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23 July 2024 (Tuesday)
Taiwan's Defense Procurement Dilemmas
A Democracy Rife With Corruption
By Wendell Minnick (Whiskey Mike) 顏文德
TAIPEI - Despite the common complaint, in my opinion, Taiwan’s Foreign Affairs and National Defense Committee is NOT the most corrupt and incompetent committee in Taiwan’s legislature (LY). With respect to corruption, the LY defense folks receive only a tiny piece of the pie.
Corruption inside the Taiwan government can be traced to the Ministry of Economic Affairs (MOEA) who manage the finances of arms deals. The LY has little oversight of the MOEA shenanigans.
Overall, Taiwan citizens and the military have become leery and weary of U.S. arms deals. Often complaining that the weapons are second-hand and pushed down their throats. The refurbished M1 A2T Abrams main battle tank is a case in point, as the U.S. is choking on them and must dispose of them via foreign friends.
Taiwan purchased 108 for $1.26 billion. The 66-ton Abrams are far too heavy for the east coast’s low wet lands and the 120mm gun will make no real difference over Taiwan’s current 108mm Patton tanks, which must now be retired. Additionally, the Honeywell AGT1500 turbine engine is another headache. Who can afford to put a helicopter engine in a tank? Well the U.S. had the bucks to do so, but for Taiwan to maintain these monsters it will cost a tremendous amount of money and training and fuel.
The Taiwanese have become so annoyed by US antics a best selling patch was released in 2022 explaining exactly what people think about American political stunts:
I am also annoyed by US naivety on arms sales to Taiwan.
The kickbacks are arranged via offsets to political party hacks, government offciials, and local sales agents.
But it is not that simple. It is a convoluted nightmare that even involves criminal syndicates (ignored in DC think tank papers) and Chinese espionage:
On corruption it is important to understand where the greatest risks of impropriety exist. Offsets are extraordinarily complex. The greatest risk of impropriety lies with the very few bureaucrats who understand and manage offsets, known in Taiwan as the Industrial Cooperation Program.
This is my honest overview:
· Taiwan, like most countries, seeks to “offset” the economic burden of throwing billions of US dollars out of the country to acquire foreign defense articles. Theoretically, central government expenditures are supposed to create jobs and stimulate economic development, as a by-product, in addition to defense value.
· For example, when the U.S. Air Force acquires F-16s, they create a lot of jobs, not just with Lockheed, but with the entire supply chain. The Northrop radar by itself has dozens of companies supplying amplifiers, antennas, transmitter/receiver modules, integrated circuits, and other components. Ditto for the engine, electronic warfare (EW)suite, flight control, and the endless spare parts needed over the lifetime of the product.
· Sustained popular support for high levels of defense spending is linked with the economic impact of that defense spending. This is why the US defense industry is spread out across America. The US military–industrial complex (MIC) is a very real and massive monster.
· Other countries, especially democracies, understand this linkage as well. Throwing billions of dollars out of the country to buy F-16s or other US systems is a bitter pill to swallow domestically. There is no direct economic benefit at the local level.
· This is where offsets come into play. Offsets make that pill easier to swallow.
· Here is how a traditional offset program would go down. Letus say a notional Crapistan wants to buy 24 F-16s from the US through Foreign Military Sales (FMS) under the U.S. Defense Security Cooperation Agency (DSCA). Overall cost in the Letter of Acceptance (LOA) is US $1.2 billion. US Air Force contracts with Lockheed for $1 billion (as much as $200 million of that for all the program management stuff).
· Crapistan’s acquisition policy imposes a 40% offset requirement on Lockheed, based on value of the contract between them and US government. So 40% of $1 billion is 400 million. Lockheed has an obligation of 400 million in offset credits. Now they have to come up with dozens of projects, let us say a hundred, to pitch to Crapistan’s offset management office to satisfy that obligation. Each project is limited to a maximum of 25 million in credits.
· Projects could be a transfer of an older Lockheed patent on the shelf for a widget that has civilian application. Lockheed estimates how much that technology transfer would cost in real dollars. Let us say $1 million, with all the man hours involved in training, contracting, legal fees, business class travel for engineers, etc.
· They then go and negotiate the value of that technology with Crapistan. Value is put in terms of multipliers, anywhere from no multiplier (1) to 25. Notionally, Lockheed would propose a multiplier of 10. If Crapistan says yes, then Lockheed satisfies 10 million out of its 400 million in credits. Then they move on to the next project, negotiating for the highest multiplier possible, then next, etc., until they satisfy it all.
· If they get a multiplier of 10 for a hundred projects (each costing $1 million to implement), then Lockheed’s real cost to satisfy that obligation would be $40 million.
· The US government Defense Federal Acquisition Regulation cites offsets as an allowable cost. This means a contractor can charge it to the Pentagon. The cost is then passed on to Crapistan through the Letter of Acceptance (LOA). So Lockheed would add in that estimate of $40 million into its contract with the US Air Force. Then that $40 million is included in the LOA with Crapistan. So in the end, Lockheed does not cut into its profit margin.
· As a general rule, the real cost to satisfy an offset obligation can be between 5-12% of contract value.
· In the meantime, the Crapistan government and Lockheed are working with a local company that would be the actual beneficiary of that specific patented technology. That technology would revolutionize that company’s business with huge estimated profits. They, along with Lockheed, will try to persuade the office making the decision on the multiplier within Crapistan’s Ministry of Economic Affairs to say yes.
· This is where there is a possibility for impropriety. The office that determines multipliers could be incentivized by the company that would benefit from an offset project.
· This whole process is kept very close to the chest. Normally it’s maybe 10 people in a dedicated office within the Ministry of Economic Affairs (MOEA). It is far too complicated for a small team inside MOEA. The beneficiary of that offset project could incentivize a legislator to advocate on its behalf with MOEA. Very few legislators, if any, understand offsets and therefore unlikely to be in a position to pressure MOEA to approve a project.
— The implication is that there is very little legislative oversight of the whole offset process.
· The Ministry of National Defense (MND), and the legislature’s defense committee, could get involved if a project is a “direct offset.” For example, Lockheed agrees to give Crapistan a role in production of some part of an F-16 sale.
· The US State Department and Pentagon approve licenses for US defense industry-related technology transfer. As a matter of policy, the US government avoids getting involved with offsets, despite being a pass through for the costs incurred by a US defense contractor.
· The role of offsets is reduced when there is a formal government-to-government mechanism for defense industrial cooperation between the US and international partners.
· With Taiwan, defense industrial cooperation is left to individual companies with offset responsibilities. With other countries, selected projects are determined in a government to government process.
· The Japan cooperation framework was set up in the 1980s specifically to address the lack of support for Japan’s low level of defense spending.
· One would think those who bitch about Taiwan’s defense spending would get the connection between economy and defense. The US shoves Harpoon anti-ship missiles down Taiwan’s throat, without any effort to work with Taiwan on its Hsiung Feng anti-ship missile. It is all sell, sell, sell. Then when the US cannot produce what was promised fast enough, there is still very little interest in formal cooperation in Taiwan’s indigenous defense industry.
Below: Old E-mail from U.S. Pentagon source on the problems with local sales representatives: