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Making the Case for International Cooperative Programs

Making the Case for International Cooperative Programs

Frank Kenlon (Prof of Int'l Acq, DAU/DSMC-Int'l)
As a result of Administration and Congressional emphasis on the subject, I have focused on several Security Cooperation topics over the past several blogs. Many people are unaware that Security Cooperation -- as defined in DoD Directive 5132.03 -- also includes “International Armaments Cooperation” as well as “Equipment Sales and Training” efforts.

This blog addresses a question many International Acquisition community members have been asking for the past several years, “when is DoD going to take action to establish a new generation of International Cooperative Programs (ICPs)?”

ICP Basics

What is the primary difference between ICPs versus Foreign Military Sales (FMS) and Direct Commercial Sales (DCS) arrangements, which are both more prevalent and well-known? It’s actually quite simple. FMS and DCS are “seller-buyer” relationships, with the U.S. (either government or industry) acting as the seller and foreign governments or industry acting as the buyer. ICPs, on the other hand, are defense acquisition “partnership” arrangements with allied and friendly nations.

ICPs are established through international agreements – commonly referred to as Memoranda of Understanding (MOUs) or Project Arrangements (PAs) -- rather than through FMS Letters of Offer and Acceptance (LOAs) or DCS contracts. The U.S. laws, regulations, and policies that govern ICP arrangements are also completely separate from those that govern FMS and DCS transactions.

Moreover, the Under Secretary of Defense for Acquisition, Technology, and Logistics (USD AT&L), rather than USD (Policy), is responsible for oversight and management of ICPs. (Note: the details of how this responsibility will be ‘split’ between the new USD (Acquisition and Sustainment) and USD (Research and Engineering) positions after February 1, 2018 is yet to be determined.)

A Brief History

‘Back in the day’ identification and establishment of new ICPs was a top priority within the Department of Defense.

First Steps: While there were a few ICPs established in the 60s and 70s – most notably NATO SeaSparrow – the first big push to establish defense acquisition partnership arrangements occurred in the 80s. Senators Sam Nunn and Dan Quayle sponsored new legislative authorities for establishment of ICPs in Title 10 and Title 22 of the U.S. Code. Senator Nunn also took action to provide a substantial amount of “seed money” in defense appropriations bills to provide funding to encourage DoD Components to start new ICPs with allied and friendly nations, primarily in Europe and the Pacific Rim. Unfortunately, the results from this initial era of cooperation were decidedly mixed. While most of the Science and Technology (S&T) programs and projects with allied and friendly nations were successful, some of the highly publicized new start cooperative acquisition programs -- including NATO Frigate Replacement (NFR) 90 -- failed to complete development and enter into production and deployment for various reasons.

Evolution and Maturation: Fortunately, DoD’s ICP specialists learned quite a bit from these initial successes and failures, and worked with the DoD S&T community and acquisition Program Managers to develop several new ICP strategies and international agreement practices. These innovations led to successful negotiation, signature, and implementation of numerous S&T and acquisition programs at all Acquisition Category (ACAT) levels from the 1990s onward. The most well-known ICP established during this era is Joint Strike Fighter (JSF), but there are many others:

Army: Guided Multiple Launch Rocket System (GMLRS), M982 Excalibur
Navy: AV-8B Harrier II Plus, MK-48 Torpedo, P-8 Maritime Patrol Aircraft
Air Force: Wideband Global Satellite, NATO C-17, NATO Alliance Ground Surveillance
Missile Defense Agency: SM-3 Block IIA, David’s Sling, Ballistic Missile Defense Framework Partnerships

While they have not received as much media attention as U.S. FMS and DCS activity in recent years, the ICPs established with allies and friends since the 1990s have played a key role in achieving DoD’s Security Cooperation goals and objectives.

Comparative Advantages

Similar to other forms of Security Cooperation in the equipment and logistics area – most notably FMS and DCS -- ICPs provide the U.S. and its allies and friends with overall benefits such as:
  • Improving coalition interoperability
  • Achieving acquisition economies of scale in production and operations & support phases
  • Helping the U.S. maintain a viable production base
  • Fair sharing production line shutdown costs at the end of a program’s life-cycle

ICPs, however, provide several additional technological and economic advantages beyond those achieved through FMS and DCS including:

  • Establishing solid partner nation(s) commitments for new or modified systems early in development
  • Sharing upfront development (investment) costs for both S&T and acquisition programs
  • Gaining access to (and using) leading-edge foreign technology to improve performance and enhance overall affordability throughout the acquisition life-cycle
  • Fair sharing production non-recurring costs
  • Fair sharing sustaining engineering & logistics costs
  • Fair sharing system product improvement costs

Quantitative Impact: The quantitative economic benefits, in terms of U.S. and allied/friendly nation ICP contributions, have been substantial. The initial set of JSF ICP agreements led to over 4 ½ billion dollars in investment from eight partner nations during JSF’s development phases. Under the current JSF ICP Memorandum of Understanding (which entered into effect in December 2006), JSF production, sustainment, and follow-on development non-recurring costs from 2006 to 2051 have been (and will be) shared on a proportional basis with the U.S. funding ~75% and the other eight partner nations funding ~25%. Moreover, U.S. and partner JSF aircraft and sustainment procurement recurring buys have -- and will likely to continue to -- occur in approximately the same proportion, providing all nine partners with substantial (if as yet uncalculated) economic order quantity savings. Based on JSF’s overall ~$400 billion acquisition and ~$1.1 trillion operations and support cost estimates, this means that overall investment by the eight JSF partner nations to develop, acquire, and sustain a leading edge, coalition-ready air dominance capability will be ~$375B by the middle of this century.

JSF is not the only ICP program that has provided substantial economic benefits. Between 2011 and 2016 the Army, Navy, and Air Force entered into 478 ICP international agreements – mostly in the S&T, product improvement, and sustainment areas -- with a total program value of $27.6 billion. The U.S. contributions to these ICPs are valued at $22.6B while allied/friendly nation contributions total $5B. These amounts are substantially smaller than the amount of FMS and DCS sales made during this time period, which total tens of billions per year (e.g., ~$42B in 2017). However, these ICP statistics do not include DoD “Fourth Estate” ICP contributions (which were not collected) nor the production, sustainment, and product improvement recurring values from ongoing ICP programs since DoD has been unable to find a way to easily and accurately calculate them.

Notwithstanding these challenges, estimating the approximate economic value of ICPs beyond what is currently being tracked by DoD is possible. Using known JSF and P-8 aircraft/sustainment recurring purchases by partner nations in recent years, plus Missile Defense Agency and other Fourth Estate ICP statistics from this period, a conservative estimate would be $5B per year. When these estimates are added to already known amount of partner contributions during this timeframe, the combined partner investment and recurring purchases through ICPs over the past 5 years total $30B or more, a substantial sum.

Qualitative Impact: While ICP economic impacts throughout the acquisition life-cycle are impressive, there are strong arguments that their qualitative benefits are even more important in the long run. Here are four areas where successful ICPs excel in achieving optimal DoD Security Cooperation outcomes on a program-by-program basis:

Burden Sharing: ICPs require early investment by the U.S. and partner nations – which means risk sharing and up-front commitment by all – in the development of new defense technologies and capabilities. While the amount of early partner investment in absolute terms is normally small – from less than a million to the low 10s of millions of dollars – successful ICPs grow into future capabilities acquired and used by the U.S. and partner nations throughout the acquisition life-cycle. One early S&T ICP with NATO partners – Communications Systems Network Interoperability – led to cooperative international testing and maturation of the ARPAnet (the precursor to the internet). A $165M R&D investment – split equally ($55M each) by the U.S., Italy, and Spain – led to the integration of the APG-65 (F-18) radar into the AV-8B, which was ultimately acquired and fielded by all three nations. Most JSF partner nations -- excepting the U.K., which contributed $200M – only invested $10M in JSF’s initial Concept Demonstration Phase conducted from 1997-2001. Yet, as noted above, this initial investment led to a $4.5B partner contribution later in JSF development as well as future billions of dollars of JSF production, sustainment, and follow-on development spending on a leading edge, coalition-ready, interoperable defense capability.

Defense Exportability: One of the biggest challenges DoD faces today is how to achieve defense exportability as early as possible in our new start or major modification programs. This is a two-pronged issue:

  1. Which defense exportability features should be incorporated into a new/modified system to make it ready for future export?
  2. Since the development of such defense exportability features costs money early in development, who should pay?

Defining exportability requirements has always a tough policy and technical problem; one that U.S. Government (USG) Technology Security & Foreign Disclosure (TSFD) processes would rather defer until as late in the development process is possible since having a defined system configuration makes TSFD decision much simpler. Unfortunately, this approach has always been problematic since -- once development on a “U.S. Only” version system is largely completed -- there are significant redesign and redevelopment cost and schedule impacts associated with modifying our version to achieve FMS exportable configurations.

Even if TSFD policy is established as part of a U.S.-funded exportability feasibility study conducted early in development, who should pay the “big ticket” exportability modification costs during (or after) the Engineering and Manufacturing Development (EMD) phase? The tax payers? U.S. industry? ‘Launch’ FMS or DCS customers?

ICPs solve this problem since early partner commitment – including investment in the new system’s development – provide both the motivation for the USG TSFD processes to develop specific exportability policy guidance and the funds needed to pay for exportability design and development. While the mechanics of this can be a bit complex, the fact is that ICPs – by definition – must develop a system that is exportable to all of the partner nations in future production and sustainment phases. As a result partner participation and investment in the ICP also sets the stage for U.S. sales of ICP-developed systems to non-partner nations via FMS or DCS (depending on USG sales policy for the system) in early production.

There are many examples of this beginning with NATO SeaSparrow, Multifunction Information Distribution System (MIDS), Rolling Airframe Missile (RAM), NATO Alliance Ground Surveillance (AGS) (Global Hawk), and many other ICPs. More recently, U.S. and partner nation JSF ICP efforts provided a basis for early, affordable acquisition of JSF aircraft by current FMS customers (Israel, Japan, and South Korea) as well as other interested FMS purchasers.

Acquisition Planning and Contracting: All ICP international agreements have a Management section which establishes a mutually agreed executive and program management level structure for cooperative acquisition decision making and execution. They also contain a Contractual Arrangements section that establishes mutually agreed arrangements for U.S. and partner nation efforts to contract for U.S. and partner nation requirements. Other ICP international agreement sections govern key areas such as Financial Matters, Disclosure and Use of Information, and Security. As a result, U.S. and partner ICP acquisition requirements are planned and implemented in manner that optimizes combined buys. This achieves consistent economic order quantity savings outcomes for all partners throughout the program’s life-cycle. While many programs attempt to optimize U.S. and FMS customer procurement requirements that arise during a program’s life-cycle in a similar manner-- and occasionally succeed – they are often unable to achieve desired results due to lack of a mutually agreed structure and set of business practices for doing so. ICPs solve this problem.

Global Competitiveness:

ICPs provide a unique way for the USG and industry to compete in the global defense marketplace. ICP international agreements create an initial set of partners willing to invest in and acquire a newly developed capability. Moreover, ICPs have already resolved exportability issues and established an efficient program management and contracting organization ready address potential FMS customer requirements. That is why ICPs like NATO SeaSparrow, MIDS, RAM, JSF, and many others have been so successful in promoting FMS sales of cooperatively-developed and produced systems and equipment.

While they are not established for this purpose, experience has shown that successful ICPs provide the U.S. and its partner nations with several unique advantages in ‘head to head’ global competitions with other nations’ products. In the case of the JSF ICP initiative, eight of the nine development partners have already purchased (or decided to purchase) JSF aircraft. The ninth partner (Canada) is still considering JSF as an option to meet its future fighter aircraft requirements. As noted above, three other nations have already purchased JSF via FMS, and several others are considering it. No other current fighter aircraft has achieved this level of success in global competitions over the past decade.

Where are Tomorrow’s ICPs?

With such an impressive record of success, one would think that pursuit of future ICPs would be among DoD’s top priorities. Even DoD Directive 5000.01 – the acquisition ‘bible’ – lists establishment of ICPs for new systems as THE preferred development alternative (in theory, a better choice than U.S. joint service and DoD Component-unique new start programs).

The fact is (and has always been) that it’s substantially harder to establish an ICP for developing a new system rather than conducting a U.S.-only development at taxpayer expense and hoping for future sales. If you are interested in learning more about the challenges in establishing ICPs, consider reading the Center for Strategic and International Studies (CSIS) paper on “Designing and Managing Successful International Joint Development Programs” published in January 2017.

From a broader historical perspective, however, the challenges outlined in the CSIS study have always existed in some form. You don’t have to be an expert to recognize that, in most cases, it’s harder to establish a partnership than make a sale. Moreover, some DoD programs just don’t lend themselves to effective partnering with allies and friends. Despite these challenges, DoD advocated establishment of ICPs on specific programs as an integral part of their acquisition strategy – despite the risks and potential problems – in the 90s and 00s. We are reaping the benefits of these ICPs now, and will continue to do so well into the future.

However, DoD’s current Security Cooperation approach favors defense sales versus establishment of new start ICPs. Since 2010 only a few new major system ICPs have been established as compared to the previous decades. Why?

Expanded ICP Policy?

Organizations attempting to change the status quo often focus on reforming existing policies and processes rather than identifying “what’s missing?” The new Administration is already pursuing several lines of effort to improve DoD’s FMS performance in well-known areas. However, a strong argument can be made that -- despite the fact that the FMS reforms being pursued are sorely needed -- they will be unable to achieve enhanced DoD acquisition outcomes across the entire spectrum of DoD’s acquisition activities.

While promoting defense sales is DoD’s current Security Cooperation preference in the current environment, putting “all our eggs in this basket” is not our only option. We don’t have to fund S&T, rapid acquisition, and new system development costs all by ourselves, assume full technology maturation and development risks, then wrestle with all-to-predictable exportability and contracting problems when we try to sell new and modified systems developed for solely for U.S. use. There is another alternative.

Experience has shown that the current set of ICPs has served us well. These ICPs have -- and are continuing to -- provide substantial benefits to the U.S. and its allies and friends throughout the acquisition life-cycle. Looking forward, our current Security Cooperation reform efforts could be clearly benefit from the establishment of new ICPs with key allies and friends in selected areas. Use of ICP initiatives early in development provides a solid foundation for future defense sales after our systems have successfully completed testing and evaluation, then transitioned into full scale production, deployment, and initial sustainment activities. Many of the challenges inherent in future FMS for our new systems could be avoided by intelligent use of ICPs as a complementary Security Cooperation option.

Shouldn’t DoD consider establishing a new generation of ICPs, starting today?

Until next time … Prof K