BACKGROUND

4. The CNGF was conceived as a bilateral (later a tri-national) collaborative programme to provide up to 16 (later 22) anti-air warfare frigates. France sought two vessels, with the possibility of two more later on. Italy declared a requirement for six but there have been doubts in some quarters about the number it really needs and now, post-Horizon, it seeks only two warships. The UK had the largest requirement, for 12 warships to replace and upgrade the capability provided by its Type-42 destroyers. The programme included the warship's principal weapon system, which is to be a new high speed, highly manoeuvrable missile to intercept attacking aircraft and salvoes of anti-ship missiles. In the UK's case, the missile system will be the successor to the much less capable SeaDart missile currently deployed on the Type-42s, and to a great extent the SeaWolf too.

5. The CNGF programme grew out of a previous collaborative warship programme — the NATO Frigate Replacement for the '90s (NFR-90) — which involved eight countries. After the UK withdrew from NFR-90 in 1989 the programme came to a halt. In its place the MoD began developing a national requirement for an anti-air warfare warship, but also reviewed warship procurement plans of potential partners with a view to a possible European collaboration. Only the French Navy was identified as having a sufficiently similar requirement and procurement timetable, and in 1991 work started to develop a detailed bilateral Staff Requirement for the new ship. Italy were already partners with France on the Famille des Systemes Sol-Air Futur (FSAF), or family of ground-to-air missiles, and so were given observer status to the discussions in 1992. Italy accepted the Anglo-French requirement, allowing all three navies to sign the Tri-national Staff Requirement for a CNGF in December 1992.

6. The CNGF programme was afflicted by significant delays to both the ship and the missile system. The MoD's 1998 Major Projects Report[13] noted that as at 31 March 1998 the CNGF programme was running some 33 months late, putting back the ship's planned entry into service from December 2002 to September 2005.[14] By the time the MoD announced that the collaborative partners had decided no longer to pursue a common warship, the planned in-service date for the collaborative PAAMS system and the warship (now to be procured nationally) had slipped to 2007[15]—an overall delay of five years.

7. In this report we examine the factors behind the delays in the CNGF programme and the termination of its Horizon component; and we take a forward look at the MoD's plans for a UK national warship to provide a platform for the PAAMS system and the implications of these delays and changes of course for the Royal Navy.

CNGF DELAYS AND THE CANCELLATION OF THE HORIZON PROGRAMME

8. The MoD's 1998 Major Projects Report[16] itemised the then expected 33 months of delays to the projected in-service date of the new frigate, most of which were attributable to difficulties with the PAAMS system. A delay of 18 months had ensued while a "realistic and well developed programme for PAAMS" was achieved. A further 12 months delay was reported as due to disagreements between the partner countries concerning the performance required of PAAMS, an acceptable common industry structure and arrangements for a tri-national contract.[17] These delays also affected the timing of the Horizon platform element, with the missile and ship programmes having to be kept aligned.[18] Only three months of the delay noted in March 1998 was attributed to difficulties in negotiating a prime contract for the Horizon warship itself. That is not to say that progress within the Horizon part of the programme had proceeded without hitches, and there had been delays in gearing up Horizon after its deliberately imposed periods of idleness.[19]

9. Difficulties on the PAAMS element of the programme were resolved (finally we hope) in October 1998,[20] allowing it to proceed to the next stage. However, the UK's involvement in the warship collaboration (the Horizon element) will proceed no further. The MoD put this down to difficulties with the required performance of the weapon system and with the contractual approach being followed—

The Horizon International Joint Venture Company[21] was unable to put forward proposals for an affordable ship that would deliver the capability and in-service dates required. It did not demonstrate that it had established itself as a strong prime contractor with a robust supporting industrial structure that could manage the development and build of the warship and its main systems. The UK will now pursue a national prime contract and seek the maximum benefit from collaboration over equipment for the ships.[22]

We explore these factors further below.

DIFFERENCES IN THE CAPABILITIES REQUIRED BY THE PARTNERS

10. For the PAAMS weapon system, there were differences from the outset of the collaboration between the UK and the other partner countries concerning the extent to which different systems would satisfy the missions envisaged in the common capability requirement. For the Royal Navy, PAAMS was intended to provide a local area defence against modern anti-ship missiles, protecting lightly armed and unarmed vessels operating alongside it—amphibious assault ships and Roll-on-Roll-off ships—as well as aircraft carriers.[23] For the French, the initial focus was on protecting key naval assets like aircraft carriers, rather than the whole naval task force. The system performance sought by the UK, in terms of such factors as the likely number of incoming missiles to be defeated and their stealthiness, was more stringent than the others.[24] Although the Tri-national Staff Requirement was to be able to counter threats envisaged for 2010-15, because of underestimated difficulties in tailoring an essentially land-based missile system for maritime use, the capability sought was later eased to be able to counter only the threat level envisaged at the date that the system would enter service.[25] This was the principal cost/capability trade-off in the PAAMS programme.[26] Nevertheless, the PAAMS development contract will include provisions for individual nations to commission the study work for subsequent enhancements, and such an upgrade might be commissioned by the UK for 2010.[27]

11. Greater compromises would have been needed, however, with the PAAMS' multi-function radar. Rather than a completely common PAAMS system, the partner countries agreed to create a twin-track approach in which separate prime contractors would provide two separate PAAMS packages. Consequently, while the three partner countries have agreed to procure a mainly common PAAMS system, they will buy different multi-function radars (Figure 1). France and Italy will use the European Maritime Passive-Array Radar ('Empar') already being developed as part of their bilateral FSAF programme. The FSAF programme predates the PAAMS project, and France and Italy had already invested heavily in its Empar radar. The UK, on the other hand, will procure the Sampson radar,[28] developed by UK industry and based on research by the UK's Defence Evaluation and Research Agency (DERA) for a Multi-function Electronically-Scanned Adaptive Radar ('Mesar').[29] Empar involved less technical risk and would be in-service earlier, but it would have less capability than Mesar. The UK Sampson radar would involve more technical risk but have a superior performance which CDP described for us in some detail, in particular the future development potential that is possible with its 'active array'.[30]

12. Differences between the CNGF partners concerning the operational capability acceptable for the missile system hampered the PAAMS programme. But questions of military capability are closely bound up with industrial strategy. The UK's requirement for a more sophisticated multi-function radar would allow UK industry to take forward work done with DERA. France sought a system available early for the escorts for its Charles de Gaulle carrier, but along with Italy they also favoured the lower level of capability that their industries were working to deliver. While such flexibility can be seen as a positive element of collaborative procurement, to the extent that it is driven by non-defence factors it must also be recognised as an impediment to good procurement practice.

NATIONAL DIFFERENCES IN APPROACH TO COMPETITION AND CONTRACTUAL MATTERS

13. The PAAMS and Horizon elements of the CNGF programme were each managed by a Joint Project Office on behalf of the three governments, each of which in turn reported to a tri-national steering committee. Each project office was intended to contract work from its relevant prime contractor—the Horizon International Joint Venture Company (IJVC) for the warship, and 'Europaams' for the PAAMS system.[31] While these prime contractors would be tasked with developing and manufacturing the ship and missile system respectively, there were tri-national memoranda-of-understanding that required them to hold competitions for as many sub-systems as possible.[32] To handle the separate national requirements for the missile system, subsidiary organisations were set up within Europaams—'Eurosam' for the French and Italian requirements, and 'UKAMS Ltd' for the UK requirement.

14. While France and Italy could base their selection of contractors for the various PAAMS systems to favour their state-owned enterprises, the UK selected for UKAMS the companies possessing the relevant technologies—not just the UK supplier of the Sampson radar, Siemens Plessey Systems (now BAe Defence Systems Ltd), but also French and Italian firms involved in the FSAF missile system.[33] Furthermore, although originally a consortium, UKAMS was subsequently restructured as a wholly-owned subsidiary of Matra BAe Dynamics,[34] providing a stronger leadership on the industrial side of the project.[35] With a single contractor for the UK PAAMS requirement, the MoD considered that a price reduction of around 10% became possible as the management of risks was grasped by a single responsible body. A consortium of firms from each country risked a "tablecloth tugging exercise where everybody is frightened to let go, in case all the work-share lands in the lap of the person sitting opposite".[36] We see evidence here of the inhibiting effects on efficient procurement of the unresolved turbulence in the European defence manufacturing industry. The hodge-podge of interlocking companies and project teams for the programme, with different reporting lines, also illustrates the complexities of trying to bring off a collaborative project. It does not, we judge, provide a very positive pattern to be followed in the future. However, despite these institutional impediments to swift and effective decision-making, the PAAMS project appears now to be on reasonably firm ground.[37] In April 1999 the three governments agreed to proceed as quickly as possible to begin the missile systems' full-scale development and initial production,[38] and the contract for this work was placed on 11 August 1999.[39] Though adding to the complexity of the organisation of the CNGF programme, and eroding the benefits of collaboration, it seems clear that its twin track approach is part of what makes the PAAMS project workable, allowing different priorities for trading-off costs, capabilities and time, as well as differences in contract strategies of the partners, to be accommodated.

15. The Horizon programme fared less well. In suggesting that its termination was a joint decision,[40] we judge that the MoD is putting a rather favourable gloss on the programme's failure. CDP told us that "the UK did not withdraw from Horizon—the three countries involved agreed not to proceed to the next phase".[41] That may be formally correct, but from comments we have received from France and Italy[42] it is quite clear that this was the initiative primarily of the UK,[43] which withdrew from the project after losing patience with the programme's unfocussed management and the high price of the warship. The Horizon IJVC was based in London and would have operated to UK law and UK Government contracting standards.[44] The MoD had sought for it to be restructured as a genuine prime contractor,[45] but the firms involved in the Horizon IJVC could not agree amongst themselves on how such a prime contractor should be established,[46] nor which one of them should become the leader.[47] The governments of France and Italy, however, also clearly played their part. Their Horizon contractors, which they nominated to the IJVC, were state-owned monopoly shipbuilders[48] and under the strong influence, and in some cases the direction, of their respective governments.[49] Direction des Constructionnes Navales (DCN), for example, is also part of the French Defence Ministry. The UK, on the other hand, ran a competition for its member of the tri-national industry body, which was won by a GEC Marconi-led consortium.[50] GEC Marconi recognised the need for a strong leadership on the industrial side,[51] and sought to lead the Horizon IJVC in April 1999, though without success.[52] The Italian defence attaché reported that having GEC Marconi (currently the subject of a takeover bid by British Aerospace which is before the European competition authorities) as a prime contractor would not have been acceptable to France or Italy.[53]

16. The competition for the ship's Combat Management System (CMS) exemplified this fatal lack of separation of 'customer' and 'supplier' on the part of France and Italy. The CMS was one of three sub-systems being developed for the warship (Figure 2), for each of which two consortia were given contracts to develop competing proposals[54]. The two consortia competing for the CMS sub-contract—'HEPICS' and 'EuroCombat'—each comprised UK, French and Italian firms. The difficulty stemmed from a close involvement in one consortia—HEPICS—by DCN, because DCN was also part of the Horizon IJVC.[55] This blurred the contractual boundaries considerably, with DCN putting itself in the awkward position of being part of the team of one of the bidders while it would also be involved in awarding the CMS contract. CDP tried to place a charitable interpretation on the situation, stating that DCN behaved "impeccably".[56] The pressures on DCN to favour HEPICS must have been considerable, however, because its SENIT family of combat management systems (on which the HEPICS solution was based) was already fitted in other French navy vessels, including the Charles de Gaulle aircraft carrier which the French Horizon frigates were intended to protect.[57] When the Horizon programme was ended, the CMS competition had not been decided.[58] In May 1999, the French Ministry of Defence belatedly announced a restructuring of the DCN state-owned shipyard, to put it into a more commercial framework with a contractualised relationship with the French government.[59] This necessary first step has however come too late to meet the UK's concerns about the competition arrangements for Horizon.

17. The 1994 Horizon Memorandum of Understanding made value for money the primary consideration in awarding contracts, and no formal work-share was defined (although work-share was intended broadly to reflect cost-share).[60] The disciplines of competition and value for money, however, proved difficult to apply. Firms involved in the EuroCombat bid told us of their frustration over the inability of both the Horizon IJVC and the Horizon Joint Project Office to deal with the CMS competition in a sound manner.[61] BAe Defence Systems, for example, told us that—

Both French and Italian Government defence procurement methodologies were closer to the pre-Levene[62] era of UK procurement than current UK practices ... As a result, the attempt to run a competition on the basis of a level playing field was probably unrealistic. The French and Italian industrial organisations involved in Horizon had different approaches to competition, and were not faced with a "winner takes all" situation but an environment where a national workshare deal was inevitable. The enforcement of a best value for money UK-style equipment selection decision was always going to be difficult in such a situation ... In the Horizon procurement, the position of the DCN—part of the French Ministry of Defence—meant that it was the customer (working with the DGA [French procurement agency]), a shareholder in the prime contractor organisation (the IJVC) and a subcontractor bidding ... its HEPICS combat management system . This, combined with the French Government's support for its national champion, had a significant impact on the prospects for a level playing-field competition.[63]

18. And GEC-Marconi, part of the Horizon IJVC, was particularly scathing about the arrangements for managing the Horizon programme more generally—

The structure of the Horizon IJVC was sub-optimal. Shareholders in the IJVC, taking shared liability on a high risk programme, inevitably required the protection of unanimous agreement. This led to a lack of clear leadership and the shareholders tended to be more concerned with protecting their domestic interest, particularly in terms of work share, than managing the project on an objective basis. Further there was lack of agreement until very late in the programme on the extent to which responsibility should be delegated to the chief executive of the IJVC, and this resulted in too many decisions being referred to the shareholders ...This resulted in the IJVC being micro-managed by the customer ... Industry initiatives were frustrated ... by the Joint Project Office, who were concerned with preserving technical performance instead of balancing risk and value for money ...—[it sought to] refine the project in greater and greater detail rather than allowing the IJVC to ... define an overall warship with balanced and affordable capabilities ... The introduction of Smart Procurement in the UK has emphasised the different approaches to contracting. The UK places more emphasis on cost targets and performance than specification and schedule. Although the French and Italian Defence Ministries are moving towards similar disciplines they still place a greater emphasis on political and industrial considerations and work-share.[64]

19. CDP himself told us that the compromises needed to keep Horizon afloat were substantial, and would have involved moving away from a performance based contract. The twin track approach for PAAMS allowed the UK to place its contract ultimately through a single-entity prime contractor—UKAMS Ltd.[65] The Horizon IJVC, on the other hand, was in CDP's words "almost unimaginably complex", with its membership comprising DCN (the French state-owned shipyard and defence manufacturer) and Italian state-owned firms as well as a consortium of three UK private-sector firms. CDP told us that—

Getting all these people to agree a fixed price performance based contract looked to me to be a possibility three years ago, but by the middle of last year it was beginning to look increasingly unlikely. We gave industry three chances to do that: a last chance in December [1998], another last chance in February [1999], and an absolutely final last chance in April, and we did not get it. We would not compromise on that principle.[66]

20. Differences in procurement procedures between the UK and the other partners were clearly at the very heart of the difficulties encountered with Horizon, and the other partner countries highlighted for us the difficulty of reconciling the UK's market approach with their own focus on work-shares.[67] Such differences in approach were ultimately dictated by whether the relevant defence industries in each country were privately or publicly owned. With hindsight, it seems clear that the Italian and (in particular) the French governments were never going to be prepared to embrace the MoD's focus on competition, value for money and contracting for system performance. Indeed, France's DCN appears to have had every intention of buying certain equipment from sources close to home, whatever the requirement or the equipment competitions might have otherwise suggested. Looking to the future, the constraints of work-share, or juste retour, may be eased if managed by the 'Organisation for Collaboration and Cooperation in Armaments' (OCCAR).[68] OCCAR is charged with seeking to achieve a global workshare balance over several years and over several equipment programmes, rather than the balance within each programme more usually sought by collaborative partners.[69] We are separately examining the treaty to establish this five-nation[70] organisation, ahead of its ratification by the UK.

LESSONS IDENTIFIED

21. As part of the arrangements for its winding-up in October 1999, the Horizon Joint Project Office has been charged with providing the three partner countries with an audit of the work done, a project history and views on lessons to be learnt.[71] For its part, the MoD intend to undertake a comprehensive national evaluation which will draw on the work by the Joint Project Office.[72] The Department meanwhile has set out a tentative view of the lessons from the collapse of the Horizon programme—

At this stage, it seems that four of the major lessons to be drawn from this experience are that:

• The operational requirement should be agreed in detail,[73] be affordable against agreed budgets and be nationally achievable in the timescales required by the service customer. Where national requirements diverge[74] a handling strategy must be specified from the outset.

• Early in the programme, an industrial organisation must be established which meets the requirements of industry and of all participant governments. For the UK, this means the appointment of an effective prime contractor.

• Databases should be established very early on in a project's life to collect Integrated Logistic Support data, particularly that required to conduct the comparative analysis of through-life costs for the competitions for individual weapon and ship equipments.

• There should be a common view of the risks and how to manage them, and technical obstacles to collaboration, such as differing national shipbuilding and safety standards, must be harmonised early in the programme.[75]

22. CDP also elaborated some other areas where he considered that future collaborations might usefully be conducted differently. Governments need to be readier, he told us, to share information on budgets and equipment requirements to help reduce over-ambitious proposals, and then to communicate this information to potential contractors. Although this would be a break from traditional methods, CDP was convinced that without such budget disclosure years may be wasted while "you bring people's feet back down to earth".[76]

23. On the CNGF programme some of the firms involved complained to us that the defence departments themselves had initially sought attractive but over-complex and unaffordable technical solutions.[77] Without visibility of the indicative costs, industry said it had had difficulty in establishing clearly with the customer governments the relative priorities, and trade-offs opportunities, for meeting cost targets and technical specifications.[78] The earlier NFR-90 programme had involved over-ambitious and irreconcilable requirements, with the net cast too widely in trying to encompass the needs of eight nations each requiring a fundamentally different type of frigate,[79] and although the subsequent CNGF programme involved cost/capability trade-offs to produce a common solution there were still differences in the technical specifications that proved difficult to reconcile. As a result of those cost/capability trade-offs, the PAAMS requirement will only be fully satisfied once it is upgraded in-service,[80] but they have allowed sufficient commonality for that project to proceed.

24. We welcome the steps being taken to assess thoroughly the lessons of the CNGF programme. Such lessons-learning exercises are not new, however, and conclusions have sometimes not been fully followed up. This time, we look to the MoD to disseminate the lessons identified to all project teams, and to apply the lessons with more conviction.

14  'Major Projects Report' National Audit Office, HC 519, Session 1998-99, page 65 Back

15  Ev p 21 Back

16  Published as an annex to HC 519 Back

17  MPR 98, page 66 Back

18  Ev p 54 Back

19  ibid Back

20  ibid Back

21  The putative prime contractor for the collaborative warship Back

22  Ev p 22 Back

23  Ev p 21 Back

24  Q 31 Back

25  Ev p 20 Back

26  ibid Back

27  Q 31 Back

28  Ev p 21 Back

29  Q 23 Back

30  QQ 23-26 Back

31  Ev p 21 Back

32  ibid Back

33  Ev p 22 Back

34  ibid Back

35  Ev p 62 Back

36  Q 34 Back

37  Q 31 Back

38  MoD Press Notice 141/99 Back

39  MoD Press Notice 312/99 Back

40  Ev p 54 Back

41  Q 3 Back

42  The defence attachés of the French and Italian embassies in London kindly provided their countries' views. These are reproduced at Ev p 59 and 63 Back

43  Ev p 59 Back

44  Ev p 22 Back

45  Ev p 54 Back

46  Q 4 Back

47  Ev p 54 Back

48  Ev p 22 Back

49  Ev p 62 Back

50  Ev p 21 and 24 and Annex Back

51  Ev p 60 Back

52  Ev p 54 Back

53  Ev p 59 Back

54  These competitions were set-up by the Joint Project Office, pending the establishment of the Horizon IJVC to decide the results of the competitions Back

55  Q 21 Back

56  Q 21 Back

57  Q 21 Back

58  Ev p 55 Back

59  Q 11 Back

60  Ev p 22 Back

61  Ev p 59 and 62 Back

62  For a history of the MoD's procurement initiatives, including the Levene reforms, see the Defence Committee's Eighth Report, Session 1997-98, The Strategic Defence Review, HC 138; paragraphs 305-319 Back

63  Ev p 62 Back

64  Ev p 60 Back

65  Q 10 Back

66  Q 10, Ev p 54 Back

67  Ev p 59 Back

68  Q 34 Back

69  Q 34 Back

70  UK, France, Germany and Italy are already members of OCCAR, and the Netherlands' accession is currently being processed Back

71  Ev p 57 Back

72  ibid Back

73  Although in the case of the CNGF there was an agreed common operational requirement, the partners could not agree on how to implement it. Back

74  The CNGF had a common requirement, but different national variants were put forward to meet it. Back

75  Ev p 57 Back

76  Q 34 Back

77  Ev p 60 and 62 Back

78  Ev p 66 Back

79  Q 35 Back

80  On the Horizon programme, when it was terminated the capability to be acquired had not yet been fixed.  Back