Communicated with another blogger, found out he agrees and actually planned to write about the very same conclusion. Now I need to hurry in order to save whatever originality my thought might have had. :)
Cuts of procurement
problems programs usually yield surprisingly little savings. Well, experience alleviates the surprise, for there's really a pattern.
Assume a procurement program was about 200 aircraft and after delivery of 60 aircraft something changes and the program shall be cut down to 160 aircraft - a cut of remaining deliveries by 40%. The price for the remaining deliveries usually drops by far less than 40%, usually more as 10-15%, and this is not only due to lost economies of scale.
The reason for why it may even happen that such cuts don't save anything or no substantial sum is in the existing contracts; there's usually a penalty clause saying that if the government cancels or renegotiates the contract, a certain substantial penalty shall be paid.
Why would governments agree to such a clause in the first place? They're in a position of strength at the during the bargaining (assuming there's any bargaining at all). Sure, they want that piece of kit, but they can buy elsewhere, while the supplier likely needs the development money and order to get an exportabel product in the first place.
The answer is that bureaucrats and politicians in office want to rig the contract so fast that it makes cancellation difficult. This rigging is meant to reduce the freedom of action of governments in the future and doesn't serve the interests of the people at all. It merely serves the personal preferences of the bureaucrats and politicians in favour of 'their' project. They exploit the 'sunk costs' issue to suit their personal preferences.The more the program advances, the less costs are not sunk and depending on the contract text it's even possible that a point approaches at which the contract penalty is as large as the remaining regular order. The program would then be immune to cuts because cuts would not save any funds at all.
|illustration principal-agent problem, (c) "MisterX000", wikipedia|
This is yet another example for how bureaucracies (and politicians) as agents of the citizens (principal) don't truly represent the interests of the people, but their own ones. It's an example for a principal-agent problem.
The solution is simple, and may actually help not only in military procurement, but in governance in general: Outlaw contract penalties and anything which has the same effect in government procurement of goods or services. Make it plain illegal and ineffective. This wouldn't neutralize penalty clauses retroactively (because of the rule of law), but it could save a country such as Germany billions of Euros per year on average.
Edit: There's an additional and substantial benefit in this proposal for countries with a tendency to cancel big programs often. An example would be the U.S.Army and USMC, which appear to be almost totally unable to bring an all-new combat vehicle or helicopter program into the production phase.
The example is that while the costs for cancellation are not initially high-profile, the corporations would likely seek to get a fixed and lower revenue as a substitute for it. This would be hig-profile, visible from start as costs.