The Defence Security Cooperation Agency (DSCA) announced a new policy on 9 August that will allow US allies and partners to use a bank letter of credit as a financing option under the Foreign Military Sales (FMS) programme.
Nations will be able to use commercial financing to complete a number of functions previously conducted using national funds, replacing national funds held in the FMS Trust to conduct routine payments and supplementing national funds in letters of Offer and Acceptance. Purchasing countries can also use the bank letters of credit to secure payment schedules under the Credit Assured Payment Schedules (CAPS) policy codified in January 2023.
US allies and partner nations purchase an average of $45bn in military products and services every year, with FMS sales increasing by 49% between 2021 and 2022, according to the US Department of State, who oversee the FMS programme.
Customers of FMS may obtain loans from a US bank with a minimum “A” credit rating or from a foreign bank operating in the United States with a licence from the Office of the Comptroller of the Currency.
While the congressional notifications is required on sales of major defence equipment that have a value greater $14m, or $25m for sales to Nato allies, 95% of FMS purchases are evaluated and approved by the State Department within 48 hours.
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Brandon Daniels, CEO of Exiger, a major of supply-chain risk management service to the US government, credits the policy as a positive step in allowing private markets to alleviate timing issues for funding. “It is allowing the United States to essentially provide financing options and have private sector capital placed on sales and innovation build.”
“Most people would finance these because it is essentially backed by sovereign government finances.”
Asked whether the expansion of private financing, at a time when supply-chains are taught and contractors have extensive back-orders, could drive inflation for military costs, Daniels points out that the increased demand signal should lead to an expansion of the defence-industrial base before inflationary pressures manifest.
“The timelines for major weapons systems and military technology and critical infrastructure and technology to be created and to be produced allow for us to ramp up supply chains,” said Daniels.
“Actually the more demand we have, the better planning we can do. One of the things that’s really tough for the Pentagon, that’s really tough for foreign governments and their defence industrial base, is the fact that we’re just one buyer,” continued Daniels, who goes on to explain that without international demand there is a reluctance to develop crucial industries. “Today, in free markets – the EU, US, UK, Australia – they don’t want to artificially prop up things like lithium reserve mining, and extraction and production. They don’t want to artificially create plants for near neodymium iron, boron magnets or samarium-cobalt magnets that are needed in military applications for fuel couplings or, navigation, or even for sealing the door on an F-35.”
“But if you have, today, a lot of security demand, that you need to open up,” such as the increasing demand and scheduling demand highlighted by Russia’s invasion of Ukraine, “these private markets allow you to do it, and then they allow us to actually invest in the downstream supply chains more effectively.”
While the addition of commercial financing to the options available to FMS customers will broaden out the demand for US military equipment, the additional options brought through private funding may have a weakening effect on benefits to US Foreign policy that the FMS program brings.
The structure of FMS transactions have historically allowed the US to maintain a degree of political and diplomatic leverage over purchasing countries. The terms of sales, including financing arrangements, can be used as tools of foreign policy, allowing the US to incentivise purchasing countries toward a desired effect. With the advent of commercial financing, these avenues for leverage may have to be found elsewhere.