Military Contracts

French Shipbuilder's Lawsuit Could Freeze German Naval Order

  • Why it matters

    Why it matters

    Should shipbuilder Iskandar Safa sue the German government for being excluded from bidding for a recent warship contract, it could cause serious delays to the launch of Germany’s next batch of corvettes as well as the new generation of frigates.

  • Facts

    Facts

    • Germany is under pressure to double its defense spending as a proportion of GDP.
    • The German navy is waiting on €10 billion, or $10.8 billion, worth of new equipment, including a fleet of five corvette warships and a batch of MKS 180 frigates.
    • French shipbuilding magnate Iskandar Safa wants in on a consortium to build the new vessels – and is threatening legal action if excluded.
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    Audio

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main 78861680 source Picture-Alliance Bernd Von Jutrczenka DPA – Defense Minister Ursula von der Leyen Ship navy army port of Rostock July 2015
Defense Minister Ursula von der Leyen could face delays in the delivery of new ships. Source: Picture-Alliance / Bernd Von Jutrczenka / DPA

The last Mediterranean winter storm has moved on, and a spring breeze is now wafting through the French Riviera city of Cannes. On a hill above the Côte d’Azur playground for the rich and famous, the Lebanese-French businessman and shipbuilding magnate, Iskandar Safa has built his office – a one story building, which also houses a part of his art dealership. Two curators belong to the 120-man team which manages his 1350 hectare property.

But these days, Mr. Safa is hardly concerned about his art business – not to mention his stud farm or golf course. Even real estate projects have lost their luster. It’s Germany that is on his mind.

On the German coast between the North Sea port of Emden, near the Dutch border, and the Baltic port of Wolgast, near the Polish border, Mr. Safa owns three ship-building yards. There, he builds mega-yachts and naval ships, and although his business building luxury boats for the super-rich is going strong, his naval manufacturing business is currently a cause for concern. As it stands, the German government is seeking to exclude him from their next big project.

“If it becomes fashionable for unsuccessful bidders to go to court, then uncertainty rises for all parties.”

Hans-Peter Bartels, German Parliamentary Commissioner for the Armed Forces

Currently, the German navy has commissioned Thyssen-Krupp Marine Systems (TKMS) and Lürssen to build five new K130 corvettes – the smallest class of warship – for around €1.5 billion ($1.6 billion). The companies, which belong to the same consortium, have previously built the K130 Corvette before.

While both companies’ previous contract to build the K130 was plagued by bad luck and mishaps, the new contract could be vital to the survival of the struggling shipyards.

However, Mr. Safa wants to secure a part of the work for his company, German Naval Yards, and believes he was illegally passed over in the competition to secure the contracts.

“We want in on the consortium that’s going to build the K130,” he told Handelsblatt. He said that, if necessary, he would sue. Without the contract, he believes his shipyard is threatened.

The German defense ministry is aware of Mr. Safa’s complaint, but says they don’t deal directly with the smaller sub-contractors.

“We negotiate only with the principal contractors,” a spokesperson told Handelsblatt, referring to Lürssen and TKMS.

German Defense Minister Ursula von der Leyen is now under pressure. It’s her responsibility to ensure that new military vessels and equipment are built and ready for use on time. For years, expenditure on new materiel has been sinking. Due to the high number of overseas deployments, there is now an enormous need to catch up. The German navy is currently waiting on new equipment worth up to €10 billion.

And the corvettes are just the beginning. Contracts for the construction of the heavily-armed MKS 180 frigates are to follow. The federal government wanted to seal the deal on the corvettes and other materiel before the summer – that is, before the federal parliamentary elections on September 24.

20 p8 Forecast On the Rise-01 Defense spending
Defense Spending Germany

Pressure on Germany to raise military spending to 2 percent of its annual GDP has been growing since Donald Trump’s entry into the White House. After the U.S. president’s awkward meeting with Chancellor Angela Merkel last week, Mr. Trump tweeted angrily –and inaccurately – that Germany owed millions of euros to NATO.

Germany currently spends 1.2 percent of GDP on military expenditures – a number that has remained stable while economic growth has continued.

With the threat of legal action from Mr. Safa’s shipbuilding company German Naval Yards, doubts are also growing as to whether the corvettes can be ordered before the federal parliamentary elections. When competitors for military contracts sue, things become complicated. This was shown recently when Germany’s department of defense sought to lease Israeli drones. A  drone-building competitor brought the matter to court and now the project has been put on ice.

“If it becomes fashionable for unsuccessful bidders to take court action, uncertainty rises for all parties,” Hans-Peter Bartels, the parliamentary commissioner for the armed forces, told  Handelsblatt. “In the end, it means that the armed forces must wait longer for urgently needed equipment,” he said.

Mr. Bartels is calling for the defense ministry to accelerate its military procurement projects.

“To request all tenders across all of Europe for such contracts is not necessarily the best solution,” he said.

Germany currently spends 1.2 percent of GDP on military expenditures – a number that has remained stable while economic growth has continued.

However, defense minister Ursula von der Leyen, unlike her predecessors, insists on procuring military materiel the same way as it would be done in the civilian business world.

Indeed, she appears to be drawing on the lessons learned from previous armament orders, which were often more expensive, went past deadline, and were sometimes of poor quality.  The A400M transport plane and even the first launch of the K130 corvettes are two such examples.

Nevertheless, the deficiencies in the warships have since been remedied and TKMS have been able to sell an order of corvettes to Israel. For this reason, Mr. Safa argues that the current warship contract is not for the same ship and therefore not a successor model to the K130.

Indeed, if the German defense ministry were to try to categorize the project as a successor to the initial launch, they could be opening the doors to legal action. It would also not be possible for the ministry to farm the work out by private contract to the old consortium. But Mr. Safa also doesn’t want to spoil his chances for cooperation with Lürssen and TKMS. He is openly campaigning for a merger between the shipyards.

“With the large projects planned in Germany and other European countries, as well as the demand from the U.S. to boost our defense budget, now is the right time to lay the foundations for a new order in the industry,” he said.

At TKMS, Mr. Safa’s message will surely not fall on deaf ears. Currently, parent company Thyssen-Krupp is seeking to withdraw from the defense business, but has yet to find a buyer willing to pay the price for its subsidiary.

 

Donata Riedel has worked for Handelsblatt for 20 years and writes about economic policy; she has also covered the telecommunications sector. Martin Murphy covers the steel, car and defense industries for Handelsblatt. murphy@handelsblatt.com  Contact the authors: riedel@handelsblatt.com and murphy@handelsblatt.com

 

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