Procurement of major weapons require large shares of military spending in many countries. NATO member states agree to spend at least 20 percent of their military expenditures on major weapons. At the same time, procurement of weapon systems is prone to be wasteful. A study on German major weapon procurement programs current in early 2022 provides rough estimates of inefficiencies in the procurement of major weapon systems.
The procurement of major weapons is a complex process, not least because it is driven by various, partly conflicting, interests and objectives. Armed forces want systems at the edge of technological possibilities, tailored to their specific national demands. Arms producers have an interest in expanding their sales through international competitiveness but also in protection of their national markets by their governments. Politicians with political bases in locations with major arms production have an interest in bringing major procurement contracts to their constituencies. Those focusing on security policy will see a benefit in joint production with allies, an objective that is particularly strong among member states of the European Union. Because of secrecy provisions, weapon procurements are more affected by corruption than most other economic activities. Procurement authorities are often marked by utmost cautiousness in decision-making in an environment of many legal requirements and political interferences, leading to arduous and long procurement processes.
The multitude of interests and objectives in major weapons procurement raises its cost beyond what would be necessary if it was only about minimising the cost of obtaining a set quantity and quality of a weapon system. The relationship between costs and benefits for the military is marked by technical inefficiency.
Seen from the perspective of taxpayers, such technical inefficiency has an allocative consequence: Money could be saved for other purposes if procurements of major weapons were about providing armed forces with appropriate and functioning systems at the lowest possible costs, rather than to use weapon procurements to pursue various additional objectives.
Data for recent German major weapon procurements allows for rough estimates of the scale of inefficiency from three major causes: preference for national production of arms, either through national products or co-production with partners; demand for specific national requirements in international co-production projects (“Germanization” of weapon systems); and overcomplexity of major weapon systems.
These are reflected in non-competitive prices for weapon systems, cost overruns and time delays as well as low utilization rates of weapon systems in the inventory of German armed forces.
Official German data makes it possible to provide rough estimates for these four categories of inefficiency.
All four elements of inefficiency in German procurement programmes are substantial. The first source of inefficiency investigated are overly high prices resulting from preference for national production, when purchases from other countries would have been cheaper because of larger production runs.
Lack of exploiting options for savings from the economies of scale added between 4 and 17 percent to German procurement costs for the programs included in the study, depending on assumptions about the availability of suitable alternatives to purchases from German sources.
Overly complex coproduction programmes, such as the Eurofighter or the Tiger helicopter, are another source of inefficiency, both because of national specific requirements and the principle of “juste retour”. In this frequent practice, subcontracts often do not go to the most competitive supplier but to companies that primarily qualify because of their location in a partner country. Additional costs of complex coproduction are estimated at 12 to 18 percent of German procurement for programs current in 2022.
Many German procurement programs have been marred by large cost overruns and time delays. Demanding technical requirements beyond the capabilities of arms producers at the time of deciding on programs, as well the preference for national producers are the prime reasons for cost overruns and time delays.
Official data from the German defence ministry reported total cost overruns amounting to €11 billion for the programs included in the study, or 19 percent of total program cost. Some of the additional cost occurred after first deciding on a project is due to changes in requirement, and so cannot be considered to be due to inefficiency.
However, even considering this factor, cost overruns are substantial. This is not least because they are linked with time delays. Time delays create additional costs by themselves through inflation, at least when contracts for major weapon production are on cost-plus basis, as is the case for almost all German major weapon procurement programs.
Finally, most major weapon programs delivered to the German armed forces in the 2010s had low utilization rates. While utilization rates are never 100 per cent, with some systems always in maintenance or used for training, utilization rates below 70 percent are considered low – a threshold that many German weapon systems in service in early 2002 did not meet.
Depending on calculation method, an estimated 6 to 13 per cent of procurement expenditure has been wasted for weapons with low utilization rates.
It is tempting to add up these inefficiencies to estimate how much of the €62 billion Germany spends on procurement for programmes current in 2002, could have been saved if inefficiencies had been avoided.
However, several of the inefficiencies overlap: for example, complex co-production programs have higher cost overruns than other forms of procurement. Still, it is safe to estimate that the German taxpayer could have saved at least a third of procurement costs, had inefficiencies been avoided.