JSF-related contracts for Dutch aerospace companies
The fact that the Netherlands is a partner in the JSF programme gives Dutch aerospace companies an opportunity to play a role in the development, production and maintenance of the JSF. But how can Dutch companies secure JSF-related contracts, and how much are such contracts actually worth?
Best value
Partner countries do their best to ensure that their own aerospace companies are awarded JSF-related contracts. This works on the ‘best value’ principle, i.e. price and quality are the key competitive criteria. The three principal contractors, viz. Lockheed Martin, Pratt & Whitney and Northrop Grumman, take best value as the basis on which they decide which industrial companies in the partner countries should be awarded JSF-related contracts. This is not generally the case with other projects involving the procurement of defence materiel, in which purchasing countries are awarded what are known as ‘compensation orders’. In other words, orders are awarded to Dutch companies by the country supplying the materiel in question. These compensation orders are agreed at the time when the contract for the supply of the defence materiel is signed. For example, if the Dutch government agrees to buy a number of tanks from Germany, the German government is then obliged to ensure that German companies place orders with Dutch companies to a value representing a given percentage of the price of the tanks.
The way in which the Dutch government arranges compensation orders is worked out in the Industrial Participation Policy from the Ministry of Economic Affairs and Climate Policy.
JSF-related orders for Dutch companies
The Ministry of Economic Affairs and Climate Policy keeps a record of Dutch companies that have been awarded JSF-related contracts. Known as the ‘JSF thermometer’, this document shows all current and likely future orders, quotations and long-term contracts, as well as potential opportunities for the future. The Minister of Economic Affairs and Climate Policy uses the information in the JSF thermometer as input for the progress reports on the replacement of the F-16 and the acquisition of the JSF. These progress reports also indicate how many contractually binding orders have been signed. Apart from stating the value of the contracts, the JSF thermometer also indicates how many orders involve development work and how many production work. This is an important distinction, as companies are not required to pay any remittances in respect of development work.
Table in progress report
The Minister of Economic Affairs and Climate Policy reached an agreement with the Lower House of the Dutch parliament in 2014, to the effect that a table stating the value of current contracts should be included in the progress report published in September (of the year after the contract year). This has to do with the fact that the information received from Dutch aerospace companies has not yet been audited at the time when the March progress report is published. In addition, since the publication of the September 2015 progress report, the Minister has also made a distinction between orders that have actually been placed and long-term framework contracts. We have already made clear in the audit reports we have published since 2009 that not all orders quoted in the progress reports are firm orders. In the case of long-term framework contracts, it is a matter of waiting to see whether these actually result in any orders.
Value of orders for Dutch industry
The following graph shows the value of JSF-related orders for Dutch industry from year to year. The blue section (SDD) refers to development work, while the red section (LRIP) refers to production.
Framework contracts
Orders for Dutch aerospace companies are based on contracts with a duration of no more than one year. This is because the principal contractors, i.e. Lockheed Martin, Pratt & Whitney and Northrop Grumman, also work with one-year contracts. As long as the JSF is not in full production, the US administration only awards these companies contracts for the production of a single series of JSF aircraft.
The problem with one-year contracts is that the companies who are required to execute the orders have to invest large amounts of money, for example in staff and equipment. This is why the principal contractors have signed framework contracts with their subcontractors (including Dutch companies) stating that, in principle, orders for subsequent series will be placed with the same subcontractors. It is important to bear in mind, however, that these framework contracts are not legally binding. If a Dutch company can no longer offer the best terms or if there are fewer aircraft in the next series, the principal contractor may, if it so wishes, decide not to make use of the Dutch company. In other words, a framework contract does not offer any guarantees.