2015-10-08 By Zsolt Lazar
Since the Swedish defense firm SAAB and the Brazilian government have signed the financial contract of 36 Gripen NG multirole jets some weeks ago, time has come to take look on the first Gripen deal – which was conducted in Hungary between 2001 and 2008.
In September 2001, György Matolcsy (Hungary’s Minister for Economy) and János Szabó (Hungary’s Minister for Defense) of the Viktor Orbán-led cabinet announced the National Security Cabinet’s decision on the Hungarian fighter jet tender.
At the media event, the two department heads presented the decision, announcing the Swedish Saab JAS-39 Gripen as tender winner, ahead of other jets including the U.S.-made F-16 Falcon, F-18 Hornet and the French Mirage 2000.
The agreement contained offset and industrial cooperation commitments to Gripen International, in order to provide opportunities for expansion and development of the Hungarian economy in the coming 14 years.
The offset program’s total value was 110 % of the agreement value (roughly 789 million Euro) and a total of 14 companies, mostly Swedish firms owned by the Investor AB, are involved.
However only five are relevant in terms of capital allocation or export value.
Moreover, the Electrolux investment stands out, as their massive contribution to the program accounts for roughly 80% of the program’s total value.
Although, one of the main objective of the Hungarian offset was to stimulate the national SMEs and some less developed areas in the country, 90 % of the offset value was invested by Swedish companies, more specifically, by companies owned by the Swedish Investor AB and none of the investments were located in the prioritized geographical areas.
Which means, significant part of the offset volume was channeled back to the Swedish firms during the offset period and their interests prevailed the most.
The Gripen purchase as a whole was not only a defense-related decision but also a political decision, made in order to deepen Hungary’s bilateral links with Sweden and to strengthen cooperation with the EU.
However, according to the WikiLeaks documents, Viktor Orbán privately admitted to American diplomats in 2008 that his reputation and his relationship to the U.S. had been damaged as a result of his decisions regarding the Gripen acquisition.
The circumstances surrounding Hungary’s fighter jet selection have been strange since the outset.
Although the tender had not yet been announced in 2000, and in fact the aircraft procurement was postponed in 1998 by the new right-wing government led by Viktor Orbán, the Independent Smallholders, Agrarian Workers and Civic Party-led Ministry of Defense had begun negotiations with German-American DaimlerChrysler (DASA).
Additionally, they had signed a Memorandum of Understanding regarding upgrading of the capabilities of the Russian MIG-29 Falcons that had recently been purchased by the Hungarian Air Force in order to comply with NATO requirements.
Later, however, the idea of modernization was removed from the agenda, primarily due to pressure from Peter Tufo, the U.S. Ambassador, who stated that the MIGs would be unable to operate in the NATO fleet, even with the implementation of technological improvements.
And Saab-BAE also pointed out that without a tender, investments in Hungary would remain unstimulated.
Nevertheless, many questions remained unanswered.
One of these is over the role of Alfons Mensdorff-Pouilly in the background processes.
As a Saab-BAE / defense industry lobbyist, Mensdorff-Pouilly sought to influence the decision-makers from the very beginning.
In an interview (Magyar Narancs, 2013), Mensdorff-Pouilly mentions that the U.S. competitors for the fighter jet tender could not offer an offset because the regulations banned this kind of compensation.
This statement is highly questionable, since Poland, for example, was allowed to purchase F- 16s in 2003 with an offset package from the U.S. firm Lockheed Martin.
The Gripen offset program stretched across several government terms.
At the beginning, the decision was made by the right-wing cabinet (1998-2002).
The implementation was carried out by a socialist-liberal government, which was led by three different prime ministers between 2002 and 2010.
Since the decision-making process and the implementation were passed from one government to another and the judgment of the fighter jet tender and procurement differed according to each government’s political standpoint, the evaluation of the program is rather ambiguous – the official evaluation is still confidential.
Originally, according to the agreement, the offset should have been completed in 14 years and 50 % of the program should have been completed within the first eight years.
In contrast, the entire program was completed in seven years.
This is not particularly anomalous in the ‘world of offsets’, but is quite rapid compared to the initial plans, implying a very intensive compliance period.
Based on the offset results, several conclusions can be drawn.
Above all, it is worth mentioning that the implementation was completed before the deadline and there was not even a single report claiming that financial resources had been stolen.
Although the Hungarian economy benefited from the technology transfer (stemming primarily from Electrolux) and export opportunities originating from the Gripen offset, many of these initiatives were not sustainable.
According to the Hungarian company information service provider Ceginfo.hu, almost all the Hungarian-owned offset participant companies went bankrupt and/or were deleted from the company register without a legal successor between 2009 and 2014.
The final outcomes were a joint consequence of the political environment, the regulations and the implementation process.
Some goals were reached (such like the technology transfer and job creation), but the stimulation of the Hungarian SMEs and the investments into the less developed / prioritized geographical areas were neglected.
Since the decision itself had been made just before the election, the investment areas had been defined on the basis of current political issues.
The right-wing government subsequently lost power and thus did not have a chance to continue the program. The political mentality of a non-cooperative party system had serious impact on the offset implementation.
In fact, the new left-wing government treated the program as a stepchild.
It was not integrated into any wider economic development program and control was eventually transferred to the Swedish partners.
Moreover, neither the Hungarian economy as a whole nor the government bodies were able to handle these kinds of complex economic situations, in which technology transfers and economic development issues are at stake simultaneously.
Since there was no earlier experience of offsets, and most of the regime had been socialized before the political change of the 1990s, the government bodies possessed no know-how about the implementation of such business dealings.
This led to inefficient use of resources and project management that lacked vision.
It would be interesting to know what would have happened if the right-wing government had won the elections and managed the program, since other cases, such as the Czech Gripen offset, shows that such a situation can fundamentally determine the future of the counter-trade.
Equally interesting to know is what would have happened if the U.S. or French made jet fighters had won the tender.
Editor’s Note: Zsolt Lazar has published a new book entitled Impact of the Gripen Offset Agreement on the Hungarian Economy.