar systems.
To win tenders, however, in the defence sector it is necessary that the national defence ministry also believes in the product and proves it by buying it. In itself, this is nothing special, because in other sectors of the economy too, investors/buyers want to be sure that the product is suitable, no matter how competitive the manufacturer thinks it is. So it makes sense for potential clients to turn away from a supplier if the largest customer or investor pulls out in whole or in part. Whatever the political reasons for this.
II.6. Industrial participation
In markets where there is no level playing field within Europe or for sectors that are important for maintaining a certain degree of strategic independence at the sovereign Member State level, customisation is sometimes needed. See also the MINEZK parliamentary letter published on 8 July 2022 Making a difference with strategic and green industrial policy, page 31.
When resources for the armed forces were procured abroad, compensation was therefore demanded since the 1960s. The contractor had to purchase products from Dutch industry for the same amount. From the supply of flower bulbs (which is why Washington DC is now full of tulips in spring), this grew step by step to technological cooperation within the project and is now called industrial participation.
A common method is that products are produced and sometimes even partially developed in the country of delivery. Instead of concentration in the already fragmented defence market, this leads to even more fragmentation in the defence industry. Scania vehicles are a good example, but also the construction of Damen Naval-designed frigates by a yard in Germany. Following the war in Ukraine, Denmark also wants to reactivate its naval construction. See Marineschepen.nl on 18 August 2022.
II.7. European naval construction
In the long term, the effect of further fragmentation of the defence industry does not seem to be the best solution for Europe. Concentration into a monopolist is undesirable, but three or four major OEMs within Europe in a technology area seems sensible for a balanced sector. Together with supply industry and investors, this could lead to a number of clusters, or "valleys", in Europe. For example, aircraft construction in France and Sweden, land vehicles in Germany, Italy and Turkey, among others, etc.
A naval construction valley would be an appropriate contribution by the Netherlands to European Defence. But in addition, France, Germany and Italy could also form such a valley.
There are now about 7 relevant naval yards in Europe. TKMS (DE), Luerssen (DE), Naval group (FR), Fincantieri (IT), Navantia (SP), Saab Kockums (SE) and Damen Naval (NL). This is already far fewer than the 30 yards that built a wide variety of naval vessels in the 1980s, yet they are not running at full capacity. In addition, some EU member states have ambitions to develop or strengthen a portfolio of naval ships. To do so, they want to reactivate old yards or build new ones (Denmark, among others). As mentioned under "industrial participation", the sector is growing as a result, even though there is already overcapacity. So in the coming decades, this will inevitably lead to a shake-out in the naval shipbuilding sector. Fewer yards, producing more efficiently and delivering better ships. See, among others, 'There's just ten years to go for shipbuilding in Europe' in SWZ Maritime of 8 July 2022.
Naval construction is the only part of the Dutch defence sector that can competitively develop, build, supply and maintain complete weapon systems. In order to make a serious contribution to European defence, it is therefore advisable to maintain this sector specifically. If indeed a small number of naval construction "valleys" emerge in Europe, the Netherlands can excel in this and better export to countries that cannot build advanced naval ships themselves.
II.8. Technological knowledge and innovation
If the line of this argument is followed, the knowledge, skills and capacity are needed in the Netherlands to realise this. Both at the knowledge institutes TNO and MARIN, industry and the ministry.
All of these are currently top-level and internationally leading. This is also not surprising, as it builds on the ecosystem that has been growing in this sector for over five hundred years(since 1488) and the need in recent decades to build advanced ships at low cost. To remain operationally relevant, this involves regular anticipation of future innovations, the technical capabilities and limitations of which are not yet fully known at the time of commissioning.
The necessary knowledge to make a (unique) ship are shipbuilding knowledge, technology and the ability to test it in each unique case. New challenges, such as emission-free sailing, labour-extensive or even crewless sailing, new weapon systems, such as high-energy lasers, advanced ship forms and safe sailing are among them. Both on the water and underwater. MARIN's empirical testing methodologies, modelling & simulations are world-leading. MARIN was co-founded by the Royal Netherlands Navy in 1932 for this purpose.
The necessary knowledge to turn a ship into a naval vessel concerns (1) deployment doctrines, (2) technological possibilities to improve them, (3) the international market of subsystems and the possibility to influence them, (4) mutual integration of (sub)systems into an effective working ship. This requires having capabilities for applied scientific research, test and trial laboratories. TNO, as a government organisation established by law in 1932, is crucial in this respect. In the field of communication, sensor and weapon systems, even more development is needed than for the ship's platform. For example, radar and sonar technology, cannons, missiles, fire control and command and control. Also, the need for high-speed data links between ships and with shore-based command centres is still growing all the time.
This new technology has to be integrated into a ship by the construction yard. Foreign shipyards tend to look at their own portfolio for innovative applications and seek suppliers in their own country. In doing so, they are often supported by the national government. When naval ships are purchased abroad, Dutch knowledge and innovation is applied less or not at all, which means that the Royal Netherlands Navy also loses insight into the latest developments. This is noticeable internationally with all navies no longer building their own ships.
Purchasing naval vessels abroad also erodes the Dutch knowledge position for two other reasons.
On the one hand, because risk-averse tendering means suppliers tend to use proven technology. This is by definition outdated (because already proven on existing ships) and therefore does not contribute to knowledge development and the need for innovative applications.
On the other hand, it also erodes the knowledge position if the supplier does use advanced technology. It is then always protected by the supplying company or by the country where it is located.
Despite political or legal promises of knowledge sharing, reality is different: secret knowledge and know-how remains the developer's secret as long as it can give a competitive advantage.
II.9. Technology
The Netherlands has been at the forefront of technological developments in the shipbuilding field for many centuries. In the past century, a few significant developments stand out, which have been adopted worldwide: construction of the first submarine by the Scheldewerf in Vlissingen (1906), integrated computer-controlled command centre on the GW frigates (1980), development of special active rudder systems for the Walrus class and the M frigates (1980), development goalkeeper rapid-fire weapon system against air targets (1986), development phased array radar system APAR (1993). In these, and many other cases, the Netherlands was 10-15 years ahead of technical developments in the rest of the world. The years mentioned and are indicative, as the start of development and delivery are sometimes 10-15 years apart.
In recent years, this lead has diminished. This was mainly caused by cutbacks at Defence. Applied technology development at TNO was halved, the CODEMA grant for product development from the Ministry of Economic Affairs was terminated. Acquisition of new systems stagnated, as no new ships were ordered for 15 years.
This change has become so interwoven in Defence policy in recent years that Minister Hennis indicated in the DMP-D for the replacement of the Walrus class, that Dutch industry should prepare to become a supplier of components for foreign shipyards.
That would mean the end of the lead described above. Suppliers produce products developed by the client. In jargon, this is called "build to spec". In the process, they do not develop their own knowledge for further development and innovation. Clients or their governments place even stronger restrictions on this for defence applications than in other sectors of the economy. Especially when it comes to system knowledge. As a pregnant example, compare the technology transfer and export restrictions imposed by the US on F-35-related technology.
Technologies for different types of naval vessels are not completely different. Obviously, the hulls of submarines, frigates and minehunters are different, but many of the subsystems are very similar or even identical.
Meanwhile, technological development continues to accelerate. Energy transition and artificial intelligence are the basis for a whole new generation of naval vessels. Fossil-free and autonomously sailing. The Netherlands is not contributing significantly to this, instead opting policy-wise for traditional ship models and outsourcing development to foreign shipyards. This is very disappointing because the Netherlands still has a better knowledge position than friendly countries today.
We believe that the government should not be tempted to permanently give up our unique position in the naval construction field. For that, this knowledge and expertise is too important for the Dutch economy. There are many applications in civilian ships, but if Defence opts for foreign purchases, the direct and indirect spin-off to that important civilian market also disappears.
Therefore, in the coming years much more attention should be paid to energy transition for naval construction, artificial intelligence for autonomous sailing and laser weapons, among others. This has an impact on complete ship design. See e.g. the plans for autonomous sailing, laser weapons for naval vessels and emission reduction in the US.
To improve and accelerate this process, this would require looking holistically at naval construction innovation. Not only technical innovation, but also social innovation (personnel-extensive) and financial innovation (no longer fully dependent on subsidies). In modern society, major innovations can only be achieved through intensive cooperation between government and society. See also the KIVI technology lecture 2022 by shipbuilder Thecla Bodewes on 16 Sep 2022.
II.10. Technical personnel
The Netherlands profiles itself internationally as a knowledge country. The broad top sector policy and the international ambitions of the technical universities are examples of activities to be at the forefront of knowledge development in all possible technology fields. Except for Defence, as more and more standard products are bought "off the shelf" for that purpose. Products developed with knowledge from other countries and used by the Dutch armed forces. There is no top sector for defence technology.
However, as indicated, in-depth knowledge is urgently needed to translate specific operational requirements into technology and for integration of subsystems in a complete naval ship. Knowledge transfer, as advocated in industrial participation, is not sufficient for this purpose. Only through in-house activities in research and development will the required knowledge be built up and secured.
Years of cutbacks have seriously eroded the knowledge position of the DMO, TNO and companies. For meaningful control of the acquisition process, the construction period and the maintenance phase of naval ships, this is insufficient and leads to further decay of the Dutch position in Europe and NATO. See also Progress Report on replacement of submarine capacity, Parliamentary paper 34225 no 35 dated 1 April 2022.
II.11. Economic effects
The need for this knowledge was laid down in 2007, 2013 and most recently in 2018 by the Ministries of Defence and Economic Affairs in the Defence Industry Strategy (DIS). This describes which knowledge, technology and industry should be anchored nationally as much as possible for the Armed Forces to operate with a certain degree of autonomy. In addition to the importance of a certain degree of strategic autonomy, the DIS underlines on page 29 that the innovative character gives an important contribution to the earning capacity of the Netherlands.
For example, Damen Schelde in Vlissingen has developed corvettes for and delivered them to foreign navies with an export value of about 3 billion Euros, using the knowledge gathered on the basis of Dutch orders. The knowledge gained also enables the sector to be competitive in the civilian domain. E.g. is detailed in the report "Economic effects naval construction cluster" mentioned earlier in this paper.
II.12. Defence policy
In the previous century, the Royal Netherlands Navy had one or more house suppliers of naval ships in the Netherlands, a new design was started about every year and ships were also usually delivered every year. At the beginning of the 21st century, during the period of austerity, quantity was cut back, causing the number of ships to decline and the average age of ships to increase. In the DMP-B for the submarine replacement , the government stated on page 11 that there will be a consolidation of naval construction in Europe and that the Dutch naval sector should prepare to become a subcontractor to foreign yards.
This does a great disservice to the qualities and importance of naval construction in the Netherlands and shows a lack of understanding of this special sector. Dutch naval construction excels in integrating third-party systems and is much less unique as a parts supplier. See also Financial Dagblad on 4 Oct 2022.
Not the industry interest, but much more the defence interest is served by keeping precisely this sector in the Netherlands. As a result, Dutch naval vessels better fit military and political requirements and are also much cheaper. It is also important for the Royal Netherlands Navy to build on the technological knowledge gained during construction in the operational phase. If naval construction becomes more community-based in Europe in the future, precisely this sector could play a powerful role within the overall European defence industry.
The premise that the Netherlands can no longer be a designer and main contractor in the construction of submarines has been adopted as an axiom by the government and substantiated mainly on the basis of the RDM bankruptcy. However, as indicated earlier, naval construction is mainly integration of hundreds of systems and subsystems from manufacturers around the world. For frigates, for example, the hull comes from Romania, propulsion from the UK, radar from Hengelo, cannons from Italy and missiles from the US. However, integration and software development is carried out in the Netherlands. It is precisely in the system design and integration required for this that the strength of the Dutch sector lies. There are more similarities than differences between frigates, submarines and smaller ships. To a large extent, integration is no different for submarines than for frigates, minehunters and other naval vessels.
We also foresee a consolidation of naval construction. This consolidation is likely to lead organically or directed to a number of clusters (or valleys) in Europe. Contrary to the government's view, this should be a reason to encourage that very sector to stay in the Netherlands. This is precisely the sector in which the Netherlands has been strong for centuries. Not only in frigates and support ships, but also in minehunters and submarines.
II.13. Financing
Defence always pays large investments in cash during construction or on delivery. In the rest of the economy, this hardly happens anymore. Airlines lease aircraft. Hospitals lease MRI scanners. The Ministry of V&W builds tunnels and highways using bank financing.
Pay-for-use (including long-term continuous use) has become an integral part of the economy. It is cheaper and more effective. By the way, this need not affect ownership. After all, large weapon systems can never be owned by a private company or investor.
In many cases, pay-for-use is also possible in Defence. A €4 billion investment in naval ships, for example, would then require less than €200 million a year. This is more in line with the state budget, which has no capital service, but relies entirely on annual expenditure. Properly worked out, it could also be cheaper than financing via a government loan. Other important projects would then also not have to be immediately postponed if slightly more money is needed, as is happening again now with the replacement of submarines.
A pay-for-use system also has the advantage of making it easier to replace ships regularly, so that the armed forces always have the best equipment available. Ships are really old after 30 years. Even after an extensive conservation programme. It is better to sell them in good time. Preferably at a time when less wealthy countries are still interested in them.
After all, in budgetary terms, pay-for-use can maintain a stable cash flow while new ships are built, replacing the old ones.
Regular renewal and effective second-hand sales not only keep defence equipment up-to-date, but also create work and turnover in the Dutch economy.
III. CONCLUSIONS AND RECOMMENDATIONS
- Military assets in the maritime domain are important for all three main tasks of Defence. Russia's war in Ukraine and China's evolving threat has greatly enhanced that importance. Winning a conflict requires advanced assets to match the specific military requirements. The European Commission's strategic compass and several national policy documents are very clear on this.
The defence interest in it is precisely to preserve and strengthen the naval construction sector in the Netherlands. Dutch naval vessels are cheaper and better. This applies not only to frigates but to naval construction in general.
It is recommended to follow EU and national policy and strive for a strong Dutch naval construction sector, building "high-end naval platforms...with next generation systems full of disruptive and other innovative technologies" - Naval ships are always unique or part of a very small series. This certainly applies to naval vessels as well. Buying off the shelf is actually not possible and buying larger numbers does not lead to significant savings on the unit price, except for subsystems. Development in the Netherlands is demonstrably 30% cheaper and realises a technological lead over other countries in the EU and NATO. Moreover, ships can be optimised for national requirements, such as the smallest possible crew and good interoperability with other Dutch units.
It is recommended to keep design, integration and assembly national. This leads to a better product and lower costs. In doing so, it is realistic to realise that many subsystems will come from other European or friendly countries.
- It is important that new naval ships have the latest innovations. This is necessary to win a conflict and to keep the platforms effectively deployable 30 years after delivery, while the development and construction process also takes more than 10 years. Realising these assets requires knowledge and innovative strength. Naval ship development often anticipates future innovations, the technical capabilities and limitations of which are not yet fully known when the contract is awarded.
It is therefore recommended to design appropriate (innovative) procurement methods. In doing so, continuity of innovation and development should be a given, with sharp price and quality control.
- Technologically, breakthroughs in artificial intelligence (for autonomous sailing and weapon deployment), energy transition and laser weapons are to be expected in the coming years. These are developments that cannot be separated from social innovation to achieve the smallest possible crew.
To get a better fit with social and reciprocal technology developments, it merits exploring financial innovation as well. Other forms of financing can stimulate mutual use while placing less burden on the national budget.
It is recommended to pay much attention to these breakthrough technologies in order to excel in them (also) at the (sub)system level. A holistic approach is desirable here, so that the various elements of technical, social and financial innovation fit together - Military-strategic autonomy and economic value cannot be separated. Strategic autonomy also leads to economic value when building naval ships, and international security is ultimately no different from a vital societal and economic interest. When our Armed Forces cannot perform their tasks effectively, it has a direct impact on the functioning of our economy.
It is recommended to include the economic value of international security in the cost-benefit analysis for the nature, number and capabilities of naval vessels.
- National strategic autonomy is increasingly difficult to achieve due to globally rapid technological developments. For naval vessels, many subsystems are only available on the international market. As system cohesion and integration is the most important design aspect, national strategic autonomy for naval construction is still possible. The DMO and the Royal Navy's own software house have proved essential in this respect.
It is recommended to carefully monitor knowledge of the international market for subsystems and possible alternatives. In doing so, consider whether vital systems should be developed and produced from NATO countries, EU countries or nationally. However, for all (sub)systems, national development will no longer be possible - If a national government purchases naval vessels abroad, it undermines confidence in the quality of the national product. This significantly limits export opportunities.
It is recommended to have a policy that reflects a clear confidence in one's own industry. Not only at the level of (sub)systems, but also at the level of complete ships - Industrial participation in procurement abroad strengthens the knowledge position in the Netherlands, but due to requirements of national production, results in further fragmentation of the European defence industry. This is not sustainable in the long run.
It is recommended to develop the industrial participation policy further, aiming to bundle knowledge in a few clusters or "valleys" in subfields of defence technology. In particular, the Netherlands should thereby strive to create a naval construction "valley".
- Naval ships are very large capital investments. It is economically unattractive and does not fit well into the Dutch budget system to pay for them in full before or upon delivery. This is also very unusual in the rest of the economy. Various forms of pay-for-use are the norm. This is often cheaper and more flexible than other forms of borrowed capital, such as a government loan. It also makes it easier to replace ships on a short-cycle basis, and other important projects do not have to be immediately postponed in the event of a minor setback.
It is recommended to investigate, with knowledge from the financial sector, to what extent pay-for-use is also possible in Defence.
- There are more similarities than differences between frigates, submarines, minehunters and smaller ships. In particular, the technical systems and the integration of these systems into a naval vessel have many similarities.
It is therefore recommended to investigate whether the assumption was correct, that the Dutch industry can no longer act as the main contractor for design and construction of submarines.
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The Hague, 30 September 2022
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Disclaimer: This position paper has been prepared by the subject department(s) listed therein in collaboration with the Council for Science, Technology and Society (RWTM). The facts and opinions given are based on open sources. This is not an official position of KIVI. The association accepts no liability for anything expressed in this position paper.
Photo: Ministry of Defence
