Monday, June 16, 2008

Some in Pentagon Wary of EADS Ownership

While KC-30 tanker supporters would like you to overlook the foreign government ownership of EADS, Congress and DoD would be negligent to gloss over this fact. The important distiction is that EADS is not just a foreign company, it is a government owned and controlled foreign company. And, by doing business with the government owned EADS, the Pentagon is essentially reversing 60 years of procurement policy.

There are solid reasons the U.S. government no longer owns numerous arsenals, ship yards, and defense manufacturing facilities. Since the end of the New Deal, Congress has steadfastly been on the side of increased privatization. Throughout the American government and, indeed, throughout American society, there is a widely shared and ultimately decisive belief that placing primary reliance on the private sector to produce the nation's arms is good for reasons of political principle as well as practicality.

Foreign government owned and subsidies firms like EADS should not be treated as other truly private companies. The rise of these strange hybrids of government-owned enterprise should be viewed in fact as undermining the very foundation of the free market.

Luckily not everyone in DoD is blind to this fact. in an article entitled, "Pentagon Surveying use of Sovereign Wealth, Private Equity Funds" (subscription required) reported that, unlike those in Air Force procurement, some in DoD are starting to get worried about the potential impact of foreign government ownership on the U.S. defense sector.

Gary Powell the Assistant Deputy Under Secretary of Defense for Industrial Policy has commissioned a RAND study on how foreign governments use sovereign wealth and private equity funds and the potential impact on the U.S. defense sector. The report is due to be completed in January 2009.

In the article, Mr. Powell talks about foreign government ownership:
“So if the government of China wants to buy a U.S. defense contractor, what are the implications of that?” he questioned. “We’re a little worried about that because our concern is that we understand from a business perspective when one company wants to buy another company -- what the motivation is” but less is known about the intentions of a country.

Powell said DOD has heard stories about Russia harnessing its oil influence to put pressure on Ukraine. On that note, he wondered to what extent Russia would be willing “to use these sovereign wealth funds to buy into our firms and then do things for political purposes that may be counter to our best interests?”

Earlier this year, Russia warned of targeting missiles against former Soviet neighbor Ukraine if it joins NATO. The countries have also argued over natural gas over the last few years.

In a similar scenario, a Russian bank bought a roughly 5 percent stake in EADS, a French-German aerospace manufacturer, in 2006, he said.

“What if Russia uses that and they develop a voice in the management of the company? And they decide, ‘EADS, we want you to move your production facility from France to Russia. We want you to eliminate some of your non-Russian subcontractors and use Russian subcontractors,’” Powell said.
What Mr. Powell fails to mention is that in addition to Russia, Dubai, through the use of its sovereign wealth fund, also owns 3% of EADS.

Just as the U.S. must counter the rise of Illiberal Democracies, which undermine the very foundation of Democracy, so to must we confront and counter government-owned enterprises, like EADS, if we are to protect and maintain the independence and integrity of the private enterprise system.

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