Tag Archives: aerospace and defense industry

Guess Who Benefits from the Russo-Ukrainian War?

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In the two years since Russia invaded Ukraine, the U.S. defense industry has experienced a boom in orders for weapons and munitions. Business is coming from European allies trying to build out their military capabilities as well as from the Pentagon, which is both buying new equipment from defense manufacturers and replenishing military stocks depleted by deliveries to Ukraine. Industrial production in the U.S. defense and space sector has increased 17.5% since Russia launched its full-scale invasion of Ukraine two years ago, according to Federal Reserve data.  Biden administration officials say that of the $60.7 billion earmarked for Ukraine in a $95 billion supplemental defense bill, 64% will actually flow back to the U.S. defense industrial base.  Recent spending by European governments on U.S. jet fighters and other military hardware represents “a generational-type investment. The past few years are equal to the prior 20 years,” said Myles Walton, a military industry analyst at Wolfe Research….Poland has placed orders worth about $30 billion for Apache helicopters, High Mobility Artillery Rocket Systems, or Himars, M1A1 Abrams tanks and other hardware, the department said. Germany spent $8.5 billion on Chinook helicopters and related equipment, while the Czech Republic bought $5.6 billion of F-35 jets and munitions.

The boost to the U.S. defense industry is just one way the fragmentation of the world economy along geopolitical lines is tightening U.S.-European relations, often to the benefit of the U.S. The U.S. became the world’s largest LNG exporter in 2023, and its LNG exports are expected to almost double by 2030 on already-approved projects. Around two-thirds of those exports go to Europe….

 The Ukraine war served as a warning for American defense strategists, said Cynthia Cook, a defense industry expert at the Center for Strategic and International Studies, a Washington-based think tank. “What Russia’s war pointed out relatively quickly is the constraints in the U.S. defense industrial base especially in terms of surging production rapidly. The good news is that this lesson has been learned when the U.S. is not directly at war.”

Excerpts from Tom Fairless, How War in Europe Boosts the U.S. Economy, WSJ, Feb. 20, 2024

Why China Fears Elon Musk More than the U.S.

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Chinese military observers have been increasingly concerned about the potential of SpaceX’s Starlink satellite network in helping the US military dominate space, especially so, in the wake of the Ukraine war, where Elon Musk activated Starlink satellites to restore communications that had stopped because of shelling by the Russian troops…. 

“SpaceX has decided to increase the number of Starlink satellites from 12,000 to 42,000 – the program’s unchecked expansion and the company’s ambition to use it for military purposes should put the international community on high alert,” said the article on China Military Online, the official news website affiliated with the Central Military Commission (CMC), China’s highest national defense organization headed by President Xi Jinping himself.

The article notes the SpaceX Starlink’s role during the Russia-Ukraine war, where Elon Musk provided Starlink terminals to restore communications…However, there have also been reports of Starlink aiding the Ukrainian armed forces in precision strikes against Russian tanks and positions, which has not been unnoticed by Chinese military observers.

“In addition to supporting communication, Starlink, as experts estimated, could also interact with UAVs [Unmanned Aerial Vehicles] and, using big data and facial recognition technology, might have already played a part in Ukraine’s military operations against Russia,” said the China Military Online article…..Another remarkable event was SpaceX’s swift response to a Russian jamming effort targeting its Starlink Satellite service which was appreciated by the Pentagon’s Director for Electromagnetic Warfare. Elon Musk had claimed that Russia had jammed Starlink terminals in Ukraine for hours at a time, following which he also said that after a software update, Starlink was operating normally….“And suddenly that [Russian jamming attack] was not effective anymore. From [the] EW technologist’s perspective, that is fantastic … and how they did that was eye-watering to me,” said Dave Tremper, the Director of electronic warfare  (EW)for the Office of the Secretary of Defense.

The China Military Online commentary listed the numerous instances since 2019 when Starlink has cooperated with the US military, which also included the successful data transmission test conducted by the US Air Force (USAF) on March 3, 2022…It also raised a possibility that Starlink could form a second and independent internet that threatened states’ cyberspace sovereignty.

Another concern for Chinese military analysts has been the scarcity of frequency bands and orbital slots for satellites to operate, which they believe are being quickly acquired by other countries. “Orbital position and frequency are rare strategic resources in space,” said the article, while noting, “The LEO can accommodate about 50,000 satellites, over 80% of which would be taken by Starlink if the program were to launch 42,000 satellites as it has planned.” “SpaceX is undertaking an enclosure movement in space to take a vantage position and monopolize strategic resources,” the article further added.

Excerpts from Tanmay Kadam, China ‘Deeply Alarmed’ By SpaceX’s Starlink Capabilities That Is Helping US Military Achieve Total Space Dominance, EurAsian Times, May 9, 2022

A Lethal Combination: Pentagon and NASA

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U.S. government and aerospace-industry officials are removing decades-old barriers between civilian and military space projects, in response to escalating foreign threats beyond the atmosphere. The Pentagon and the National Aeronautics and Space Administration (NASA) are joining forces to tackle efforts such as exploring the region around the moon and extending the life of satellites. Many details are still developing or remain classified.  Driving the changes are actions by Moscow and Beijing to challenge American space interests with antisatellite weapons, jamming capabilities and other potentially hostile technology. Eventually, according to government and industry officials briefed on the matter, civil-military cooperation is expected to extend to defending planned NASA bases on the lunar surface, as well as protecting U.S. commercial operations envisioned to extract water or minerals there…

Large and small contractors are maneuvering to take advantage of opportunities to merge military and nonmilitary technologies. They include established military suppliers that already have a foot in both camps, such as Northrop Grumman,  the Dynetics unit of Leidos Holdings, and Elon Musk’s Space Exploration Technologies Corp. Smaller companies such as Maxar Technologies Holdings,  closely held robotic-lander maker Astrobotic Technology, and small-satellite producer Blue Canyon Technologies, recently acquired by Raytheon Technologies, also seek to diversify in the same way…

The U.S. astronaut corps always has included many military officers, some previous NASA scientists quietly shared data with military counterparts and NASA’s now-retired Space Shuttle fleet was supposed to launch Pentagon satellites. But today, veteran industry and government experts describe the cooperation as much more extensive, covering burgeoning capabilities such as repairing and repurposing satellites in orbit, or moving them around with nuclear propulsion. Intelligence agencies are more involved than ever in leveraging civilian technology, including artificial intelligence, robotic capabilities and production know-how.

Excerpt from Pentagon, NASA Knock Down Barriers Impeding Joint Space Projects, WSJ, Feb. 1, 2021

New Fait Accompli in Space: the Artemis Accords

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Seven countries have joined the United States in signing the Artemis Accords on October 13, 2020, a set of principles governing norms of behavior for those who want to participate in the Artemis lunar exploration program: Australia, Canada, Japan, Luxembourg, Italy, the United Arab Emirates and the United Kingdom….The accords outline a series of principles that countries participating in the Artemis program are expected to adhere to, from interoperability and release of scientific data to use of space resources and preserving space heritage. Many of the principles stem directly from the Outer Space Treaty and related treaties.

NASA was originally focused on having the document apply to lunar and later Martian exploration. Japan wanted to include asteroid and comet missions as well, based on that country’s program of robotic asteroid missions like the Hayabusa2 asteroids sample return spacecraft. The document now includes asteroid and comet missions, as well as activities in orbit around the moon and Mars and the Lagrange points of the Earth-moon system.

NASA is implementing the Artemis Accords as a series of bilateral agreements between the United States and other countries, which allows them to move more quickly than if NASA sought a multilateral agreement under the aegis of the United Nations…Frans von der Dunk, a professor of space law at the University of Nebraska, drew parallels with development of international civil aviation regulations, which started with bilateral agreements between the United States and United Kingdom that were later copied among other nations. “That is something that will possibly happen here as well,” he said.

The bilateral nature of the accords, though, do present restrictions. China, for instance, cannot sign on, because NASA, under the so-called “Wolf Amendment” in US law, is restricted from bilateral cooperation with China.

The accords are outside the traditional UN framework of international space law – such as the UN Committee on the Peaceful Uses of Outer Space. The requirement to sign bilateral agreements with the US can be viewed as a way of trying to impose US preferences on how to regulate space on others. Russia has already stated that the Artemis Program is too “US-centric”.  India, Germany, France and the European Space Agency (ESA) have not yet signed on to the accords.

Excerpt from Jeff Foust ,Eight countries sign Artemis Accords, Space News, Oct. 13, 2020

Government Intervention is Great: What China is Learning from the United States

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A study published by the China Aerospace Studies Institute in September 2020′China’s Space Narrative: Examining the Portrayal of the US-China Space Relationship in Chinese Sources‘ used publicly available Chinese language resources to draw insights on how the Chinese view the U.S.-China space relationship. According to the study:

“Chinese sources weave a space narrative that portrays China as a modernizing nation
committed to the peaceful uses of space and serving the broader interests of advancing humankind through international space cooperation, economic development, and scientific discovery. Chinese sources minimize the military role of China’s space program.

In contrast, the same sources portray the United States as the leading
space power bent on dominating space, restricting access to space, and limiting international space cooperation to countries with similar political systems and level of economic development.

The report concludes that the United States and China are in a long-term competition in space in which China is attempting to become a global power, in part, through the use of space. China’s primary motivation for developing space technologies is national security…China’s space program is one element of its efforts to transition the current U.S.-dominated international system to a multipolar world….

Many Chinese writings on commercial space analyze the experiences of U.S. companies, with a particular focus on SpaceX. Chinese space experts call SpaceX the “major representative company” for commercial space worldwide. A report from Hong Kong media claims that Chinese investors view SpaceX as the “benchmark company” for emerging commercial space companies in the mainland. Chinese authors also follow developments in other U.S. commercial space companies, such as Digital Globe
and Rocket Lab.

Chinese authors also pay attention to the ways in which the U.S. government uses various policies and incentives to create a favorable ecosystem for the growth of new commercial space companies. Chinese writings analyze ways in which NASA has supported private companies with funding, technology transfer, consulting, and infrastructure leasing. Although their specific recommendations vary, Chinese authors view strong government oversight and intervention as crucial toward the success of the domestic commercial space industry.”

Conquering Space: China’s X-37B and the United States

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Ever since China claimed success in the secretive launch of an experimental spacecraft, experts have been pondering over what it could be and what it did in space.The spacecraft – mounted on a Long March 2F rocket – was launched from the Jiuquan Satellite Launch Centre in northern China on Sept. 4, 2020 and safely returned to Earth after two days in orbit…Unlike recent Chinese high-profile space missions, very few details have emerged about the vehicle and no visuals have been released. Chinese authorities have been tight-lipped about the nature of the short-duration excursion and what technologies were tested. The exact launch and landing times were not revealed, nor was the landing site although it is thought to be the Taklamakan Desert, which is in northwest China.

Three years ago, China said it would launch a space vessel in 2020 that “will fly into the sky like an aircraft” and be reusable. A reusable spacecraft – as the name implies can undertake multiple trips to space – thereby potentially lowering the overall cost of launch activity. A traditional one-off spacecraft – costing tens of millions of dollars – is practically rendered useless after a single mission.

The experimental vessel reached an altitude of about 350km, which is in line with China’s previous crewed flights. The spacecraft also released an unknown object into the orbit before returning to Earth…Once the testing is complete, such a vehicle could be used to launch and repair satellites, survey the Earth, as well as take astronauts and goods to and from orbit, possibly to a planned future Chinese space station.

The Chinese craft’s size and shape remain unclear but it is widely believed to be some sort of uncrewed space plane similar to the X-37B Orbital Test Vehicle operated by the US Air Force. The recent mission could be linked to the Shenlong – or divine dragon – space plane project, which has been in development for some time, according to reports. A second Chinese reusable space plane called Tengyun, or cloud climber, is also in the works. If confirmed as a space plane, China would become only the third country to have successfully launched such a vehicle into orbit after the US and the former Soviet Union. The European Space Agency is working on its own reusable orbital vehicle called Space Rider, while India is also said to be developing a space shuttle-like craft.

The X-37B, resembling a miniature space shuttle, has been in orbit since late May 2020 following its launch on its sixth assignment. Very little is known about the X-37B’s missions, prompting speculation that the planes could be used for spying activity or testing space weapons.

x-37b

According to Bleddyn Bowen, China’s spacecraft launch is “just another part of China becoming a comprehensive space power that utilizes space technology for the purposes of war, development, and prestige like all others”.

Pratik Jakhar, China claims ‘important breakthrough’ in space mission shrouded in mystery, BBC, Sept. 9, 2020

Power of Indigenous Defense Industry

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Even though Colombia, Kuwait, Malaysia, Morocco and Singapore have very different perspectives and agendas, they are all expected to sharply increase their defence spending over the next 10 years. Due to the arms race and an increasing threat perception, the effects of the 2008 financial slowdown on defence spending in these transitioning markets are gradually reducing.

“Unlike leading transitioning economies like India, South Korea, Turkey, the United Arab Emirates and Brazil, the five countries selected for this study are still attempting to develop an industrial base …,” said Frost & Sullivan Aerospace & Defence Industry AnalystAlix Leboulanger. “Upon a closer look at these countries’ dynamics, it is found that their political intent is stronger than their financial and infrastructure capabilities.”  Several factors are dampening indigenisation plans. The increasingly competitive marketplace has left little room for emerging local players unless they can distinguish themselves appropriately – for instance, with price in Colombia and technology in Singapore. Moreover, weak market prospects beyond local demand, along with the absence of small- and medium-sized enterprises, have restricted partnership opportunities and transfer-of-technology ventures with foreign companies.

“Investing in high-end foreign technology is perceived as the way forward to fulfil three objectives: achieving modernisation programmes, consolidating the domestic industrial base, and providing employment to locals,” explained Leboulanger. “This will require efficient and easily-applicable regulations to create an attractive and stable environment for foreign investments and industrial partnerships. The lack of skilled personnel and infrastructure, also need to be addressed.”… Financial constraints mean that governments will try to reduce armed forces and invest in combat-proven platforms, surplus material and second-hand equipment…

“As a matter of fact Colombia, Kuwait, Malaysia, Morocco and Singapore are expected to spend 21 percent of their total budget, circa 9.77 billion USD per year, on new equipment.”

Combat Readiness Plans Win Over Defence Indigenisation Targets in Select Markets, Finds Frost & Sullivan, PR Newswire, July 22, 2015

The X-37B Drone: 4th Mission

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The unmanned X-37B spacecraft was launched May 20 2015  atop a United Launch Alliance Atlas 5 rocket from Florida’s Cape Canaveral Air Force Station. The liftoff will begin the reusable space plane’s fourth mission, which is known as OTV-4 (short for Orbital Test Vehicle-4).  Most of the X-37B’s payloads and specific activities are classified, so it’s not clear what the space plane will be doing once it leaves Earth. This secrecy has led to some speculation that the vehicle might be some sort of space weapon. Air Force officials have repeatedly rejected that notion, saying that the X-37B flights simply test a variety of new space technologies.

For example, the space plane is carrying a type of ion engine called a Hall thruster on OTV-4, Air Force officials said. This Hall thruster is an advanced version of the one that powered the first three Advanced Extremely High Frequency military communications satellites, the officials added.  NASA is also flying an experiment on OTV-4. The agency’s Materials Exposure and Technology Innovation in Space investigation will see how exposure to the space environment affects nearly 100 different types of materials. The results should aid in the design of future spacecraft, NASA says.

The X-37B looks like a miniature version of NASA’s now-retired space shuttle. The robotic, solar-powered space plane is about 29 feet long by 9.5 feet tall (8.8 by 2.9 meters), with a wingspan of 15 feet (4.6 meters) and a payload bay the size of a pickup-truck bed. Like the space shuttle, the X-37B launches vertically and lands horizontally, on a runway.

Excerpts from Mike Wall, Air Force Gets X-37B Space Plane Ready for Its Next Mystery,  SPACE.COM, May 18, 2015

U.S. Military Spending 2015

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U.S. Deputy Defense Secretary Robert Work on Wednesday, Jan. 28, 2015 urged NATO allies to develop and make more innovative weapons, and said bold action was needed to stay ahead of rapid weapons development by China, Russia and other countries.  Work said the Pentagon has a new plan called “Defense Innovation Initiative” and a separate effort targeting longer-term projects to ensure that the United States continues to have a decisive competitive advantage against potential foes.

Work said concerns about advances by other countries were a key reason that the Pentagon’s fiscal 2016 budget plan to be delivered to Congress will exceed budget caps set by Congress and reverse five years of declines in U.S. military spending.   He said the budget would include “significant” investments in nuclear weapons, space control capabilities, advanced sensors, missile defense and cyber, as well as unmanned undersea vehicles, high-speed strike weapons, a new jet engine, high-energy lasers and rail gun technology…..Lockheed Martin Corp  and Boeing  and other key weapons makers have repeatedly urged the Pentagon to step up investments in key technologies….

Kendall said the department would also earmark funds for development and prototyping of a new “next-generation X-plane” that would eventually succeed the F-35 fighter jet, and a new engine.

Excerpts, ANDREA SHALAL, Pentagon official urges NATO to focus on innovative weapons. Jan 28, 2015

Hypersonic Weapons

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Payloads on hypersonic aircraft, whether they are weapons or sensors, could reach their destination within minutes, rather than hours, said Mark Lewis, former chief scientist of the Air Force and now director of the Science and Technology Institute at the Institute for Defense Analyses, a federally funded research-and-development center.  Hypersonic speed is generally defined as beginning at Mach 5, which is the point where aerodynamic heating caused by the speed of the vehicle cutting through the atmosphere becomes a factor.

The Air Force concluded its successful X-51 WaveRider program in 2013. The final test had the missile-like aircraft flying at Mach 5.1 for about 200 seconds.  Meanwhile, the Army is testing the advanced hypersonic weapon, a missile designed for vertical launch. It suffered a failed test seconds after takeoff in August 2014, but that was caused by a faulty booster, not the missile or hypersonic technology itself, Lewis noted….

Hypersonic technology could be seen as a follow-on to stealth, Lewis said. Even if an aircraft has that kind of technology, it doesn’t mean it is invisible, he said. Adversaries are growing better at spotting stealthy aircraft, he said. Speed might compensate for that, he said. “If I can fly really fast, it makes it harder to act against me. It doesn’t make it impossible. But it makes it harder.”

Top Air Force leaders are indicating that they want to move hypersonic technology to the next level.  Air Force Chief of Staff Gen. Mark Welsh and Secretary Deborah Lee James in the document “America’s Air Force: A Call to the Future,” said hypersonic development was number one on the service’s list of top five technology priorities.  [T]the Air Force sees hypersonic weapons as a potential means to break through anti-access/area-denied battlefields where adversaries have robust defenses….

The Air Force will team with the Defense Advanced Research Projects Agency on two new hypersonic programs, he said. The first will be a cruise missile called HAWC, the hypersonic air-breathing weapons concept. The other is called tactical boost glide, which will accelerate an aircraft to Mach 5 plus speeds, then let it glide to its target.

Similarly, space planes could deliver payloads in minutes. The reusable space plane concept has been proposed many times over the years, and received a new lease on life when DARPA awarded three contracts to Boeing, Masten Space Systems and Northrop Grumman to study the idea of a two-stage launch system that could rapidly place 3,000 to 5,000 pounds into orbit. The Air Force has never given up on that idea, as evidenced by the new DARPA initiative, Lewis said.  Space planes have been talked about for decades, Lewis said. There have been many starts and stops in developing the concept, he added.

NASA’s space shuttle was originally conceived as a vehicle that could rapidly lift payloads into space at low cost, and be flexible and responsive. It never lived up to that promise.

The DARPA experimental spaceplane (XS-1) program envisions a reusable aircraft that could be launched from a mobile platform, and return 10 times within 10 days. It would employ a reusable first stage that would fly to Mach 10 at a suborbital altitude. At that point, one or more expendable upper stages would separate and deploy a satellite into low-Earth orbit.  While a space plane in low-Earth orbit could potentially be used as a weapon, it would more likely be employed as a means to rapidly replace satellites that have been damaged in a space war, or to place sensors over regions where there are currently no assets, Lewis said….

Meanwhile, more akin to the space shuttle than the DARPA concept for the space plane, the Air Force continues to use the X-37B, a top-secret orbiter that also glides to Earth. One has been in orbit since October 2012. The Air Force has repeatedly denied that it has, or is intended to be, weaponized. What its exact mission is remains classified

Excerpts from Stew Magnuson, Hypersonic Weapons Can Defeat Distance, National Defense Magazine, Nov.  2014

 

US Technology Firms and War

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[N]imbler Silicon Valley outfits are beginning to invade the defence industry’s territory. “Warfare is going digital,” observes Tom Captain of Deloitte, a consulting firm. Tech firms have shown that they can supply robots, drones and intelligence software. SpaceX, founded by Elon Musk, a tech entrepreneur, is taking America’s air force to court to reopen bidding for a satellite-launch contract awarded to Boeing and Lockheed.

Excerpt, Weapons-makers: The case for defence, Economist, July 19, 2014, at 55

Militarization of Japan: the Fourth Force

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Japan will add a new division to its military or Self-Defense Forces in 2019, to protect equipment in orbit from space debris as well as other attacks, a source familiar with Japan-U.S. relations said, according to a report by the South China Morning Post.

Japan revised a law regarding its non-military activities in space in 2008, allowing the creation of a “space force,” which will initially be responsible for monitoring dangerous debris floating within close vicinity of the Earth, as well as protect satellites from collisions or attacks, according to the report, which added that the U.S. has been informed of the development by the Japanese Defense Ministry. There are around 3,000 fragments of space debris currently at risk of smashing into reconnaissance or communication satellites around the Earth.  Japan will assist the U.S. military with the information it obtains through this program, and looks to strengthen bilateral cooperation in space, or the “fourth battlefield,” the report said.  The “fourth force” will initially use radar and telescope facilities in the Okayama prefecture that the defense ministry acquired from the Japan Space Forum, which also owns the Spaceguard Center radar facility in Kagamino and a telescope facility in Ihara.

Units from Japan’s Air Self-Defense Force are currently being considered by the defense ministry to make up parts of the new space force. And, the Japanese ministries of defense, education, culture, sports, science and technology, along with the Japan Aerospace Exploration Agency, or JAXA, will jointly acquire the radar and telescope facilities from the Japan Space Forum, a Tokyo-based think tank that coordinates aerospace-related activities among government, industry and academia.

Japan and the U.S. have reportedly been working on a space force since 2007, when China tested its satellite destruction capabilities by launching a missile against one of its own satellites and destroyed it.  In May, at a space development cooperation meeting held in Washington, the Japanese and U.S. governments agreed to increase cooperation in using satellites for monitoring space debris, marine surveillance, and to protect one another’s space operations. Japan also pledged to share information acquired by JAXA with the U.S. Strategic Command.

Excerpts from Alroy Menezes, Japan’s ‘Space Force’ To Protect Satellites In Orbit, International Business Times, Aug. 4, 2014

The Art of Selling Weapons: offsets

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[When governments buy weapons] it is standard to supplement the main deal with a side contract, usually undisclosed, that outlines additional investments that the winning bidder must make in local projects or else pay a penalty. Welcome to the murky world of “offsets”.

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 in Florida…. 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.

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…

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… 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 programs…Brazil and India are catching up…

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.

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)….

How long can the offsets boom last?  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…. 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.

The defence industry: Guns and sugar, Economist,May 25, 2013, at 63