Select Committee on Defence Appendices to the Minutes of Evidence

APPENDIX 8

Memorandum from the Ministry of Defence on Major Procurement Project Survey (March 2002)

BACKGROUND

NIMROD MRA4

  The Nimrod Maritime Reconnaissance & Attack Mk4 (MRA4) will replace the current Nimrod MR2 as the RAF's maritime patrol aircraft, providing significantly enhanced Anti-Submarine and Anti-Surface Unit Warfare capability through improved aircraft and sensor performance, a greater degree of system integration and better Human Machine Interface design. The new aircraft will also provide a substantial improvement in availability and supportability. The aircraft, training system and initial support are being procured from BAE SYSTEMS as Prime Contractor.

  In November 1992, the Equipment Approvals Committee (EAC) approved a Request for Information exercise whereby 17 companies were invited to provide responses to the draft Replacement Maritime Patrol Aircraft (RMPA) Staff Requirement. Following analysis of the industry responses, the EAC endorsed the requirement and approved an Invitation to Tender phase whereby four companies (BAe, Lockheed Martin, Loral and Dassault) were invited to provide detailed technical and commercial proposals for an aircraft to meet the endorsed Staff Requirement. Dassault withdrew from the competition in January 1996, and whilst Lockheed Martin and Loral merged in May 1996, they maintained the two separate proposals until the competition concluded.

  Following assessment of these responses, selection of BAe's Nimrod 2000 (later to be re-designated Nimrod MRA4) offer was approved by EAC and Ministers in July 1996. This was the equivalent of Main Gate approval. The contract was placed in December 1996 and following difficulties encountered by BAE SYSTEMS in meeting the contractual programme, the contract was re-negotiated in May 1999. BAE SYSTEMS are now pursuing a programme which seeks to improve contracted aircraft delivery timescales. Responsibility for the build of the aircraft moved from FR Aviation to BAE SYSTEMS Woodford in October 1999 as part of the drive for programme improvements.

CURRENT POSITION

  Maintaining the intensive pace of the MRA4 programme is dependent upon successful application of concurrent engineering practices with, for example, no dedicated prototype aircraft. Considerable progress has been made and the Department expects MRA4 will satisfy or exceed the key capability requirements. Design and development is largely complete with systems integration qualification testing now underway and first flight expected to occur towards the end of 2002. This target is nine months behind the programme as rebaselined in 1999 and there is thus some risk of slippage to the in-service date. To mitigate this risk, MOD and BAE SYSTEMS have agreed to an Incremental Capability Acquisition approach. This comprises the acceptance of aircraft in two steps, an initial capability being demonstrated by the time of first aircraft delivery will full specification compliance being demonstrated by the time of the seventh aircraft delivery and ISD. In parallel MOD and BAE SYSTEMS are developing a joint approach to whole life support, under a Memorandum of Capability Partnering signed in December 2000. This appointed BAE SYSTEMS as Prime Contractor for industry in-service support to the Nimrod MRA4 Weapon Systems where such support is determined by MOD to be both appropriate and best value for money.

OPERATIONAL REQUIREMENT

  1.  To allow the UK to continue to meet its defence commitments, in both open ocean and littoral/shallow waters, and play its part in deterring aggression and instability, there is a need for Maritime Patrol Aircraft (MPA). Within the overall maritime requirement, the MPA is uniquely suited for a wide range of tasks due to its speed, range, endurance, broad range of sensors and substantial weapon load. Its ability to respond quickly not only within theatre but also between theatres, to provide defence in depth, and to engage in both offensive and defensive operations make it an essential component of the maritime force mix. It is a key capability in the safe deployment of UK forces.

TRADE-OFFS

  2.  There have been no significant trade offs.

NUMBERS

  3.  The 1996 requirement was for a fleet of 21 aircraft in total. This has recently been reduced to 18 to reflect the increase in capability afforded by the MRA4 and the revised submarine threat assessment within the Atlantic theatre.

STRATEGIC DEFENCE REVIEW

  4.  The SDR confirmed the requirement for MPA with the capabilities of MRA4.

MILITARY CAPABILITY

  5.  The Nimrod MRA4 is being procured principally for Anti-Submarine Warfare, Anti-Surface Unit Warfare and Search and Rescue. However, it can be used across a full range of missions and will contribute to 16 out of the current 27 Military Tasks. In particular the platform has a significant role to play in `Protection of the Deterrent (MT26)', `Counter-Drugs Operation (MT3)' and `Integrity of UK aters in Peacetime (MT8)'.

EQUIPMENT TO BE REPLACED AND IN-SERVICE DATE

  6.  The Nimrod MRA4 replaces the Nimrod MR2, which has been in frontline service for over 20 years. The mix of Nimrod MR2 and Nimrod MRA4s available for operations during the programme continues to be refined by the Integrated Project Team, BAE SYSTEMS and the MOD to maximise the available capability consistent with the MRA4 delivery programme. The contract will require the first aircraft to be delivered to RAF Kinloss in August 2004, with an Initial Operating Capability. The contracted In Service Date is March 2005, marking the arrival of the 7th aircraft, with Full Operating Capability. MOD risk assessment suggests these dates may not be met (para 13 refers). The 18th Nimrod MRA4 is expected to be delivered in spring 2008, when the last remaining Nimrod MR2s will be phased out of service.

PROCUREMENT APPROACH

  7.  The original contract for the supply of aircraft, training systems and an interim support package was the result of competitive tendering. Competition will also be used at the sub-contract level, as part of the process of developing the capability partnering approach to long term in-service support of the aircraft, with BAE SYSTEMS as the prime contractor.

CREWING

  8.  The Nimrod MRA4 will be crewed by RAF aircrew. With its improved sensor performance, communications, processing capability, automation and ergonomics, the MRA4 allows a reduction in crew numbers from the existing Nimrod MR2 minimum of 13 to 10. These are two Pilots, two Tactical Co-ordinators, one Communications Operator and five multi-skilled Weapons Sensor Operators. A mixture of Service personnel and civilian industrial staff will provide support and training. The optimum service/civilian mix will be determined through the process to establish capability partnering.

ALTERNATIVE PROCUREMENT OPTIONS

  9.  In selecting the MRA4 a full Combined Operational Effectiveness and Investment Appraisal study (COEIA) was conducted by the Department. Operational analysis was carried out in support of the requirement with regard to force mix within ASW, ASuW and nuclear deterrent support operations. Only MPA provided the speed of response, range, endurance and ability to carry an array of weapons required to provide an outer defence to surface forces. Within the COEIA, Nimrod 2000 (now MRA4), was compared to the competitor P3 aircraft (Orion 2000 and Valkyrie), refurbished Nimrod MR2 "do minimum" and also run-on of the MR2 the "do nothing" option. The last two options provided less than 25 per cent of the capability of the competing Nimrod 2000, Orion 2000 and Valkyrie options. There was no significant difference between the cost effectiveness of these three options.

EXPORT POTENTIAL

  10.  BAE SYSTEMS are expected to accept the US Navy invitation to bid into their requirement for a new Multimission Maritime Aircraft to replace their P3 Orion fleet. The requirement could exceed 130 aircraft. In the event that this were successful, other sales could follow, notably to Australia, Japan and Korea. In support of the Company's effort, the Department has been fostering a close working relationship between the US and UK project teams.

INDUSTRIAL FACTORS

  11.  The BAE SYSTEMS sites for the assembly and test of the MRA4 are Warton and Woodford. Additionally, wing manufacture and sub-assembly work is carried out at Prestwick, Chadderton and Brough. Principal sub-contractors are Rolls Royce (Filton and Berlin) for the engine, Boeing for the Tactical Command System and some sensor sub-systems, Ultra for the Acoustics system and Thales for the Radar and Training System. The aircraft carries a number of weapon systems, including STING RAY Torpedoes, manufactured by BAE SYSTEMS, sonobuoys currently supplied by Ultra Electronics and US-sourced Harpoon air to surface missiles.

SMART ACQUISITION

  12.  Although the MRA4 programme pre-dates the introduction of Smart Acquisition it is being managed along Smart Acquisition lines. Performance, time and cost measures drive the key milestones of the programme.

ACQUISITION PHASES/KEY MILESTONES/COSTS

  13.  ***

Milestone	Notes	Date
1st Delivery	At Initial Operational Capability Predicted (50 per cent confidence)	Aug 2004 ***
ISD	Approved Predicted (50 per cent confidence)	Mar 2005 ***
Final Delivery		***

  The approved acquisition costs for the programme in resource terms stands at some £2.98 billion.

IN-SERVICE SUPPORT

  14.  The MOD and BAE SYSTEMS are developing a joint approach to whole life support, under the Memorandum of Capability Partnering. In the context of furthering capability partnering, agreement has recently been reached with the company over an Initial Enabling Package (IEP). The IEP package includes incremental capability acquisition (the delivery of aircraft with an initial capability, followed by the balance) in order to protect ISD, as well as a series of measures covering integration facilities and software tools that are vital for long term support of the aircraft and its systems. There is also a joint commitment to conduct detailed studies to determine the optimum whole life support solutions to be progressively put in place from 2004. A Heads of Agreement document was signed in February 2002 and this will form the basis for the necessary contract action.

`FRONT LINE' NUMBERS

  15.  The 18 MRA4 aircraft will be split between 17 operating fleet and 1 sustainment aircraft (covers attrition and deep servicing). The operating fleet will be held at varying levels of readiness. All will be available within 60 days.

INTEROPERABILITY

  16.  MRA4 complies with the NATO Defence Capabilities Initiative.

DISPOSAL OF EQUIPMENT REPLACED

  17.  The final MRA4 delivery is contractually scheduled for spring 2008. Those remaining MR2 aircraft which have not been converted as part of the MRA4 programme will then be withdrawn from use in their present role.

IN-SERVICE LIFE

  18.  Nimrod MRA4 has an in-service life of 25 years based upon 650 flying hours per year.

DEVELOPMENT POTENTIAL

  19.  The mission systems have been with future development potential in mind. Provision is included for the installation of role fit work stations in the rear cabin. The aircraft's synthetic aperture radar, advanced communications suite, and extensive range and sortie duration make it a platform capable of adaptation to other roles.

REPLACEMENT FOR TRIGAT MISSILE

  The UK has decided not to proceed with the collaborative Medium Range (MR) and Long Range (LR) Third Generation Anti-Tank (TRIGAT) programmes and is proposing to procure alternative systems. The change in likely war-fighting scenarios since the commencement of the TRIGAT programmes has meant that the successor programmes will align more correctly with the envisaged threat.

OPERATIONAL REQUIREMENT

  1.  The UK entered a collaborative arrangement with France and Germany to develop and produce TRIGAT weapons to meet its separate medium and long-range requirements for equipping the infantry.

  2.  A reassessment of the UK's long-range requirement, which took account of the role that the Attack Helicopter would play, led to a decision in 1991 not to proceed with the production phase of LR TRIGAT (although the most cost-effective solution was to complete its development under the collaborative MOU with France and Germany).

  3.  For the medium range capability, while MR TRIGAT was still considered appropriate for use with mechanised and armoured infantry brigades, a decision was made in 1999 not to equip the Light Forces with it because of its weight and bulk. As a result, a requirement for the Light Forces Anti-Tank Guided Weapon (LF ATGW) was introduced with a competition to select the most cost-effective solution.

  4.  Difficulties continued with the MR TRIGAT programme which led, in summer 2000, to a decision by the UK not to proceed into production with this system. Balance of Investment studies were conducted and these reported in summer 2001 that the mechanised infantry brigades would be best equipped with the same weapon as that to be chosen for the Light Forces. Consequently, the existing LFATGW has been expanded to cover all medium range requirements. The studies also concluded that a long range ATGW would be the best solution for the armoured infantry brigades. The long range capability is still being considered and may be taken forward as part of the Future Rapid Effects System (FRES) work.

TRADE-OFFS

  5.  Trade-offs have been considered as part of the Balance of Investment studies conducted during

2000-01. Further possible trade-offs may be identified when the long range ATGW is considered in relation to the FRES requirement.

NUMBERS

  6.  ***

  7.  It will not be possible to determine the number of long range weapons for some time as it will depend on the future linkage with other programmes. Revalidation of the Balance of Investment studies will also be carried out as such decisions are not planned to be taken until 2005.

STRATEGIC DEFENCE REVIEW

  8.  The Strategic Defence Review confirmed the need for an anti-armour capability. Equipping the mechanised infantry brigades with LF ATGW and the armoured infantry brigades with a long range system will fulfil this requirement.

EQUIPMENT TO BE REPLACED AND IN-SERVICE DATE

  9.  The current in-service Medium Range ATGW is MILAN. While it continues to meet the requirement for which it was designed, it is becoming increasingly ineffective as it approaches its out of service date. It is due to be phased out between 2005 and 2008.

ACQUISITION APPROACH

  10.  The LF ATGW is currently in its assessment phase, which is identifying the most cost-effective Military Off The Shelf solution. This followed the issue of an Invitation to Tender on 21 September 2001 to two potential bidders (Raytheon-Lockheed Martin for the US developed JAVELIN system and Matra BAe Dynamics for the Israeli developed SPIKE system). Tenders were received early in 2002 and a decision on which system to procure is planned for autumn 2002.

  11.  The acquisition approach for the long range requirement has still to be determined.

ALTERNATIVE ACQUISITION

  12.  Although the possibility of developing a LF ATGW was considered, it was not likely to be the most cost-effective solution and it would not be possible to achieve an In Service Date of 2005 to match the commencement of phasing out MILAN.

COLLABORATION

  13.  As the preferred solution is for procurement of an existing off the shelf system, the possibilities for collaboration are minimal.

  14.  Discussions are underway to identify opportunities to exchange data with other nations who are conducting their own trials.

INDUSTRIAL FACTORS

  15.  Although both competing systems for the LF ATGW are based on foreign weapons, the consortia have been requested to maximise the amount of work carried out in the UK. The extent to which this is achieved will not be known until the bids have been submitted and assessed.

MILESTONES AND COSTS

  16.  The assessment phase for LF ATGW is due to be completed by autumn 2002. It is proposed that a contract would be set soon after and ISD is expected to be in 2005.***

  17.  No detailed plans have been made for a long range ATGW but the ISD would be expected to be about 2009. No detailed estimate of costs has yet been made.

AIRLIFT ASSETS: A400M

  It was decided in 1994 to replace a first tranche of the Hercules air transport fleet with 25 new C-130J aircraft. We are now seeking, through a collaborative programme, both to replace the capability provided by the remainder of our ageing air transport fleet and to procure for the long term a dedicated outsize strategic lift capability. The Secretary of State announced on 16 May 2000 [Hansard col. 150] the Department's intention to order 25 aircraft in the A400M initial launch to fulfil our long-term outsize airlift requirements from the latter part of the decade. We have leased four Boeing C-17 aircraft to improve our strategic airlift capability for the period until A400M enters service.

  The partner nations signed a Memorandum of Understanding on 18 December 2001 that enabled the Organisation for Joint Armament Co-operation (OCCAR) to place a single stage contract with Airbus Military (AM) for the development and manufacture of A400M. This contract has yet to enter force but will do so when Germany is able to provide an unqualified financial commitment. The partner nations have accepted the end of March 2002 as a realistic deadline for Germany to resolve its outstanding difficulties.

OPERATIONAL REQUIREMENT

  1.  The Staff Requirement to replace the RAF's ageing fleet of Hercules transport aircraft was originally endorsed in the summer of 1993. The roles and characteristics sought for both tactical and strategic airlift were essentially similar to those of the existing aircraft. They included the ability to deploy troops or freight between theatres or within a theatre of operations either by parachute or landing on short, semi-prepared strips. Emphasis was placed on solutions that offered significant improvements in reliability and maintenance and operating costs over the existing RAF Hercules. In December 1994, the decision was announced to buy 25 C-130J as tranche 1 of a Hercules Rolling Replacement Programme (HRR1).

  2.  In July 1977, with a view to informing decisions on tranche 2 of the Hercules Rolling Replacement programme (HRR2), we announced our intention to rejoin the collaborative European Future Large Aircraft (FLA) programme (subsequently given the Airbus family name of A400M) and to endorse the related European Staff Requirement (ESR). The ESR was prepared to meet the future air transport requirements of eight participating nations—Belgium, UK, France, Germany, Turkey, Italy, Spain and Portugal. In the event, Portugal decided not to participate formally in subsequent stages of the FLA programme, but subsequently rejoined the programme in January 2001. The ESR matches, and in some cases exceeds, the original UK requirement (SR(A)435) for a Hercules replacement. In particular, it specifies a larger cargo carrying volume, a greater maximum payload, and a higher cruise speed.

  3.  The Strategic Defence Review confirmed the need to replace the capability provided by the Hercules and concluded that an outsize airlift capability was required to support the deployment of the Joint Rapid Reaction Force (JRRF). The latter requirement is to move items such as the Attack Helicopter and certain engineer equipment but not, for example, Challenger, AS90, or armoured bridge layers. This outsize lift capability was consistent with the requirements for FLA set out in the ESR and thus required no change to the procurement strategy to meet the longer-term HRR2 requirement agreed in July 1997.

TRADE-OFFS

  4.  Studies were carried out in March 1993 to examine various Hercules refurbishment and replacement options, including C-17, C-130J, and FLA, using projected costs. Further studies were conducted in 1994, based on Lockheed Martin's response to the HRR1 Invitation to Tender. Since FLA would not be available within the prescribed timescale, these studies included consideration of refurbishment of the existing Hercules, followed by procurement of C-130J or FLA, as well as early procurement of the then current C-130H production model or its planned replacement, the C-130J. The conclusion was that procurement of C-130J to meet the HRR1 requirement would provide best value for money, earliest maximum increase in availability, and a significant increase in capability compared with refurbishment options.

  5.  Studies in 1996 examined various options to meet the HRR2 requirement, including procurement of C-130J, FLA, C-17, and a mixed fleet of C-130J and C-17. These studies indicated that none of the options could be ruled out, but it was not possible to draw definitive conclusions in the absence of firm costs. Further studies were carried out on the basis of the priced proposals received from Airbus, Boeing and Lockheed Martin, and Ministers announced their decision on 16 May 2000 to make a commitment to procure 25 A400M aircraft in the initial production tranche. In selecting A400M as the chosen solution, the greater industrial benefits and technical compliance of the European solution were taken into account.

NUMBERS

  6.  Requests for Proposals issued in July 1998 quoted a potential UK requirement for up to 45 FLA and sought prices for stated equivalent numbers of C-17, and mixed fleets of C-17 and C-130J. Final numbers were decided in the light of further operational analysis of the requirements, and cost-effectiveness trade-offs between the solutions; this process took into account the fact that we will be replacing 25 Hercules C-130K aircraft with 25 A400Ms, the latter providing a 50 per cent increase in airlift capability.

STRATEGIC DEFENCE REVIEW

  7.  As already noted, the SDR confirmed the need for HRR2 and for an outsize airlift capability.

MILITARY CAPABILITY

  8.  The A400M will provide tactical and strategic mobility to all three Services in peace, crisis and war. In crisis or war, the A400M will be employed on inter- and intra-theatre air transport tasks, primarily in support of the JRRF. The A400M meets the UK operational requirement without compromise. The only technical requirement that remains to be specified fully is the Directed InfraRed Countermeasures system—new technology that could not be adequately defined at this stage but will be examined by AM during development. The concept of a basic common standard aircraft with a range of capability options provides each of the air forces with an aircraft meeting their requirements.

  9.  To minimise the impact of cost increases caused by a number of changes by other nations both to offtake and the timing of deliveries, the UK has negotiated a restructured delivery schedule; this results in a one-year delay to the ISD. An incremental acquisition of certain configuration items for the tactical role was also agreed. The aircraft will enter service with more tactical capability than the C-130K it replaces, but it will not achieve full day/night poor weather hostile environment capability until 2015, three years later than previously planned. However, the C-130J fleet—the main provider of tactical airlift, sufficient to support 16 Air Assault Brigade—will be available; full tactical capability for the A400M enhances operational flexibility but is judged a lesser priority than competing calls for funds within the Equipment Plan. These changes were made in agreement with other partner nations in November 2001 and were made without affecting progress on contract negotiations.

EQUIPMENT TO BE REPLACED AND IN-SERVICE DATE

  10.  Of the original fleet of 55 Hercules C130, which entered service in the 1960s, 25 have been replaced by C-130J aircraft under the HRR1 project. The capability provided by the rest of the fleet, and by that provided by the short-term lease of 4 C-17s will be replaced and enhanced (by increasing outsize airlift capability) by the A400M. We expect the A400M to enter RAF service in 2010, with existing aircraft replaced progressively.

ACQUISITION APPROACH

  11.  On 4 September 1997, the seven collaborating European nations issued a Request for Proposals for FLA to Airbus Industrie against the agreed ESR. Each nation specified its required in-service date, expected off-take, support needs and other variables. The aim would be to place a fixed price contract for acquisition and elements of support for the first ten years. The contract would be placed by OCCAR and embrace many aspects of Airbus's proposed commercial approach.

  12.  A second Request for Proposals was issued to Airbus Industrie, the Boeing Company, and Lockheed Martin Aeronautical Systems on 31 July 1998 by the UK on behalf of Belgium, France, Spain and the UK, seeking tenders at prime contractor level against the ESR. Securing best value for money through competition was a condition of our willingness to remain involved with the FLA programme. Tenders for this Future Transport Aircraft (FTA) competition were received on 29 January 1999, coincident with those for the Short Term Strategic Airlift. Tender assessments were conducted jointly with other nations and in more detail on a national basis.

ALTERNATIVE ACQUISITION OPTIONS

  13.  Contenders in the collaborative competition included the Airbus A400M and the existing C-17 and C-130J aircraft, both available as commercial off-the-shelf purchases. Germany, a non-participant in the four-nation competition, also considered the Antonov An-7X, (a customised version of the Russo-Ukrainian An-70) along with France, Spain and Italy, as a further alternative to the A400M. The UK would have been prepared to assess a compliant tender for AN-7X offered by a Western prime contractor had it been proposed in response to the 31 July 1998 Request for Proposals, but no such bid was made. The C-130J cannot fulfil the `outsize lift' element of the ESR and would only be considered as part of a mixed fleet solution.

COLLABORATION

  14.  There was a seven-nation assessment of the collaborative A400M. When the Request for Proposals was issued, the A400M nations indicated potential requirements totalling 288 aircraft. Airbus offered prices for the A400M based on this and a number of other off-takes. The partner nations announced on 27 July 2000 (the Farnborough Declaration) that they intended to procure, in an initial order, numbers of aircraft sufficient to launch the programme. Since then, Italy has announced its decision not to proceed with the programme and Portugal has rejoined the programme; Turkey has also reduced its offtake. The partner nations subsequently signed a revised Memorandum of Understanding on 18 December 2001 committing to a total offtake of 196 aircraft: Belgium seven aircraft, France 50 aircraft; Germany 73 aircraft; Luxembourg one aircraft in co-operation with Belgium, Spain 27 aircraft, Turkey 10 aircraft (reduced from 26), Portugal three, and the UK 25 aircraft.

  15.  There would have been no collaborative opportunities in respect of the purchase of C-17 or C-130J, except perhaps in the field of shared support.

EXPORT POTENTIAL

  16.  AM believes that there is significant market for the A400M beyond the European collaborative partners, though estimates for the scale of this market vary.

INDUSTRIAL FACTORS

  17.  For the A400M, the aim is to ensure broadly equitable work-sharing arrangements, without detriment to overall value for money. A key element of Airbus's successful record in meeting challenging delivery timescales is their system of relying on centres of excellence in successive programmes. Thus Airbus UK, the UK industrial partner in Airbus, has become the Airbus centre of excellence for wing design. Our expectation is that AM will manage the A400M programme in the same way, drawing on partner companies' strengths as appropriate.

  18.  As a result of the engine supplier consortium (APA) encountering difficulties in confirming the required performance data for the TP400 engine, AM cancelled their arrangements with APA for the TP400 and have re-launched the engine competition. AM have indicated their intention to select a new engine solution by end-March. We understand that Rolls Royce will be offering a compliant solution, in association with other European aero-engine manufacturers.

SMART ACQUISITION

  19.  The collaborative and commercial approach will help to achieve a cost-effective solution, along the lines of civil aircraft development and procurement. There will be no separate development contract: AM will be contracted to deliver aircraft, and will be responsible for the risk management associated with development. The final price of the A400M will reflect the extent to which AM will have to carry costs pending production deliveries. This single-phase approach circumvents the potential delay evident in collaborative programmes needing production approval. In respect of aircraft certification, the intention is to adopt an approach based on civil Joint Airworthiness Requirements, supplemented by military requirements where appropriate.

  20.  An incremental acquisition strategy has been introduced for the A400M's tactical capability. A400M will still enter service with a greater level of tactical capability than the C-130K it replaces but certain items contributing to tactical capability will be acquired incrementally. The C-130J fleet will provide the tactical capability that is required whilst A400M prepares to take this role. Thus an incremental acquisition strategy permits a more affordable programme with little impact on capability.

ACQUISITION PHASES

  21.  The A400M project is entering the single phase Manufacture and Development contract with design feasibility work mature.

  22.  AM is inexperienced as a prime contractor in the military domain, but we expect it to draw heavily on the military experience of its partner companies whilst still bringing the advantages of proven Airbus best practice in the civil market.

MILESTONES AND COSTS

  23.  Key milestones are:

  FLA Request for Proposals issued  4 September 1997

  Competitive Request for Proposals issued  30 July 1998

  Tender submitted  29 January 1999

  Decision  16 May 2000

  Contract let (subject to resolution of GE funding approval)  18 December 2001

  ISD  2010

  24.  Total estimated costs for the acquisition and initial support of the A400M are of the order of £3.5 billion. No significant costs have so far been incurred.

IN-SERVICE SUPPORT

  25.  AM proposes providing a range of in-service options, with the options mainly differing in the level of contractor support offered. The in-service support strategy likely to be selected by the UK requires that RAF personnel carry out all first line maintenance and on-aircraft second line maintenance. Third line on-aircraft maintenance and second and third line maintenance off-aircraft will be undertaken by industry. This strategy will ensure flexible and responsive support to operations, especially deployed operations, whilst making best use of industry experience and resources for the conduct of the more specialised and resource intensive tasks. Opportunities for common European support and training continue to be evaluated but, as yet, no decisions have been taken on this issue.

  26.  Potential problems during any change-over period include the scope for dual utilisation of Service support resources, such as equipment or manpower. Such problems will be minimised through controlled delivery/disposal contracts and manpower planning.

FRONT LINE, STORAGE AND RESERVE

  27.  No decision has yet been taken on the exact make-up of the A400M fleet. The Concept of Employment is currently being developed.

INTEROPERABILITY

  28.  Future users of the A400M will include Belgium, France, Germany, Spain, Turkey, Portugal and the UK. It is not possible to quantify the operational effectiveness implications of different air forces using the same type of transport aircraft, but the A400M is expected to be able to carry the universal cargo pallet. Savings in support costs could be expected as a result of several nations operating the same type of aircraft. However, it will not be possible to quantify this until each nation has decided on the support strategy for its own aircraft.

DISPOSAL OF EQUIPMENT REPLACED

  29.  The 25 Hercules C-130K aircraft that are being replaced by C-130J will be returned to Lockheed Martin as part of the HRR1 procurement package. No decision has yet been made on the subsequent disposal of the remainder of the C-130K fleet.

IN-SERVICE LIFE

  30.  The Staff Requirement assumes an in-service life of 30 years.

DEVELOPMENT POTENTIAL

  31.  No specific options are being considered at this stage for long-term development. Improvements to avionics and other systems are likely to be required over the life of the aircraft.

FUTURE RAPID EFFECTS SYSTEM/WATCHKEEPER

  Future Rapid Effects System (FRES) is the generic name for a new concept being evaluated to meet the requirements of rapid deployment with large operational impact. As such, it will meet part of the requirement for new Armoured Fighting Vehicles. Through its reconnaissance variant (one of nine), FRES will provide an element of the capability planned under the TRACER programme and will be complemented in delivering the land component commander's Intelligence, Surveillance, Target Acquisition and Reconnaissance (ISTAR) requirements by the WATCHKEEPER Unmanned Air Vehicle (UAV) programme. The TRACER programme will cease at the end of July 2002 when the project completes the current concept phase and it is anticipated that much of the technology development as part of TRACER will be pulled through into the FRES programme. For clarity, FRES and WATCHKEEPER have been included as separate sub-sections to this memorandum.

FUTURE RAPID EFFECTS SYSTEM

OPERATIONAL REQUIREMENT

  1.  FRES is still in the concept phase and the operational requirement that it is to meet has still to be refined. Broadly, it will be based on land-based vehicles with an emphasis being on "rapid effect". This will enable FRES to be deployed quickly, probably by air, and still have the operational capability to be highly effective in theatre.

  2.  It is not clear yet whether FRES will be a single type or a "family" of vehicles; if it is the latter, commonality will be a key feature at system, sub-system and component levels. FRES will act as the platform for Armoured Reconnaissance and Mechanised Infantry roles. It is expected that FRES will subsume the MRAV vehicles planned for the Mechanised Infantry role and the Manoeuvre Support of Future Command Liaison Vehicle (FCLV); the other requirements of these MRAV and FCLV remain and these programmes will continue.

  3.  There will be four MRAV variants; an armoured personnel carrier, a command vehicle, a communications vehicle and an ambulance.

NUMBERS

  4.  No decision has been made on the number of vehicles that will be required to meet the FRES requirement. For planning purposes, 900 are being assumed.

  5.  Equally, the number of MRAV is still to be determined but the planning assumption is 775.

STRATEGIC DEFENCE REVIEW

  6.  The need to have an improved ability to conduct expeditionary operations was highlighted in the SDR. FRES will enable this aspiration to be met.

EQUIPMENT TO BE REPLACED AND IN-SERVICE DATE

  7.  FRES will replace some of the roles carried out by CVR(T), SAXON and FV430. Its ISD has still to be finalised but will be towards the end of the decade.

  8.  MRAV will replace other roles carried out by CVR(T), SAXON and FV430 and it is intended that it will be in service by 2008.

ACQUISITION APPROACH

  9.  As FRES is still in the concept phase, no decision has been made of the most appropriate acquisition approach. However, the principles of Smart Acquisition will be applied, probably with incremental acquisition featuring significantly. A Commercial or Military Off The Shelf (COTS/MOTS) solution is an option and information to support consideration of this was provided by some of the potential suppliers in May 2001. Responses to these are currently being assessed.

  10.  MRAV is in the development phase under a fixed price contract let in 1999.

COLLABORATION

  11.  FRES is likely to offer good opportunities for collaboration with NATO partners at the sub-system and component levels.

  12.  MRAV is being acquired through a tri-national programme with Germany and the Netherlands, and the programme is being managed by the Organisation for Joint Armament Co-operation (OCCAR).

EXPORT POTENTIAL

  13.  FRES has the potential to attract export orders. However, it is still in a too immature state to establish specific interest yet. Spain and Portugal have both expressed an interest in the MRAV programme and received project briefings by OCCAR.

INDUSTRIAL FACTORS

  14.  FRES is likely to be the most significant land programme for UK industry this decade. Three UK companies, Vickers Defence Systems, BAE Systems and Alvis Ltd have all expressed interest and it is possible that the outcome of the competition will influence the rationalisation of the industry.

  15.  The principal UK Company involved in the MRAV programme is Alvis Ltd and the programme is likely to secure over 500 jobs in this country over its life. Many of these will be in the Telford area.

MILESTONES AND COSTS

  16.  ***

  17.  *** The next key milestone for MRAV is ISD in 2008.

IN-SERVICE SUPPORT

  18.  In both FRES and MRAV, methods of in-service support will be examined and the optimum selected for each. Possible solutions include various levels of contractor logistic support and the supply of spares direct to the field force; a PPP type arrangement may also prove feasible. Training Needs Analysis will be conducted for each programme to establish requirements in this field.

INTEROPERABILITY

  19.  Each programme will be planned to ensure maximum interoperability with other NATO members.

IN-SERVICE LIFE AND FURTHER DEVELOPMENT

  20.  The expected life of FRES and MRAV should enable each to remain in service until the middle of the century. During that time opportunities to upgrade them to take account of new technologies and changing threats will be considered.

WATCHKEEPER UNMANNED AIR VEHICLE SYSTEMS

  WATCHKEEPER is a programme to meet a significant proportion of the intelligence and information requirements, principally of land commanders. The WATCHKEEPER system will comprise UAVs, their sensor packages and associated exploitation facilities on the ground. It will be complemented by other programmes and existing capabilities (for example, the FRES reconnaissance variant and other ISTAR systems).

OPERATIONAL REQUIREMENT

  21.  The WATCHKEEPER system will be required to provide accurate, timely and high quality imagery and intelligence information in all weathers, day and night. It will collect, collate, exploit and disseminate such data and information to satisfy the critical requirements of land commanders from Battlegroup to Division level across the spectrum of conflict.

NUMBERS

  22.  The numbers and types of UAVs and the architecture of the overall system are currently being examined. No decision has been made on the numbers of individual systems as this will be determined once the preferred option has been selected and confirmed towards the end of the assessment phase.

STRATEGIC DEFENCE REVIEW

  23.  The Strategic Defence Review highlighted the need to enhance the capability for the Armed Forces to undertake ISTAR tasks. WATCHKEEPER is a new capability being acquired to achieve that aim.

EQUIPMENT TO BE REPLACED AND IN-SERVICE DATE

  24.  WATCHKEEPER is a new wide-ranging capability that will subsume the capability currently provided by the PHOENIX UAV system. Any future role for PHOENIX is being considered as part of the assessment of the solutions for WATCHKEEPER. The ISD for WATCHKEEPER is to be finalised as part of the current assessment work but the working assumption is an Initial Operating Capability of 2007.

ACQUISITION APPROACH

  25.  WATCHKEEPER is in its assessment phase where operational and technical risks are being identified and minimised. A variety of acquisition strategies are being examined to establish the most cost-effective way of delivering the capability.

COLLABORATION

  26.  The solutions envisaged are not likely to involve extensive development work and the opportunities for effective collaboration in the initial stages of WATCHKEEPER are considered low. High levels of co-operation among allied nations on requirement definition, technology, operational experience and acquisition issues are being maintained.

EXPORT POTENTIAL

  27.  Whilst it is likely that the major components of the WATCHKEEPER air vehicles will be based on existing off-the-shelf components, elements of the ground station might be of interest to other nations. However, the system architecture is currently too immature to establish specific interest.

INDUSTRIAL FACTORS

  28.  There are four Prime Contractors competing for the WATCHKEEPER programme; Lockheed Martin, BAE SYSTEMS, Thales and Northrup Grumman. An ITT for industry to submit proposals for detailed assessment phase work was issued in February 2002. Based on the proposals, two of the companies will be selected to undertake a series of System Integration and Assurance activities towards the end of 2002.

MILESTONES AND COSTS

  29.  Approval has been given for the expenditure of £51M (Resource base at outturn prices) for the completion of the Assessment Phase. ***

IN-SERVICE SUPPORT

  30.  A number of methods of in-service support are being examined to identify the best solution. Possible solutions include various levels of contractor logistic support and the supply of spares direct to the field force; a PPP type arrangement may also prove feasible in certain circumstances. A Training Needs Analysis is being conducted to establish training requirements.

INTEROPERABILITY

  31.  It will be important to be able to disseminate information to other systems both within the Armed Forces and to our allies. Considerable attention is being given to the achievement of this within the WATCHKEEPER programme.

IN-SERVICE LIFE AND FURTHER DEVELOPMENT

  32.  Options are being considered as to how WATCHKEEPER might best be managed over a period of 30 years. It is likely that this will be achieved through a programme of incremental acquisition with the opportunity for technology insertion aimed at meeting emerging threats.

PFI/PPP IN THE DEFENCE EQUIPMENT ARENA

  Public/Private Partnerships (PPPs) are a key part of the MOD's approach to developing better ways of supporting the Armed Forces. Ministry of Defence Policy Paper No. 4—Defence Acquisition, sets out the MOD's approach to PPPs.

  The terms PPP and Private Finance Initiative (PFI) are often used synonymously, but while PPP is usually used to describe large partnering projects, some of which may involve private finance, the principles apply to a wide-range of acquisition techniques including:

—  Outsourcing, where MOD contracts for services;

—  Strategic Partnerships between MOD and key suppliers;

—  Marketing of irreducible spare capacity, under the Government's Wider Markets Initiative;

—  PFI, where the private sector creates or acquires a capital asset and provides services based around that asset; and

—  Other long-term partnering relationships such as Defence Estates Prime Contracting.

PPP POLICY

  1.  In selecting projects for PPPs the approach must be pragmatic rather than dogmatic. PPP tools such as PFI and Partnering are employed where they offer the potential to achieve greater value for money than could be achieved through more traditional methods of doing business. This greater value for money is realised through allowing MOD to focus on its core military tasks, supported by private sector partners who are able to use their particular expertise and skills to provide services more efficiently.

  2.  The Department is committed to the disposal of surplus capacity wherever practicable, although some irreducible spare capacity is always likely to remain. Therefore, to make the best use of the MOD's extensive physical (equipment, land, premises) and non-physical (intellectual property, data, skills) asset base, MOD budget holders are encouraged to market assets for which the Armed Services have no immediate need. The Wider Markets Initiative often involves working with a private sector partner where they are able to find new and innovative ways of exploiting spare capacity and sell spare capacity to other users.

PFI POLICY

  3.  PFI remains the cornerstone of the MOD's PPP programme. Consideration is given to investment from the private sector rather than use of public funds whenever there is a need for substantial investment. But PFI is only employed if it can be clearly demonstrated that it is appropriate, workable and economic, compared to the Public Sector Comparator (PSC).

  4.  In PFI, the contracts are for services rather than assets. A decision is taken as to whether the requirements can be sensibly met by a contract under which services are provided rather than by the outright purchase of assets such as buildings and equipment. If it does, the MOD then considers whether such an approach has the potential to offer better value for money than buying assets directly. Not all projects pass these two tests, but many do.

  5.  PFI offers the potential to transfer risks to the private sector where it is better placed to manage them. Among the main risks transferred are the design and build of the asset. Because payments are only made to the partner when satisfactory service is received, there is a strong incentive on the partner to provide an asset that is delivered on time and is suitable for purpose. This is reinforced by the partner's need to service the finance that has been raised to buy the underlying assets for the contract. Under the process known as "due diligence", the providers of finance will test the assumptions behind the business plan of the partner to satisfy themselves that the question of risk has been properly addressed. This mix of mechanisms and incentives means that once a contract is signed, projects are much more likely to deliver the required level of service on time and within budget.

  6.  The Department aims to take PFI as close to the front line as possible. But as the related services become more war-like it becomes more difficult to transfer risk, for the contractors to innovate and for meaningful measures of effectiveness to be determined. In these circumstances, it would become uneconomic to acquire capability through private finance. As equipment becomes more operational in character, other issues, including security, are brought to bear. PFI is not used in circumstances where the operational effectiveness of the Armed Forces would be put at risk. There are, therefore, large numbers and types of equipment that will be bought through more conventional means applying Smart Acquisition principles.

  7.  The MOD has a very large and diverse PFI programme that includes accommodation, housing, information systems, utilities, training facilities and equipment. As at 1 February 2002, the Department has signed 42 PFI deals resulting in over £2 billion of private sector investment in defence. These include a contract to refurbish the MOD's Whitehall HQ and provide serviced accommodation for a 30-year period, the Joint Services Command and Staff College and six aircrew training simulators.

FUTURE PPP PLANS

  8.  The Department is confident that PPP will deliver quality, value for money services. PFI is still quite new, but many of the PFI deals that have been signed have now reached the point where services are being delivered and the initial responses from customers are very encouraging. Aircrew simulator training has proved to be a success as has the new housing provided through the Defence Housing Executive's PFI projects.

  9.  PFI is an evolving technique, which is being improved through MOD experience and the experience of other Departments. A rich and wide-ranging forward programme is in place in which over 40 projects are being pursued with the potential for a further £12 billion private sector investment in defence. These include the Roll On Roll Off strategic sealift, Future Strategic Tanker Aircraft, and the MoD-wide water and wastewater project (Aquatrine). It is intended to build upon the progress so far to explore and develop new and more innovative forms of PPP to meeting future requirements in partnership with industry. A private sector partner is currently being sought to help run and maintain the Army Training Estate (Project Vanguard) and investigations into a potential long-term partnership with industry to improve our tri-Service flying training are underway.

EXISTING MOD PFI PROJECTS

Future Strategic Tanker Aircraft

REQUIREMENT

  10.  The Future Strategic Tanker Aircraft (FSTA) is expected to replace the air to air refuelling (AAR) and some elements of air transport (AT) capability currently provided by the RAF's fleet of VC10 and TriStar aircraft. AAR is a key military capability that provides force multiplication and operational range enhancement for front line aircraft across a range of defence roles and military tasks. The capability will remain a fundamental UK need for the foreseeable future to support the deployment of combat forces to operational theatres and to provide vital support in-theatre. However, our existing AAR/AT aircraft are old, expensive to operate and need replacing by around the end of the decade.

RATIONALE FOR PFI

  11.  FSTA was nominated as a potential PFI programme in 1997. It was judged that the project, scoped as a service rather than asset acquisition, offered the advantages of early up-front investment from Industry and greater value for money than could be obtained by conventional acquisition, through the transfer of the risks of ownership to the private sector. There is considerable scope for innovation in provision of the service. When not required by the RAF the Service Provider will be able to use spare aircraft capacity to earn revenue through commercial freight and other non-military air transport operations.

SCOPE

  12.  Provision of an AAR service will form the primary focus of the anticipated contract. However, elements of AT capability, both passenger and freight, will be included if this represents value for money when compared to capability available through civil charter arrangements. The contract will also require provision of a training service and the provision and maintenance of facilities, including flight simulators. The contractor will own, manage and maintain the aircraft, but the RAF will continue to retain responsibility for the delivery of military capability. A mix of Regular RAF, Sponsored Reserve and civilian contractor personnel are expected to be involved in delivering the service.

PROGRESS TO DATE

  13.  The project was launched in 1997. Following a period of market building, a Request for Information was issued to industry in February 1999. Seven embryonic consortia responded. An Invitation to Submit Outline Proposals was issued in September 1999 to which four consortia responded. Following Initial Gate approval, the project launched a formal assessment phase in December 2000, through the issue of an Invitation to Negotiate. Two consortia submitted formal bids and these are currently being assessed. Contract negotiations are underway with both consortia.

OPERATIONAL AND FINANCIAL IMPLICATIONS

  14.  The capital value of the FSTA aircraft and associated infrastructure is estimated to be in the region of £2 billion to £2.5 billion depending upon the solution adopted. However, through life costs of the programme, with a 27-year contract duration, are currently estimated to be in the order of £13 billion at outturn prices. The protection of operational capability is paramount. A PFI service would operate in close partnership with the RAF who would continue to be responsible for delivering military capability.

Heavy Equipment Transporter

REQUIREMENT

  15.  The Army's requirement for a Heavy Equipment Transporter (HET) fleet is to be able to transport the heavy armoured vehicles of a square armoured brigade with an accompanying portion of divisional combat support, over distances of at least 150 kilometres within 24 hours. An additional requirement is to move the minimum coherent fighting force (defined as 2 square battlegroups, an artillery regiment and 2 engineer squadrons) in the first lift. The HET fleet is required to operate in a hostile environment which may include the Rear Support Area, Main Supply Routes and brigade rear areas.

RATIONALE FOR PFI

  16.  In February 1997 the Defence Support Vehicles Private Finance Initiative Steering Group recommended that the HET capability should be exposed to PFI, including a full service contract and involvement of Sponsored Reservists (SR). HET fitted the criteria for a potential PFI and was a definable service. It was also an ideal pathfinder project to test the principle of SR.

SCOPE

  17.  HET is an OshKosh M1070F 8-wheel drive tractor powered by a 700 bhp Caterpillar engine, with a 7-axle King trailer. The total numbers will be 92, comprising 84 complete HET allocated to Squadrons, 3 tractors each with a recovery system allocated to Squadrons, 3 complete HET allocated to war maintenance reserve, 2 complete HET allocated to training. Under PFI the contractor will design, build, finance, maintain and operate (within limits on operations and exercises) the HET service.

PROGRESS TO DATE

  18.  The adoption of the HET project as the pathfinder scheme for the application of the SR was agreed by Army Policy and Resources Committee in April 1998 and endorsed by the Equipment Approvals Committee in November 1998. Invitations to Negotiate were issued to four consortia in September. The original four consortia were down-selected to two with Best and final offers requested by January 2001. A contract was placed with the Fasttrax consortia, lead by Halliburton Brown and Root, on 11 December last year.

OPERATIONAL AND FINANCIAL IMPLICATIONS

  19.  The capital value of the HET is estimated to be in the region of £93M. Through life costs of the programme with a 20 year contract duration are currently estimated to be in the order of £300M in outturn prices.

  20.  Sponsored Reservists will form approximately one third of the HET drivers and maintainers, and will be spread evenly across the three tank transporter squadrons. This is the first time that SR have been contracted to be deployed but will not impact on the delivery of military capability which will remain the responsibility of the Army.

SKYNET 5

REQUIREMENT

  21.  The SKYNET 5 programme will deliver the next generation of military satellite communications services, replacing the SKYNET 4 constellation of satellites. The programme includes ground connectivity and management facilities and the provision of terminals for both fixed and mobile users in the land and sea environments. Current operational priorities place greater emphasis on satellite communications availability over Europe and the Middle East. The result is that, with a two-satellite solution, a small part of the coverage defined in the Staff Requirement will be met through commercial alternatives or MOU arrangements with other nations.

RATIONALE FOR PFI

  22.  SKYNET 5 was heralded in the SDR as an important and groundbreaking PFI programme, and its viability was agreed in June 2000. It is the largest PFI project in the MoD, so far, to have reached the Preferred Bidder stage. Satellite communications can be delivered to users as a service, with much of the risk transferred to the contractor, making it an ideal candidate for PFI. The incorporation not only of the space and ground segments, but also some terminal equipment for land and sea users, within the project boundary will offer advantages as it mitigates the integration risk and allows the service provider, and the customer, to view the business as an end-to-end service. This helped to remove the concerns of bidders and their lenders that the volume of service (and the return they might get) might be affected by any delay or reduction in MOD's satellite communications terminal programmes.

SCOPE

  23.  Two military satellites, augmented by some commercial services, will meet the operational requirement. In the PFI case at least two satellites will be launched and will be fully insured against failure. Previous MOD conventional satellite acquisition programmes did not insure the satellites but built and launched three satellites primarily to guarantee against failure.

  24.  The proposed solution includes provisions on service assurance. Particular emphasis will be placed on access to the design of the military-critical features of the system (such as satellite Electro Magnetic Pulse hardening and anti-jam measures that cannot be corrected once in orbit). During operational service, MoD will only pay for services actually received, thus incentivising the service provider. If, for any reason, the service provider is unable to deliver, contingency plans, agreed in advance with MOD, will enable a limited number of key functions to be undertaken by Service personnel. Should the service provider fail to deliver, he would be in default and the contract would be subject to termination. Compensation arrangements would then apply, and the MoD would work with lenders to establish a new service provider.

PROGRESS TO DATE

  25.  The Equipment Approvals Committee endorsed the Staff Requirement for SKYNET 5 in 1997. In 1999 contracts for competitive PFI design phase studies were issued to two consortia, Paradigm (led by Astrium, a joint venture between BAE Systems and EADS) and Rosetta (BAE Systems, BT and Lockheed Martin). The Design phase ended in January 2001 with PFI proposals from both bidders. `Extended Revise and Confirm' and `Best and Final Offers' rounds ensured the best possible bids have been obtained and Paradigm was announced as the Preferred Bidder in February 2002.

OPERATIONAL AND FINANCIAL IMPLICATIONS

  26.  Under PFI, the cost of the programme will depend directly on the actual usage of the service throughout the concession period. When considering the future requirement for satellite communications, under conventional acquisition, the MoD needs to determine the maximum likely level of growth and the overall system capacity needed to meet the assumed requirement. The Department then has to commit to the full costs of those assets. Under a PFI programme, the MoD does not need to commit to the full costs in advance. Instead, it needs to consider the minimum cost to which it is committed and the incremental cost of the extra usage above this level to meet demand at various levels of usage growth.

  27.  Owing to uncertainty about future usage levels, value for money has been demonstrated using defence planning assumptions as the basis of estimated usage. This is the most robust method of comparison because it represents the highest assumed level of future operational activity. Therefore, in any year that the operational scenarios do not exceed the assumptions, there will be a lower rate of satellite communications use and, consequently, a net saving. Independent of the scenarios, there remains a sum to which the Department is committed (the "Minimum Cost to the Department") which will be payable regardless of the volume of service provided. This sum is subject to negotiation with the Preferred Bidder.

Airfield Support Services Project (ASSP)

REQUIREMENT

  28.  The MOD owns and operates 105 airfields in the UK and word wide. Efficient operation of these airfields underpins much of UK defence activity. To maintain and operate these airfields requires a specific level of service provision (fuel, movements, clearance etc). Currently these airfields are supported by a mixture of discrete contracts and in-house provision.

RATIONALE FOR PFI

  29.  The ASSP approach evolved from "Front Line First", where specific defence cost studies suggested that airfield support had potential to yield efficiencies, possibly by public-private partnering. A number of multi-activity contracts (private contractor arrangements) have been in place at RAF airfields for some years. ASSP draws together the experience and lessons learned from running those contracts and looks at whether one, overarching, contract would provide the best value for money, without compromising operational effectiveness.

SCOPE

  30.  ASSP is a tri-service, defence-wide project looking at the viability of a PPP for the provision of airfield support services to the MOD worldwide. All the key stakeholders have been involved, to ensure that, if it proceeds, ASSP provides the right service and outputs. The project will, in particular, be assessing provision of the following services:

—  The MOD Fire Service.

—  Aircraft Fuelling Operations.

—  Movements and Air Cargo Handling Service.

—  Airfield Clearance (Sweeping, Snow/Ice Clearance).

—  Aircraft Services (Towing, Water/Waste/Cabin Services, Lifting etc).

  The project will investigate contract terms of 15 and 25 years with service provision in output based terms.

PROGRESS TO DATE

  31.  Three consortia have been invited to submit bids, which are due for return by 30 April 2002. An evaluation period of about six months will follow bid return, during which all aspects of the project will be scrutinised—technical, financial, commercial, human resources and employment legislation. A comparison against the PSC will be made in an Investment Appraisal. Main Gate business case is planned for submission early in 2003, with contract let later that year for implementation in summer 2004. If the PSC were selected then the services would continue under current arrangements but with the benefit of the identified efficiencies.

OPERATIONAL AND FINANCIAL IMPLICATIONS

  32.  The contract would have an estimated value of £3.5 billion in cash terms over the 25-year period. Operational effectiveness will not be compromised by ASSP. In line with current Departmental policy, the project is seeking proposals for the employment and use of SR. Here, some of the contractor's personnel would have a reservist commitment and would effectively become Service personnel able to deploy on ASSP tasks in military areas when required during times of crisis. Contractors on Deployed Operations could augment the SR concept. The project would explore any such proposals from bidders that could bring value for money and enhance operational capability. The outcome of these proposals would have a direct effect on the number of Service personnel to be employed on these duties in the future. Where Service personnel continued to be used, they would be embedded within the ASSP organisation, although their military command chain and working practices would be protected.

  33.  Fire Study 2000 is a study into the MOD Fire Services to review the organisation and develop a strategy to meet the Department's future fire risk management requirements. The recommendations of the study will be used to inform the PSC for ASSP.

Combat Support Vehicles

REQUIREMENT

  34.  There is a tri-service requirement for the bulk distribution of fuel on deployed operations. The principal elements are for the re-provisioning of bulk fuel storage facilities, the provision of fuel to all deployed units (including armoured and air manoeuvre formations) and supply to aircraft operating from deployed airfields. These requirements generate a need for a low mobility General Support Tanker, a medium mobility vehicle (described as the Close Support Tanker (CST)) and a medium mobility Tactical Aircraft Refueller (TAR). In addition, a capability gap for the provision of water to forces on deployed operations was identified in the Strategic Defence Review. To provide this capability, a medium mobility vehicle, similar to the CST, would be required. These four elements make up the Wheeled Tanker programme. About 430 vehicles will be required.

  35.  The Support Vehicle programme is to meet the operational need for the movement of various cargoes (for example, combat supplies, ordnance, fuel and unit equipment), specialised equipment and, on occasions, personnel. The vehicles need to be compatible with standard containerised loads while still being able to move large individual pieces of equipment. Many of these vehicles will be fitted out for specialised roles such as communication centres and mobile workshops. To maintain flexibility, operational analysis has concluded that three types of vehicle are required and should be based on load carrying capabilities of 6, 9 and 15 tonnes (these being multiples of the standard 1.5 tonne pallet). They should all have medium mobility but, in addition, there should be a smaller fleet of 9 tonne vehicles that have improved medium mobility. About 8,000 vehicles are required.

  36.  The recovery element of the Support Vehicle will be required to retrieve wheeled vehicles that have broken down, been damaged through accident or enemy action, or have got bogged in. The vehicles that might require such recovery range from Land Rovers to fully laden DROPS vehicles and M3 amphibious bridging vehicles. The level of mobility and survivability must be commensurate with the vehicles that might be recovered and the environments in which they operate. Thus the recovery vehicle fleet needs to comprise a mixture of medium and improved medium mobility vehicles. About 400 vehicles and 70 trailers are required.

RATIONALE FOR NOT EMPLOYING PFI

  37.  The Wheeled Tanker and Support Vehicle programmes were originally considered as three separate projects: the Future Fuel Vehicle, the Future Cargo Vehicle and the Future Wheeled Recovery Vehicle. Since these programmes are providing support to operations and are effectively delivering a service, a PFI approach was considered and initial indications were that this would be an achievable method of acquisition. The use of Sponsored Reserves was also considered to be a possibility.

  38.  A considerable amount of work, over a three-year period, was carried out both by the Department and by industry in putting together outline proposals for PFI solutions to each of the programmes. However, having thoroughly considered all possible ways of proceeding with PFI, it was concluded that a conventional approach would offer better value for money for these programmes. The principle reasons causing this decision were that there would be little opportunity for risk transfer, third party revenue would be minimal and there would be little scope for innovation. Analysis of the way in which the fleets would be used revealed that many of the vehicles would be located in small groups at widely dispersed units. Also many vehicles with specialised roles would be permanently fitted out while others, to meet readiness times, would be kept loaded. These facts lessened the ability to manage the vehicles on a "whole fleet" basis in a manner that would be more cost-effective than a more conventional approach. Replacing military drivers with civilians would not result in any manpower savings since the military personnel only drive as one of their duties; this also weakened the case for the use of Sponsored Reserves. In each project, an Investment Appraisal showed that a PFI solution would not offer better value for money than buying vehicles and using military personnel. Ministers approved the change to the acquisition approach in March 2001. The lack of success in identifying a PFI solution for these programmes does not mean that PFI is not being considered further in the Combat Support area. The Heavy Equipment Transporter programme has been discussed above, and progress is well advanced for the provision of the Field Electrical Power Supply through a PFI arrangement.

PROGRESS TO DATE

  39.  Invitations to Tender for the Wheeled Tanker were issued in August 2001 to MAN Truck and Bus UK Ltd, Oshkosh Truck Corporation and Volvo Truck and Bus Ltd. Tenders have been received and are being assessed. An announcement of the result of the competition is expected in summer 2002.

  40.  Invitations To Tender for the Support Vehicle were issued in January 2002 to Leyland Trucks Ltd, MAN Truck and Bus UK Ltd Mercedes-Benz UK Defence, Oshkosh Truck Corporation and Stewart and Stevenson Inc. Tenders are due to be returned in summer 2002, with an announcement of the result planned to be before the end of the year.

  41.  For both requirements, the bidders are being invited to put forward innovative ways of supporting the fleets including the use of Contractor Logistic Support.

BOWMAN

  BOWMAN will provide a secure, robust, data and voice communications system in support of land operations, to replace the Clansman combat radio and some of the HQ infrastructure element of the Ptarmigan trunk communication system. It will also play a key role in the MOD's Battlespace Digitization initiative.

  Computing Devices Canada (CDC)—a subsidiary of the General Dynamics Group, and now known as General Dynamics UK Ltd (GD UK) following an internal reorganisation—was awarded preferred supplier status for the supply and support of BOWMAN on 19 July 2001. The contract was signed with the company on 13 September 2001 and both parties are now working effectively to achieve an In Service Date (ISD) of March 2004.

OPERATIONAL REQUIREMENT

  1.  BOWMAN is required to provide a secure combat communications system for the Army and elements of the other Services, in support of land and littoral operations. It will serve as the primary means of voice and data communication for tactical level operations—characterised by mobility and undertaken by numerous individual fighting platforms and dismounted combatants—and will be based on radio communications that can operate without relying on fixed infrastructure. The BOWMAN system will be made up of: a number of radio communications sub-systems that are connected to provide a tactical internet; a range of computers that provide messaging, situation awareness and management information; a local area sub-system that interconnects data terminals and voice users within a vehicle or group of vehicles forming a deployed divisional, brigade or battle group headquarters; and connections to trunk, satellite and strategic communications systems. It will have a capability for fast data communications and connections with external networks, and excellent voice and slower data transfer. As well as being man-portable, BOWMAN will be an integral part of the communications fit of major equipments such as Challenger 2 Main Battle Tank, helicopters and warships.

  2.  This breadth of requirement was developed over the extended BOWMAN programme between 1988 and 1997. Reviews in 1999 and 2000 confirmed that the current scope is both appropriate and affordable.

TRADE-OFFS

  3.  The scope for trade-offs was identified within the User Requirement Document, in terms of cost, capability and time, across the requirements spectrum, from total numbers of radios to the level of integration that would be provided for different platforms. Some detailed reductions in functionality were agreed, and ruggedized off-the-shelf, rather than bespoke, computer terminals will be used. The delivery of capability will be staged: elements of the system that are assessed to require prolonged development to reduce risk will be delivered after the in-service date. However, the GD UK plan shows a rapid programme through to completion of deliveries in 2007.

NUMBERS

  4.  On current plans, BOWMAN equipment will be fitted to some 20,000 vehicles, 149 naval vessels (including 42 capital ships) and some 350 aircraft. Around 100,000 trained servicemen will use it. More than 47,000 radios (excluding the Personal Role Radio—see paragraph 9) and 26,000 computer terminals will be procured.

STRATEGIC DEFENCE REVIEW

  5.  The Strategic Defence Review highlighted the importance of effective command, control and communication systems, and confirmed the requirement for BOWMAN.

MILITARY CAPABILITY

  6.  As the primary means of communication at the tactical level for land operations, BOWMAN will be used across the spectrum of conflict, for all missions and at all scales of deployment. BOWMAN will be central to the command and control, and therefore the effective deployment, of forces used for military tasks ranging from disaster relief to regional conflict.

EQUIPMENT TO BE REPLACED AND ISD

  7.  BOWMAN will replace the Clansman family of combat radios in service since the 1970s. It will also replace those elements of the Ptarmigan trunk communication system within vehicle borne tactical headquarters at divisional, brigade and battlegroup level.

  8.  Investment in feasibility work for BOWMAN was initially endorsed against an ISD of December 1995. In 1993, this was revised to June 1999 as a result of budgetary constraints and an increased understanding of the technical complexity of the project gained from the Phase 1 Feasibility Studies. During the competitive first stage of the Project Development phase (PD1), the ISD was revised to April 2001, again for budgetary reasons. Following the completion of PD1, the ISD was slipped to March 2002 as a result of the revised procurement strategy (see paragraph 10) and the redefinition of the ISD to reflect the delivery of a true operational capability. In December 1999, in the light of an assessment of the technical risk remaining in the programme, the ISD was further slipped to late 2003/early 2004. Main Gate approval was given for investment against an ISD of March 2004. Since August 1998, the ISD has been defined as the date when a brigade HQ and two battlegroups are equipped and capable of deploying on other operations. The Clansman family of combat radios and the relevant elements of Ptarmigan will be progressively removed from service over the period 2003-07, as BOWMAN is deployed.

  9.  It has been possible, however, to plan for the early delivery of a small but significant operational capability that had previously been tied to the delivery of the whole system. Through the application of Smart Acquisition principles, in particular incremental acquisition, the Personal Role Radio, a short range, non-secure tactical radio for use at section level, is being delivered in advance of the main BOWMAN system. Early deliveries were made in late 2001 to troops deploying for Exercise Saif Sareea and on operations in Afghanistan. ISD was declared on 29 January 2002, two months earlier than the formal target of March 2002. In addition, the requirement for insecure tactical ground-air communications has been met by the Tac G-A project.

ACQUISITION APPROACH

  10.  Initial work on BOWMAN was conducted by two consortia that undertook Phase 2 Feasibility Study and PD1 work. Following completion of PD1 in late 1996, the competing consortia announced their intention to form a joint venture company, known as Archer Communications Systems Ltd (ACSL), to bid for the BOWMAN supply contract. This resulted in a review of the procurement options open to the MOD, namely continuing with either one of the consortia, continuing with ACSL, or finding a new prime systems integrator. A revised, single source, procurement strategy for BOWMAN and the remainder of the risk reduction work was approved in March 1997, and a risk reduction contract was placed with ACSL in August 1997. A further risk reduction contract (known as Package 0) was placed with ACSL in October 1998 at a value of £185 million to ensure the necessary confidence in performance, time and cost of the programme prior to the Main Gate approval and before contractual commitment. Package 0 was also to enable the completion of the sub-system definition and sub-contractor selection and it was planned to award the first of the production contracts in late 1999. An affordability review and some redefinition of the project was carried out in March 1999 following a submission from ACSL. The principal area of risk was the integration of sub-systems supplied by a number of different sub-contractors. A further key risk was the timescale for contracting for installation design certification and conversion in over 200 platform types with complex existing design rights.

  11.  Assessment of ACSL's final bid showed it as unable to meet the minimum performance requirements and the decision was taken to remove preferred supplier status from the Company and to launch a fresh competition. A pre-qualification questionnaire exercise was conducted resulting in the selection of three potential prime contractors: CDC, Thales and TRW. An invitation to tender (ITT) for a supply and support contract was issued to each of them in November 2000. This sought bids within the tradable range of the BOWMAN requirement, allowing the potential prime contractors to offer capability, risk and cost trade-offs down to a minimum acceptable range. The ITT also mandated a UK supplier for the cryptographic system (Cogent) and offered preferred supplier status for the VHF radio sub-system to ITT Defence Ltd. The principal areas of risk remained with the new competition and so, in parallel with the ITT, risk reduction contracts were let with each of the potential prime contractors, and with the two key sub-contractors (Cogent and ITT Defence Ltd). The risk reduction work aimed to provide maximum confidence in delivering capability and informed the assessment process prior to the announcement of the preferred supplier. Within each general area, the potential prime contractors had different specific areas of risk and output. All of these areas were fully reported at Main Gate.

  12.  Bids for the BOWMAN supply and support contract were received from each of the potential prime contractors on 7 February 2001. The evaluation process assessed the performance, programme management, commercial, and risk areas of the bids, with the main emphasis being on delivering the relevant BOWMAN criteria at the ISD with a viable and affordable programme. The three month assessment and clarification period concluded that CDC offered the best value for money solution to the BOWMAN requirement, together with high confidence of delivering an early ISD. The results of the assessment phase informed the Main Gate submission in June last year. Preferred supplier status was awarded to GD UK (as CDC had become) and final negotiations resulted in the signature of a firm price contract on 13 September 2001.

ALTERNATIVE ACQUISITION OPTIONS

  13.  The options of upgrading Clansman or procuring an austere off-the-shelf solution were examined at the time of the review of procurement options in 1997 but were not considered to be cost-effective for meeting the requirement. A number of alternative technical options were examined, as was the validity of the basic approach to BOWMAN in the light of rapid developments in the mobile communications field. This analysis demonstrated that the BOWMAN approach was best able to meet the military requirement and could lead to a robust solution.

EXPORT POTENTIAL

  14.  The sophistication and cost of BOWMAN will limit the market for the total system but there will be scope for supplying elements in a number of countries: those where VHF and HF radios bought from the selected BOWMAN suppliers are already operated and that might seek an upgrade using elements of the BOWMAN system; and, those that wish to improve their capability at brigade level and below.

INDUSTRIAL FACTORS

  15.  Ninety-nine per cent of the work content of the winning bid is UK based—the highest proportion of any of the bids—and will secure around 1,600 jobs across the UK in design, development, manufacture and project management. Sub-contract work is expected to secure more than 100 jobs in Scotland, more than 300 jobs in South West England, and around 75 jobs in the South East, centred on Hastings. Major UK sub-contractors include Alvis plc and GKN Westland Helicopters. There will be significant technology transfer to the UK, and MOD will hold appropriate intellectual property rights, available for use by other companies working on linked projects. Industry has committed itself to maintaining development and production facilities in the UK.

SMART ACQUISITION

  16.  Smart Acquisition has given the MOD scope to deal with BOWMAN in a controlled and managed way. The freedom to trade requirements in search of a more cost-effective solution enabled `fallback' options to be identified in case the ACSL bid failed. The results of these studies revealed that there were realistic alternatives to ACSL that could be rapidly pursued. The MOD was, therefore, able to re-open the competition in search of value for money rather than stopping the entire programme and starting from scratch, delaying BOWMAN even further. The Prime Contract with GD UK incorporates Smart Acquisition principles, in partnering, incentives and a shared date environment.

  17.  We have been able to adopt an incremental acquisition approach and have delivered the Personal Role Radio element of the programme ahead of the main BOWMAN system.

ACQUISITION PHASES

  18.  The principal acquisition stages are as follows:

—  Feasibility Studies 1988-1993;

—  Phase two Feasibility Study and (competitive) Project Development first stage 1993-1996;

—  Single source strategy—risk reduction work and programme review 1997-2000;

—  New competition and further risk reduction work 2000-2001;

—  Bowman Supply and Support contract—September 2001.

MILESTONES AND COSTS

  19.  Key milestones now in prospect for this project are:

Conversion of the first unit (an infantry battalion)	July-Sept 2003
In Service Date	Mar 2004
End of BOWMAN conversion programme	2007

  20.  The original budget for BOWMAN was £1.9 billion at LTC 93 prices, excluding long-term support. This was the first Ministerially approved total acquisition cost. Allowing for inflation, the current cost is estimated to be £2.321 billion, excluding long-term support (cash at outturn prices). On a resource basis (that is including the cost of capital charge but excluding long-term support and Post Design Services) the current cost of BOWMAN is £2.40 billion.

  21.  The total costs incurred to 31 March 2001 are shown in the table below:

Year	Costs (£ million)
Prior to 1993-94	10.208
1993-94	8.809
1994-95	23.963
1995-96	19.796
1996-97	20.754
1997-98	21.123
1998-99	66.181
1999-2000	86.858
2000-01	92.328
2001-02 estimate	99.935
Total	452.881

Expenditure still to be incurred:		£1.873 billion (at EP 2002 outturn prices). Of this £1.767 billion is committed.
Peak Expenditure:	04/05	05/06
Current Forecast:	£354.762 million	£389.775 (at outturn prices)

IN-SERVICE SUPPORT

  22.  The BOWMAN supply and support contract encompasses the provision of initial spares and facilities to support operations that will be supplied with the prime equipment and installations, contractor support to ensure sustainability of the deployed system for five years, and reprovisioning activity. The level of support required is being determined using integrated logistics support principles. The importance of reliability and spares availability, and their impact on equipment sustainability, is reflected in the contract. The use of existing spares and equipment, where appropriate, was mandated. Training is being addressed under a tri-Service training needs analysis that will recommend training methodologies and training media.

  23.  The programme to convert fighting platforms and formations to operate BOWMAN is a major task that will be carried out over a total of five years, including a three year period of main conversion. For the main customer, the Army, conversion will be undertaken as each operational unit, principally a brigade, enters its training year within the Formation Readiness Cycle. The BOWMAN Fielding Plan addresses the requirement to provide support to both the new system and that being replaced, and parallel BOWMAN and Clansman training will be needed at certain locations.

FRONT LINE, STORAGE AND RESERVES

  24.  In accordance with the principles of whole fleet management, BOWMAN equipment that is not assigned to the front line will in effect be held in reserve, although there will be no formal war reserve. Spares to support BOWMAN will be held in storage, under arrangements still to be decided.

INTEROPERABILITY

  25.  National interoperability for land operations will be achieved, as, ultimately, all elements of the three Services that take part in the land or littoral battle will be equipped with BOWMAN. International interoperability will be achieving through the implementation of all endorsed NATO Standards applicable to the operating environment. To achieve secure interoperability, BOWMAN mandates the endorsed NATO appliqué unit to meet NATO encryption interoperability standards.

DISPOSAL OF EQUIPMENT TO BE REPLACED

  26.  Disposal Services Agency will consider the most appropriate disposal route (sale or scrap) for Clansman equipment that is no longer required. Relevant parts of Ptarmigan will be retained as spares to support the Ptarmigan elements remaining in service.

IN-SERVICE LIFE

  27.  BOWMAN is planned to be in service for at least 25 years.

DEVELOPMENT POTENTIAL

  28.  Given the pace of change in information systems technology, it is likely that there will be developments that require technology insertion over the course of BOWMAN's service life, and the system is being designed accordingly.

SEA LIFT ASSETS: ROLL-ON ROLL-OFF (RoRo) SHIPS

  The Strategic Defence Review identified a need for four additional Roll-on Roll-off vessels, making a total of six, to support the deployment of the Joint Rapid Reaction Forces (JRRF). After Initial Gate in March 1999, an Invitation to Negotiate (ITN) was issued to four consortia. Assessment of the bids received in July 1999 indicated that a Private Finance Initiative (PFI) solution was likely to provide value for money. After optimisation of the bids to reflect commercial and capability trade-offs, final bids were received on 14 January 2000. However, as MOD could not be certain that it was receiving the best value for money, the bids were revised and confirmed by the bidders in July 2000. The competition confirmed that each potential service provider would intend to build new, or convert existing, ships to meet the operational requirement. The selection of AWSR Shipping Ltd (AWSR) as the preferred bidder was announced on 26 October 2000.

  Following a period of negotiation, MOD entered into a preliminary agreement with AWSR in December 2000. This cleared the way for shipbuilding contracts to be let by AWSR with the German Flensburger yard (for four ships) and Harland and Wolff (H&W) (for two) in time to benefit from Shipbuilding Intervention Fund support. ***. In ordering ships from two shipyards, AWSR has been able to offer early delivery of the capability, which is of benefit to Defence by reducing the period in which availability of sufficient strategic sealift to support the JRRF could not be assured. However, difficulties in the detailed commercial arrangements for the two H&W ships were threatening the timely completion of the PFI negotiations and early deliver of the service. In March 2001, MOD therefore took over the commercial shipbuilding contracts with H&W as part of the PFI arrangements. (AWSR's shipbuilding contracts with Flensburger are unaffected). The H&W contracts are being managed on MOD's behalf by AWSR. On delivery the H&W ships will be taken into the PFI arrangements and AWSR will then provide the full six ship service on PFI terms.

  Contract award was planned for Summer 2001 but the negotiations have been complicated by several factors: taking into account the developing tax and other aspects of the Government's initiatives on the shipping industry set out in "British Shipping Charting a New Course"; H&W's future financial stability; and developing with AWSR and the Seafarers Unions the relationship between commercial crewing arrangements and the deployment of Sponsored Reserves. These factors were compounded by the extra wariness and risk aversion induced in the insurance, commercial shipping and financial markets by the events of 11 September. It is now expected that the negotiations leading to award of the full PFI contract will be completed this spring. The expected early full service availability date of 2003 is not affected by the extended negotiations.

  Until the full service is available a provisional service is being managed by MOD which provides an enhanced level of sealift compared to that previously available.

OPERATIONAL REQUIREMENT

  1.  The requirement is for guaranteed, world-wide delivery of JRRF early entry equipment, including containerised ammunition, at sustained speeds of at least 18 knots. The vessels will be of commercial design. They will not be provided with warlike features such as a self-defence capability or military communications, although the selection of appropriate commercially available equipment will maximise their operational use. Ship size is a balance between optimum load carrying capacity and the need to operate into small ports with draught restrictions and no specialist Ro-Ro facilities; manoeuvrability is built into the design to assist with berthing in the absence of tug support.

TRADE-OFFS

  2.  Trade-off between operational risk and value for money has been tested in negotiations.

NUMBERS

  3.  The long-term requirement is for a capability of six vessels in total.

STRATEGIC DEFENCE REVIEW

  4.  Operational analysis in the SDR subsumed earlier studies of strategic lift to identify the number of RoRo vessels, and aircraft, required.

MILITARY CAPABILITY

  5.  The RoRo service can be used across a full range of missions and military tasks that require deployment of UK forces into theatre through a seaport of disembarkation. It is not the intention to use the service in `battle conditions' but the ships may need to transit warlike zones and may be under escort as part of a task force.

EQUIPMENT TO BE REPLACED AND IN-SERVICE DATE

  6.  Following the expiry of the contracts for the bareboat charter of RFAs SEA CRUSADER and SEA CENTURION in January and April 2001, these two vessels have been rechartered, along with Merchant Vessel Dart 10, to provide an enhanced level of sealift (the `provisional service') pending the introduction of the PFI service; a fourth vessel will be chartered on an ad hoc basis as required. The target date for the full PFI service to be available to provide the increased capability identified by the SDR, is 2005, but under the preliminary agreement signed in December 2000, it will be available by 2003.

PROCUREMENT APPROACH

  7.  Under the PFI arrangements, the service provider will be responsible for the design, finance, manning, operation and maintenance of the service. PFI is inherently `Smart' in that it looks at whole life costs, harnesses commercial skills and opportunities, and seeks to place risk in the hands of the parties best placed to manage it. The opportunity for commercial trading of capacity under-used by MOD will reduce the cost of the service to the MOD.

CREWING

  8.  The PFI service provider must provide a guaranteed service, which includes the possibility of transiting warlike zones as well as limiting the possibility of interference from other nations. Furthermore, there is also a clear operational requirement to man these vessels with British seamen, as a minimum, for security considerations. AWSR have bid, and will be contracted to provide, British seafarers eligible to be called out as sponsored reserves for all vessels when working for the MOD.

ALTERNATIVE PROCUREMENT OPTIONS

  9.  An Investment Appraisal has considered a wide range of options including: do nothing for 20 years, short and long term charter options, and conventional design and construction. None of these matched the value for money offered by the PFI approach.

EXPORT POTENTIAL

  10.  The issue of export potential does not arise directly in the circumstances of this project.

INDUSTRIAL FACTORS

  11.  Both the interim and long term requirements have been addressed through competition. It was recognised before the competition that the long-term requirement might involve a new build by the selected PFI contractor. As the requirement was for a service to be provided using commercial, non-warlike vessels, the competition could not be restricted to UK shipyards. The selected PFI solution involves the build of four ships by the German Flensburger shipyard and two by H&W.

  12.  Although the current lack of orders to follow on from the RoRo contracts leads to concerns over H&W's longer term prospects, the ship building work is not affected.

SMART ACQUISITION

  13.  The programme is being managed using a Smart Acquisition approach.

ACQUISITION PHASES/KEY MILESTONES/COSTS

  14.  Key milestones as currently planned:

Initial Gate	Approving issue of Invitation to Negotiate assuming PFI	March 1999
Assessment of bids (including the `revise and confirm' round)		Late 1999- July 2000
Main Gate	To approve selection of preferred bidder for PFI solution	October 2000
Announcement of preferred bidder		October 2000
Preliminary agreements in relation to shipbuilding subcontracts		December 2000
MoD take over commercial shipbuilding contract with H&W		March 2001
Provisional Service		March 2001
PFI Contract		Spring 2002
Full Service		By 2005

  15.  The capital cost of the asset element of the PFI service will be around £175 million. The annual service cost to the MoD is related to usage but might amount to £40 million per annum (fuel excluded).

IN-SERVICE SUPPORT

  16.  Under a PFI arrangement the service provider is responsible for the operation and maintenance of the service and is paid against performance.

"FRONT LINE" NUMBERS

  17.  The intention is that all six ships, under a PFI arrangement, with optimum risk transfer, should be at the graduated readiness required for JRRF operations.

INTEROPERABILITY

  18.  The service supports the NATO Defence Capabilities Initiative in a number of areas but full commitment is limited by contractual limitations appropriate to a PFI contract.

DISPOSAL OF EQUIPMENT REPLACED

  19.  As the PFI vessels become available, the charters for the ships providing the `provisional service' will expire.

IN-SERVICE LIFE

  20.  The contract will be 20 years from the introduction of the full service and the contractor will be responsible for the disposal of the assets at the end of the contract. The 20-year period is related to value for money, financing and ship life.

DEVELOPMENT POTENTIAL

  21.  A change procedure will allow, for example, technical upgrades offering value for money to be introduced by agreement.

FUTURE CARRIERS- (CVF)

  The decision in the Strategic Defence Review to purchase two large aircraft carriers to replace the three Invincible-class carriers from around 2012 is being taken forward and competitive contracts for the CVF Assessment Phase were awarded in November 1999 to BAe Land and Sea Systems (now BAE SYSTEMS) and Thomson-CSF (now Thales Naval Ltd). The first part of this phase examined a wide range of carrier designs, to reflect the options for the Future Joint Combat Aircraft (JCA (formerly known as the Future Carrier Borne Aircraft (FCBA))—see separate memorandum). This work helped to inform a decision, in January 2001, to select the Joint Strike Fighter (JSF) as the aircraft with the best potential to meet the JCA requirement. A new strategy for the remainder of the Assessment phase was agreed in Autumn 2001 and a revised Stage 2 of Assessment began in November 2001. Carrier design work is now focusing on vessels capable of supporting JSF pending a decision on aircraft variant selection, which is currently planned by autumn 2002.

OPERATIONAL REQUIREMENT

  1.  The Strategic Defence Review (SDR) concluded that the ability to deploy offensive air power will be central to future force projection operations, and that aircraft carriers can provide valuable flexibility in a range of operational circumstances. They can also offer a coercive presence, which may forestall the need for war fighting. The SDR recognised that there is an increasing likelihood of future operations being conducted by forces far from their home bases. In such operations, host-nation support, including access to suitable air bases, cannot be guaranteed, particularly during an evolving regional crisis or the early stages of a conflict. The SDR concluded that there is a continuing need for Britain to have the capability offered by aircraft carriers. Our three Invincible-class carriers were designed for Cold War anti-submarine operations. Our intention, announced in the SDR, is to replace these with a new class of larger and more capable carriers, known as the Carrier Vessel Future (CVF) class.

  2.  In accordance with the Smart Acquisition model, CVF is following a two-stage approval process that involves an Initial and a Main Gate. Initial Gate approval, utilising the Smart Acquisition model, was given in December 1998 for an Assessment phase. Studies being undertaken in Assessment with examine the User Requirement Document and develop it, using cost/capability trade-offs to produce an affordable and achievable System Requirements Document. The objective is to build a replacement for the current carriers that has an increased emphasis on offensive air operations and is capable of operating the largest possible range of aircraft in the widest possible range of roles.

TRADE-OFFS

  3.  Trade-offs between cost and capability and time and capability are integral to the Assessment Phase work.

NUMBERS

  4.  The original plan was to replace the three Invincible-class carriers with three 20,000 tonne vessels. Operational analysis demonstrated, however, that it would be more cost-effective to procure two large carriers, each capable of carrying up to about 50 aircraft. The SDR also saw advantage in future carriers being capable of carrying more fixed-wing aircraft than the current vessels, in order to be able to contribute more effectively to the support of operations on land and at sea.

STRATEGIC DEFENCE REVIEW

  5.  The SDR assessed the requirement for aircraft carriers within the overall requirement for an offensive air capability. It concluded that "there is....a continuing need for Britain to have the capability offered by aircraft carriers" and the emphasis for replacement carriers should be on "increased offensive air power, and an ability to operate the largest possible range of aircraft in the widest possible range of roles" (The Strategic Defence Review, Supporting Essays, pages 6-6 to 6-8).

MILITARY CAPABILITY

  6.  The CVF will deploy offensive air power in support of the full spectrum of future operations, including force projection, as a central component of the maritime contribution to joint operations.

EQUIPMENT TO BE REPLACED AND IN-SERVICE DATE

  7.  The planned out of service dates for HMS Invincible, HMS Illustrious, and HMS Ark Royal are 2010, 2012 and 2015 respectively. The SDR introduced no changes to this programme of withdrawals from service. The first CVF is scheduled to enter operational service in 2012 and the second in 2015. The in-service date of CVF will be declared as the date when the military capability provided by the CVF is assessed as available for operational use in its minimum usefully deployable form, i.e at least as capable as the system it replaces.

ACQUISITION APPROACH

  8.  The CVF procurement strategy is based on competition and prime contractorship, with clear and unambiguous output requirement specifications.

  9.  Invitations to tender for the Assessment Phase were issued in January 1999 to six potential prime contractors—BAE, Lockheed Martin, Boeing, Marconi Electronic Systems, Raytheon, and Thomson-CSF. Responses were received in May from two teams: the first led by Thomson-CSF of France with BMT Defence Services Ltd and Raytheon Systems as major sub-contractors; the other by BAe Land and Sea Systems with Marconi Electronics Systems as a sub-contractor.

  Following tender evaluation and face-to-face meetings with industry it was judged that the bids offered the basis for robust and effective competition and contracts were awarded to both teams in November 1999. BAe and Marconi subsequently merged to form BAE SYSTEMS and in February 2000 Lockheed Martin joined the Thomson-CSF team (now known as Thales).

  10.  The Assessment phase was originally intended to comprise two main stages. The first involved the examination of carrier design options and helped inform the decision, in January 2001, to select JSF as the aircraft with the best potential to meet the FJCA requirement. Reflecting this decision, the remainder of Stage 1 focused on vessels capable of supporting JSF.

  11.  Stage 2 was previously planned to involve detailed work, informed by our choice of JSF, to determine the carriers' design parameters and to reduce technological risk, and culminate in the Main Gate approval decision, planned for December 2003, to down-select to one preferred prime contractor to proceed to Demonstration and Manufacture.

  12.  The first stage of Assessment was completed in June 2001. The Department carefully considered the proposals received from the contractors for the originally configured Stage 2, taking into account their views of the amount of work required to minimise the level of risk in the CVF programme. Having revisited our strategy to determine the most efficient and cost effective way forward for the remainder of the Assessment Phase, we concluded that the original approach no longer offered best value for money.

  13.  As a result, the CVF procurement strategy was changed. In a revised and shortened stage 2, until November 2002, the competing consortia will concentrate on refining their designs and on taking key trade-off decisions. During this period the Department will continuously assess the two consortia's work so that we can announce a single preferred prime contractor in early 2003.

  14.  The selected prime will then work on the third stage of assessment from early 2003 through to the award of a Demonstration and Manufacture contract early in 2004.

  15.  In adopting this revised approach we are seeking to apply Smart Acquisition principles. This approach will allow us to maximise the advantages offered by competition and thus ensure that we achieve best value for money. The new strategy concentrates the forces of competition at appropriate levels; namely between the candidate primes whilst designs are refined and key trade-off decisions are made; and then, once the prime has been selected, at the sub-contractor level to ensure that robust prices are achieved. The new strategy will allow a seamless transition from Assessment through to Demonstration and Manufacture. The strategy also addresses industry's concerns about the level of risk reduction required on major programmes. Both BAE SYSTEMS and Thales have welcomed the revised approach.

  16.  The revised strategy provides additional funding for the remainder of the Assessment Phase but offsets this by the fact that only one prime will be contracted for Stage 3 post-November 2002. We will also seek to withhold some of the payments for this stage until after the award of the D&M contract. The additional cost of the revised strategy is around £20 million. This additional funding will enable the selected prime to compile more confidently their performance, time and cost proposals, which we will expect them to achieve during the build programme. The programme remains within its previously approved maximum acceptable cost for the Assessment phase. The planned In-Service Dates of the two carriers remain unchanged at 2012 and 2015.

  17.  The Demonstration element of the D&M phase will initially continue design and risk reduction work from the Assessment Phase, the intention being to achieve the highest possible level of mature design before construction begins.

  18.  A cost model has been developed to generate whole-life cost estimates for CVF and this is populated with regularly updated data from industry. In the event of competition collapsing before the end of Stage 2, this model would be used as the basis for negotiations with industry.

ALTERNATIVE ACQUISITION OPTIONS

  19.  During the first stage of Assessment, a wide range of carrier and aircraft options, including conventional take-off and landing, short take off and vertical landing, and short take off but arrested recovery were considered. As part of this work and following normal practice, the cost of extending the three existing carriers, by ten years, has been assessed to provide a baseline against which the cost effectiveness of all the options can be evaluated.

COLLABORATION

  20.  Whole ship collaboration is unlikely to be a viable option, but opportunities are being reviewed during Assessment, especially for equipment systems and subsystems. In particular, discussions are continuing with the French and US to explore areas for possible co-operation in common areas of aircraft carrier technology at a system or sub-system level.

EXPORT POTENTIAL

  21.  It is unlikely that this project will lead directly to whole-ship sales, although the commercial marketing of CVF design skills and production technology could benefit UK industry. Much of the ship's equipment could have export potential. Industrial Participation proposals will be invited, as appropriate, for offshore content of the proposed solution.

INDUSTRIAL FACTORS

  22.  In accordance with government policy for the construction of warships, the CVF will be built in a UK shipyard or shipyards. Industrial factors will be taken into account in the selection of the prime contractor.

SMART ACQUISITION

  23.  The CVF programme is adopting and further developing a range of Smart Acquisition techniques including a greater emphasis on identifying, evaluating, and implementing effective trade-offs between system performance, whole-life costs and time; the adoption of incremental acquisition for areas such as the combat systems; and the use of off-the-shelf equipment and commercial standards, where appropriate. An Integrated Project Team (IPT) is managing the project under the leadership of an industrialist recruited in an open competition. In accordance with Smart Acquisition, what would previously have been Feasibility and Project Definition stages have been combined into a single Assessment phase, with increased investment at this stage to achieve early risk reduction. The two consortia have been encouraged to be innovative throughout the project.

  24.  The preferred contractor for the CVF programme will be selected through a continuous assessment process. This offers a new and faster means of discriminating between two competing contractors. The process also breaks new ground by addressing significant but less tangible `soft issues'—such as the contractors' ability to work with the MoD, which is an important issue when the MoD could be working with the selected prime for many years. The continuous assessment process will run throughout the coming year and will provide the MoD with a robust and fair method of determining which contractor is best placed to build the carriers. It is a move away from the traditional tender assessment approach and should mean that the MoD will be able to make its decision more quickly than would otherwise be possible.

ACQUISITION PHASES

  25.  A number of small-scale pre-feasibility studies were completed prior to the award of the assessment contracts. A risk register will be maintained throughout the life of the project as the core of an integrated risk management system. This contains both MoD and contractor inputs and is the focus for risk reduction work during the Assessment phase. The risk reduction work will help to provide confidence in the data to be assessed in the Combined Operational Effectiveness and Investment Appraisal that will support the Main Gate submission to proceed with Demonstration and Manufacture.

MILESTONES AND COSTS

  26.  CVF milestones, as currently planned, are shown in the table below.

User Requirements Document endorsement and Initial Gate approval	December 1998
Issue Invitation to Tender (ITT)	January 1999
Start ITT Assessment	November 1999
FCBA decision	January 2001
Start Stage 2 of Assessment	November 2001
Announcement of preferred prime contractor, start Stage 3 of Assessment	January 2003
Main Gate approval	December 2003
Order date	2004
ISDs	2012 and 2015

  27.  We envisage a total acquisition cost for the two carriers of £3 billion (resource costs, outturn prices), including combat system and initial support costs, but excluding the aircraft. The peak years of expenditure are likely to be between 2008 and 2012. Costs incurred so far, including pre-feasibility studies, total around £46 million.

IN-SERVICE SUPPORT

  28.  We plan to investigate the let of a design/build/through-life support/disposal contract as one package. Collaborative support arrangements are unlikely.

  29.  Manning levels will be based on work by human factors designers, to achieve a balance between automated and manual tasks, and by training needs analysis, in accordance with the RN training equipment strategy. The size of ship's complement is planned to be about the same as for the Invincible class. Contractors will be tasked to propose the most efficient manning strategies for their designs, which will be examined during Assessment.

  30.  All logistic support associated with CVF will be considered as a direct cost to the project, with an emphasis on avoiding expenditure on new infrastructure. The maintenance management system will be required to integrate with other MoD logistic systems and to take account of emerging developments in IT. Innovative support solutions will be examined, using Integrated Logistic Support methodology to minimise costs throughout the ship's life.

  31.  Contractor Logistic Support (CLS) will be examined for some or all of the maintenance and logistics. The benefits of CLS include a strong focus on reliability for initial designs; better standards of availability, reliability and maintenance; and an incentive to the contractor to design and build systems that minimise support costs. One option to be considered is the adoption of best practice in supply chain techniques, to minimise MoD ownership of spares, by contracting for agreed spares availability from industry. CLS options for up to 30 years will be examined during Assessment.

  32.  The upkeep cycle of the CVF will reflect the vessels' modern design and developments in upkeep practice such as `reliability centred maintenance' rather than lengthy and expensive refits. This will enable availability requirements to be met by only two carriers.

FRONT LINE NUMBERS

  33.  Both CVF will be assigned to the front line.

INTEROPERABILITY

  34.  The aim is to maximise the interoperability of the CVF with the greatest possible range of UK and allied aircraft and with other carriers, to the extent that this can be achieved cost-effectively. This is being explored further during the Assessment phase.

DISPOSAL OF EQUIPMENT REPLACED

  35.  Prospects for the sale of the Invincible class will be explored in due course.

IN-SERVICE LIFE

  36.  Each CVF is planned to have an in-service life of 30 years with a stretch target of up to 50 years.

DEVELOPMENT POTENTIAL

  37.  The CVF programme is closely linked with JCA and Maritime Airborne Surveillance and Control (MASC—formerly known as the Future Organic Airborne Early Warning (FOAEW) programmes (the latter managed by a dedicated team within the CVF Integrated Project Team).

SWIFTSURE & TRAFALGAR CLASS UPDATE

  The Swiftsure & Trafalgar (S&T) Class Update is a two-phase incremental programme to counter sonar obsolescence and to deliver enhanced military capability to the in-service attack submarines. The Initial Phase (Stages 1 & 2) successfully achieved its in-service date (ISD) in June 1996. This phase resolved sonar obsolescence, introduced enhanced sonar capability (Sonars 2074 & 2082), integrated the new submarine command system (SMCS) and delivered an incremental improvement in weapon system effectiveness to the Swiftsure Class and older Trafalgar Class submarines. The Final Phase (Stages 3 & 4) will enhance the operational effectiveness of the four newest Trafalgar Class submarines, principally by the introduction of a new integrated sonar suite, an upgraded Tactical Weapon System (TWS) and a number of signature reduction measures.

  BAE Systems Astute Class Ltd (BACL), as Prime Contractor for both the Astute Class and the S&T Class Update Final Phase, has selected derivatives of the main Final Phase sub-systems for the Astute Class.

Co-ordination of requirements across both programmes is ensured as they are being managed by the same Integrated Project Team.

  The new sonar suite (Sonar 2076) is a software intensive system that represents a step change in both technology and military capability. The sonar contractor, Thales Underwater Systems Limited (TUSL), formerly Thomson Marconi Sonar Limited (TMSL), has experienced difficulties in meeting the required programme. In particular, TUSL has faced a major challenge in developing the signal and data processing software. A lower risk recovery programme has now been established that involves implementing the required Sonar 2076 Stage 4 functionality in incremental stages, and this contains the slippage. The full impact of the slippage is partially mitigated by parallel slippage in the host submarines' repair and maintenance programmes.

OPERATIONAL REQUIREMENT

  1.  Nuclear powered attack submarines (SSNs) provide a vital contribution to peace and security by providing conventional deterrence. In time of conflict, the SSN's qualities of stealth, endurance and flexibility afford it the freedom to operate unsupported, worldwide, in a threat area, whilst remaining undetected, either independently or in support of surface ship task groups or joint operations. The SSN provides a capability to seek out and destroy other submarines that may present a threat to friendly forces, and can also detect and attack surface forces. By its actual or potential presence in an area, the SSN can deny the use of that area to an opposing force.

  2.  Those SSNs that have the capability to launch Tomahawk Land Attack Missiles (TLAM) are able to influence the strategic situation by posing a serious threat in periods of tension. In the event of hostilities, they can deliver these highly accurate and lethal weapons against important targets that might otherwise have remained relatively invulnerable. The SSN is also able to make a significant contribution to the intelligence collection effort, through its ability at close range to conduct covert surveillance and reconnaissance of opposition forces at sea or on the coastline. In support of covert operations, Special Forces can be inserted by a submarine, able to approach a coastline undetected and to provide an accurate launch point for operations ashore.

  3.  The Royal Navy's current SSN flotilla of Swiftsure & Trafalgar classes provides this range of operational capabilities. The Final Phase of the S&T Update programme will provide greatly enhanced sonar performance, Tactical Weapon System (TWS) integration and signature reduction measures, thereby increasing the UK's ability to fulfil these operational roles.

TRADE-OFFS

  4.  Feasibility studies, including cost/capability trade-offs investigations, were completed in November 1990. It was concluded that a phased approach, in four stages, would progressively satisfy the operational requirements in a way that would reduce technical and programme risk whilst fully exploiting the remaining submarine hull lives.

NUMBERS

  5.  The Initial Phase (Stages 1 & 2) introduced capability enhancements to three of the Swiftsure Class (SSN08, 09 & 10) and the three oldest Trafalgar Class (SSN13, 14 & 15) submarines.

  6.  The Final Phase (Stages 3 & 4) will be limited to the four newest Trafalgar Class submarines (SSN16, 17, 18 & 19) as the other in-service SSNs have insufficient remaining planned service life for further updating to be cost-effective.

STRATEGIC DEFENCE REVIEW

  7.  The SDR confirmed and highlighted that the nuclear-powered attack submarine is an extremely potent weapon system with an important role to play in support of a wide range of operations.

MILITARY CAPABILITY

  8.  The S&T Update is designed to shift the balance of operational capability in favour of the Royal Navy by enhancing the submarines' sonar performance and reducing the chances of counter-detection.

EQUIPMENT TO BE REPLACED AND IN-SERVICE DATE

  9.   The programme involves the upgrading of existing equipment. The ISD for the Final Phase is based on the successful completion of HMS TORBAY's sea trials with the Stage 4a increment (Initial Operating Capability), following her first Revalidation Assisted Maintenance Period (RAMP). This is planned to be achieved in 2004. The Final Phase update will be introduced progressively to the remaining submarines during their first refit and second commission.

PROCUREMENT APPROACH

  10.  Approval for Full Development and Initial Production for the Final Phase was given in January 1994. Procurement of the Final Phase was initially being undertaken through eight separate contracts with various equipment suppliers, including the Sonar 2076 contract with TUSL. These contracts were novated in 1997-98 to the prime contract with BAE SYSTEMS Astute Class Ltd (formerly GEC Marconi Astute) as part of a risk reduction strategy embracing both the S&T Class Update and the new Astute Class.

CREWING

  11.  The current complement of the submarines will be unchanged as a result of the update.

ALTERNATIVE PROCUREMENT OPTIONS

  12.  Alternative procurement options are not applicable due to the maturity of development and the level of commitment on contracts placed by competition in 1994. Radical options were considered in mid-2000, in the context of the Sonar 2076 difficulties, but were discounted due to their unacceptable impact on the timescales and costs of both the S&T and Astute programmes.

EXPORT POTENTIAL

  13.  Export potential is constrained by the high performance and sensitive nature of the technologies involved, particularly in respect of Sonar 2076. There are no export plans for these technologies.

INDUSTRIAL FACTORS

  14.  TUSL is a major supplier of cutting edge military sonars. This company currently employs around 350 personnel on the Sonar 2076 programme at locations in Cheadle Heath (Manchester), where the bulk of the system design, software development and systems engineering work is performed, and in Church Crookham (Hampshire) and Templecombe (Somerset) where hardware production is carried out.

SMART ACQUISITON

  15.  This is a legacy project in that its inception pre-dates the Smart Acquisition Initiative (SPI). Nevertheless, Smart Acquisition principles have been adopted where appropriate. This has resulted in a more incremental development programme and the formation of an integrated management team, in partnership with industry, to exploit the benefits to be derived from a common product fitted to both S&T and Astute class submarines and the appropriate integrated programme. Finally, a `Smart' documentation set is being adopted, where appropriate, albeit retrospectively.

KEY MILESTONES

  16.  The Key milestones and their expected dates are as follows:

Milestone	Criteria	Date
ISD for First of Class (HMS TORBAY), providing an Initial Operating Capability (IOC)	Stage 4a increment accepted into service	2004
Second Stage 4 increment installed and operating in HMS TORBAY	Stage 4b increment accepted into service	***
Final Stage 4 increment installed and operating in HMS TORBAY	Stage 4c increment accepted into service	***
Fleet Weapon Acceptance (FWA)	The full required Stage 4 functionality accepted into service in HMS TORBAY	***
Final Operating Capability (FOC)	The full required Stage 4 functionality introduced into service in the last of the four Trafalgar-Class SSNs	***

COSTS

  17.  The Major Projects Report for 2001 reported estimated total programme costs of £687 million (on a resource basis at outturn prices) for both the Initial and Final Phases (Stages 1 to 4). Of this total, some £615 million is attributable to the Final Phase.

IN-SERVICE SUPPORT

  18.  The current planning assumption is that the in-service support responsibilities for the constituent equipments and systems will be transferred from the Attack Submarines (ASM) Integrated Project Team (IPT) to the appropriate IPTs within the Defence Logistics Organisation, who will manage the required support using existing arrangements wherever possible. However, other options are being addressed, particularly for common equipments such as Sonar 2076, where there may be an opportunity to provide support more cost effectively by exploiting the Contractor Logistic Support arrangements being established for the Astute Class submarines.

`FRONT LINE' NUMBERS

  19.  The Initial Phase is currently operational in three Swiftsure-Class and the three oldest submarines of the Trafalgar-Class. The Final Phase programme is applicable to the four newest Trafalgar-Class submarines. At any given point in time, some of these submarines are in the repair and maintenance cycle and are not immediately available for operational deployment.

INTEROPERABILITY

  20.  There are no operational interoperability issues. However, the new Stage 5 programme could lead to a wider use of commercial off the shelf technology to enable future capability insertion and the potential re-use of common modules (software and hardware) from other submarine combat system projects. This may in turn facilitate the sharing of advanced signal processing algorithms with collaborative partners, in particular the US Navy.

DISPOSAL OF EQUIPMENT REPLACED

  21.  There are no equipment disposal opportunities in this programme as the project involves either the fitting of additional equipment or the upgrading of existing equipment.

IN-SERVICE LIFE

  22.  The six Swiftsure and Trafalgar Class submarines that received the Initial Phase update are due to remain in service until their planned decommissioning ***. The first submarine to receive the Final Phase update (1st increment at Stage 4a) is planned to be in-service in 2004 and will provide the Initial Operating Capability. The last submarine in the programme to receive the full Stage 4 update is planned to be in service by ***. The four Final Phase submarines are planned to remain in-service until they are progressively decommissioned ***.

DEVELOPMENT POTENTIAL

  23.  An additional programme of work (known as Stage 5) is currently being planned. It would develop and de-risk the enabling technology that would allow a more affordable timely and cost effective means of sustaining and upgrading Sonar 2076 in the longer term.

TYPE 45 ANTI-AIR WARFARE DESTROYER AND ITS PRINCIPAL ANTI-AIR MISSILE SYSTEM (PAAMS)

  The Common New Generation Frigate (CNGF), a collaborative programme with France and Italy, was planned to replace the UK's Type 42 destroyers in the early part of the century. CNGF comprised two distinct collaborative programmes: the Principal Anti Air Missile System (PAAMS) and the ship with its other systems (Horizon). Whilst the contract for the development and initial production of PAAMS has been placed, the Horizon project did not progress satisfactorily. The three nations agreed on 25 April 1999 that it would not be cost-effective to pursue a single prime contract for the ship and that the tri-national Horizon programme would end upon completion of its Project Definition and Initial Design Phase (Phase 1) at the end of October 1999. The UK is now taking forward its ship programme, designated the Type 45 Anti-War Warfare Destroyer Programme, through a national Prime Contractor, building on the tri-national project work already carried out and pursuing opportunities for co-operative procurement in equipping the ships.

OPERATIONAL REQUIREMENT

  1.  PAAMS and Horizon both derived from the single Tri-Partite Staff Requirement for CNGF. The requirement was approved by the three participating nations, the UK, France and Italy, in December 1992. At the start of Project Definition for Horizon in 1995, the intention was that PAAMS would provide an anti-war warfare capability sufficient to meet the most demanding threat foreseen. It was subsequently agreed that the initial capability sought should be sufficient to meet the most demanding threat forecast at the then expected In-Service Date (ISD) for CNGF (2004), but that a growth path to provide the capability necessary to address future predicted threats would also be identified as part of this work. This remains the position for the Type 45, which will provide effective area air defence against aircraft and missiles. We have confirmed that PAAMS will be able to meet the most demanding threat foreseen for 2007, when the Type 45 is due to enter service.

TRADE OFFS

  2.  The principal cost/capability trade-off in the PAAMS programme has been the acceptance of a capability sufficient to meet the threat at ISD, rather than beyond. However, the PAAMS Full Scale Engineering Development and Initial Production (FSED/IP) contract (see Paragraph 14) includes a Growth Potential Study that examines the modifications that may be required to meet the threat beyond 2010. Studies into cost/capability and programme/capability trade-offs for Project Horizon to achieve an affordable CNGF were undertaken as part of Phase 1 of its programme which completed on 31 October 1999. This work has been carried forward into the UK's national programme.

NUMBERS

  3.  The UK planning assumption is for the acquisition of up to 12 Type 45s. The Horizon Memorandum of Understanding, which was signed in 1994, assumed French and Italian acquisition of four and six ships respectively.

STRATEGIC DEFENCE REVIEW

  4.  The requirement to replace the Type 42 destroyers was scrutinised in the Strategic Defence Review. No changes were made to the operational case underpinning Project Horizon, which is now being addressed by the Type 45 Programme.

MILITARY CAPABILITY

  5.  Type 45 destroyers equipped with PAAMS will provide area defence against aircraft and missiles, including local area defence against modern anti-ship missiles, to protect lightly armed or unarmed ships. In this role, the warships will support maritime assets across the range, from RoRo vessels through amphibious assault ships to aircraft carriers, in both UK national and allied/coalition operations. In addition, the Type 45—in common with all destroyers and frigates—will be a multi-role, general-purpose platform capable of operations across the spectrum of Defence tasks, from peace support to high intensity warfare.

EQUIPMENT REPLACED AND IN-SERVICE DATE (ISD)

  6.  The warship and PAAMs are planned to replace the capability currently provided in the Type 42 destroyer with its GWS30 Sea Dart weapon system. It is planned that the eleven Type 42s currently in service will be replaced progressively as Type 45s enter service, starting with the First of Class in 2007.

  7.  The ISD for CNGF was defined as the completion of Part IV Trials, which indicate the ship is fit to enter service. The original estimated ISD was December 2002. This slipped to June 2004, largely owing to the need to synchronise the warship and combat system programmes. The last offer from the Horizon industry group pointed to a UK first of class CNGF being further delayed until 2007, although there was no detailed plan to support even this date. The planned ISD for the Type 45 first of class is now set at November 2007 with less risk in the programme than would have been the case for CNGF. Deliveries of the Class of up to 12 ships are planned to complete in 2014. Prior to Main Gate, ISD definition for the Type 45 was revised to match the availability of the Destroyer for operational tasking after sea training. There was no effect on the programme as a result of this change.

ACQUISITION APPROACH

Type 45

  8.  Marconi Electronic Systems (MES) was nominated as the Prime Contractor for the Type 45 Programme on 23 November 1999, and at the same time contracted to complete the Preparation for Demonstration (PFD) phase of the programme. This responsibility passed to BAE SYSTEMS when MES merged with British Aerospace. The nomination of BAE SYSTEMS ensured: the minimum of delay to the overall programme; that maximum benefit from the Horizon programme was carried forward into the UK national programme; and that the Prime Contractor would own much of the risk associated with that earlier work. On 20 December 2000 the Demonstration and First of Class Manufacture (DFM) contract, which was to complete the design and build of the first three ships, was placed with BAE SYSTEMS Electronics, which is the commercial title for the Type 45 Prime Contract Office (PCO).

  9.  The MoD's original procurement strategy for the Type 45 was announced by the Secretary of State in July 2000. Under this, the first of class (HMS DARING) would have been assembled by BAE SYSTEMS Marine, with a substantial contribution from Vosper Thornycroft (VT), the second (HMS DAUNTLESS) by VT, and the third (HMS DIAMOND) by BAE SYSTEMS Marine. Both companies continue to be jointly involved in developing the design for the Type 45.

  10.  Under this strategy, it was intended that the Prime Contract would manage competitions for the manufacture and assembly of subsequent batches of Type 45 destroyers with MOD oversight. It was expected that all UK shipyards would have the opportunity to bid for the manufacture of blocks for the second batch of ships (with the competition for assembly of this batch being limited to Marine and VT), and for both ship assembly and manufacture for subsequent batches. In line with Government policy, there were no plans to extend competition for warship construction for the Royal Navy to yards overseas.

  11.  In late 2000, the MoD and Prime Contractor received an unsolicited bid from BAE SYSTEMS Marine which proposed assigning construction of twelve Type 45 ships to that company, as well as commitment to other naval programmes. After careful consideration, in conjunction with other Government Departments, the bid was rejected.

  12.  In June 2001, a possible alternative approach emerged from BAE SYSTEMS Marine and Vosper Thornycroft. This required MoD commitment to a further three Type 45s (bringing the total to six, within the planned class of up to twelve) but did not include reference to other programmes. It proposed that substantial sections of each ship would be built by Vosper Thornycroft at Portsmouth and BAE SYSTEMS Marine on the Clyde and at Barrow in Furness. The First of Class (HMS DARING) would be assembled and launched by BAE SYSTEMS Marine at Scotstoun, with the remainder assembled and launched by BAE SYSTEMS at Barrow. The focus of design support to the whole Class would remain at Scotstoun, with continuing participation by both shipbuilders. After careful consideration, involving other Government Departments, this alternative approach was accepted in principle.

  13.  On 10 July 2001, it was announced that the construction of a further three Type 45s had been approved, subject to successful completion of contractual negotiations. The intention was to extend the MoD's contractual commitment with the Prime Contractor to include this second batch of three ships, bringing the total to six. At the same time it was expected that the Prime Contractor would sign legally binding agreements with the shipbuilders (BAE Systems Marine and Vosper Thornycroft) for their work on the first six Type 45 platforms. The extension to the contractual commitment and the signature of the shipbuilding sub-contracts was announced on 18 February 2002.

PAAMS

  14.  Collaboration continues with France and Italy on PAAMS. On 11 August 1999, France placed a contract on behalf of the three nations for Full Scale Engineering Development and Initial Production (FSED/IP) with the tri-national consortium EUROPAAMS acting as Prime Contractor. Prime Contractor members were nominated by their governments. The UK member is UKAMS, which began as a jointly-owned subsidiary of Siemens Plessey, GEC and BAe SEMA—see paragraph 24 below. Following subsequent restructuring, UKAMS is now a wholly owned subsidiary of, and remains within, the recently formed MBDA (formerly Matra BAe Dynamics). FSED/IP sub-contracts have been let by the Prime Contractor and the placement of second tier sub-contracts is now complete.

  15.  In order to get PAAMS to sea as quickly as possible, a strategy of incremental acquisition of platform capability, from a baseline standard which is both affordable and achievable in the time to in-service date, has been adopted. This will enable the insertion of capability throughout the life of the Type 45s as requirements become affordable and to take advantage of future changes in defence requirements and technology advances. Following the placement of the Demonstration and First of Class Manufacture (DFM) contract on 20 December 2000 we have been able to accelerate part of the Incremental Acquisition Plan (IAP) and a hull-mounted sonar (the top priority in the Plan) will be fitted to all the ships on build.

ALTERNATIVE ACQUISITION OPTIONS

  16.  Before the 1996 PAAMS Programme Memorandum Of Understanding (MOU) was signed, the UK considered a number of procurement options, including life extension of Type 42s and acquisition of off-the-shelf alternatives.

COLLABORATION

  17.  The PAAMS Programme MOU and its FSED/IP Supplement were signed by France, Italy and the UK in March 1996. The UK share of the costs of PAAMS FSED/IP will be higher than those of France and Italy. This is because we are bearing the costs of developing the Sampson Radar, which, whilst more capable than the FR/IT EMPAR radar, will be used only in the UK variant, and because the UK is making a contribution to the development cost of the Family of Future Surface to Air Missile Systems (FSAF) Programme being used for PAAMS. In addition, the UK currently plans to fit PAAMS to a significantly larger number of ships than the French and Italian navies combined.

  18.  The PAAMS Programme is managed by the tri-national PAAMS Programme Office (PPO) in Paris which reports to a tri-national Steering Committee. The aim is to delegate as much programme management work as possible to the PPO, although co-ordination of UK policy on PAAMS remains the responsibility of the Type 45 Integrated Project Team (IPT). Charters, agreed with France and Italy, set out the arrangements for co-ordinating PAAMS with the national Type 45 ship-programme and the new Franco/Italian bilateral Horizon programme.

  19.  At 12 February 2002, the PPO had 21 full time staff (ten from the UK (including two locally employed), five Italian and six French) and four part time staff (one Italian and three French). The UK also has one member of staff located with the FSAF Project Office in Paris. The tri-national Joint Project Office (JPO) located in London disbanded on completion of Phase 1 of Project Horizon on 31 October 1999. The Type 45 IPT has an annual running costs budget of £4.2 million, including the salaries and expenses of UK staff working in the PPO and FSAF Project Office.

  20.  Work is currently being undertaken to enable the integration of PAAMS into OCCAR (Organisme Conjoint De Co-operation En Mati"ere D'Armament). The OCCAR Board of Supervisors has stated that entry should be completed by the end of 2002.

  21.  The reasons for the failure of the tri-national Horizon programme were the subject of analysis by the tri-national Horizon JPO and the Horizon Steering Committee. The lessons learned are informing the UK's approach to future potential collaborative ventures. A short paper summarising the lessons learned was provided to the Committee as an Annex to the 2000 Memorandum.

  22.  The potential for achieving economies of scale by co-operative purchasing of common items in the Type 45 and Franco-Italian Horizon programmes has been explored without success to date. However, there have been benefits from PAAMS industry (MBDA) working closely with the T45 industry (BAE Systems). The most significant was the initiative to develop a common architecture, including servers and consoles, for the PAAMS and Combat Management System. This improves inter-system operability and generates considerable savings in through life costs.

EXPORT POTENTIAL

  23.  Export potential for the Type 45 system as a whole constrained by its high technological specification and cost, but elements of the system such as the selected prime mover (the Rolls Royce/Northrop Grumman WR21 gas turbine) and PAAMS (in particular its associated multi-function radar) have considerable potential export prospects up to the value of several billion pounds over the next fifteen years. There could be prospects for refit programmes as well as in new build hulls. There is a growing level of interest from the Royal Australian Navy, which has plans for three air defence destroyers from 2013.

INDUSTRIAL FACTORS

  24.  For PAAMS, the Matra BAe Dynamics UKAMS consortium was formed out of the companies possessing the technologies crucial to the programme—notably the existing FSAF contractors and the Sampson supplier Siemens Plessey Systems (now BAe Defence Systems Ltd). PAAMS work share is constrained by existing FSAF arrangements, but the aim is to achieve equitable work share throughout the life of the programme as far as practicable, subject to considerations of cost-effectiveness and competition.

  25.  For the national Type 45 warship programme, MES, as part of GEC, was part of the Horizon International Joint Venture Company (IJVC) and was heavily involved in the work that was undertaken by the IJVC during Phase 1 of the Horizon programme which completed at the end of October 1999. To avoid further delay to the replacement of Type 42 destroyers, it was essential that the chosen Prime Contractor would be able to make maximum use of the outputs of the HORIZON definition work and demonstrate an ability to resource the programme and deliver to the required timelines in partnership with the IPT.

SMART ACQUISITION

  26.  The Type 45 Programme is being undertaken in accordance with the principles of Smart Acquisition. The Type 45 IPT was formally established in September 1999, consisting of the MoD Project Team at Abbey Wood and the single Prime Contractor Organisation (PCO) two miles away at Filton, Bristol. A charter, setting out the working ethos between the DPA and PCO, has been agreed. The Department is confident that the Smart Acquisition approach to requirements management, through the development of an initial operating capability, which could be progressively enhanced through a programme of incremental upgrading, will enable the first of class ship to be delivered on time and to cost.

  27.  The principal lessons for the UK that were learned from the outcome of the Horizon programme have been built into the Smart Acquisition Initiative. These lessons covered the procurement strategy, risk reduction, communication with industry at an early stage of the project, and affordability.

ACQUISITION PHASES

  28.  The PAAMS FSED/IP contract was placed on11 August 1999. This includes the supply of the systems and associated equipments and spares for the three nations' first of class ships. Systems for follow-on ships will be covered by a Supplement to the PAAMS programme MOU which is expected to be submitted to Ministers for signature by the Summer of 2002.

  29.  For the warship, the Prime Contractor, BAE SYSTEMS Electronics, was contracted on 20 December 2000 to undertake the DFM phase. This contract has been extended to include the second batch of three Type 45s.

MILESTONES AND COSTS

  30.  The tables below show the currently planned milestones and approved budget.

HORIZON

	Original	Completed
Start of PAAMS FSED/IP	September 1996	August 1999
Start of warship assessment phase	July 1999	July 1999
Completion of Horizon Phase 1	July 1998	October 1999

TYPE 45 DESTROYER

	Original approval	Current estimate
Expenditure (see Note 1)	£6,168 million (approval for six ships)	£5,416 million
Start of warship Demonstration and First of Class Manufacture (DFM) phase (for first three ships) (see Note 2)	September 2000	December 2000 (Extended to include further three ships in February 2002)
First-of-class ISD (see paragraph 7 above)	November 2007 (availability for operational tasking)	November 2007 (availability for operational tasking)
DFM completed (ISD of sixth ship)	August 2011 (December 2009 for third ship)	June 2011 (December 2009 for third ship)

Note 1

  Following Main Gate Approval in July 2000, figures show: total approved level of expenditure for six ships and prior approvals covering predominantly PAAMS FSED/IP, HORIZON and T45 Assessment phase (Latest Approval); against the current estimate of expenditure (Current Estimate). Expenditure is calculated at out-turn prices.

Note 2

  Warship assessment phase completed on placement of DFM.

  31.  Delays in the PAAMS programme were largely related to slow progress in agreeing a procurement strategy with partners and then in negotiating a satisfactory contract.

  32.  Forward commitment now amounts to £2,252 milliob (this figure has been increased from the one reported last year because of the ongoing progress in the ship programme). For the projected class of 12 ships, the total cost is expected to be of the order of £8 billion, including £2.8 billion total acquisition costs for PAAMS (with figures calculated on a resource basis, as in MPR 2001). The years of peak expenditure are expected to be 2007-08 and 2008-09.

  33.  Under the terms of the Horizon MOU, the UK carried liabilities in respect of additional expenses associated with winding up the Horizon JPO/International Joint Venture Company (IJVC). Following completion of the contract, the IJVC has been wound up without any claim on the MoD. The JPO was closed on 31 October 1999, with no additional expenses being incurred.

IN-SERVICE SUPPORT

  34.  As part of the initial contract to procure the first three Type 45s, BAE SYSTEMS undertook to study options for Contractor Logistic Support (CLS) of the platforms, reporting by the end of 2001. As this study progressed it became clear that a CLS contract based on whole warship availability would be extremely complex and necessarily require a high degree of contingency built in to cover the contractor's risk exposure. Additionally, it would not enable the MoD to optimise its resources and priorities over all platforms. It was therefore decided, in conjunction with the Warship Support Agency, to alter the scope of the study into a phased approach to support. The first phase, now on contract, is to devise, in conjunction with the Warship Support Agency, the optimum support solution for all T45 equipments. From this, it is envisaged there will emerge a range of support from conventional support, or CLS contracts through the Equipment IPT, to a core CLS contract for the T45. The study will also define the means of managing in service support, with the aim of delivering a bid in late 2003 to undertake the core CLS activity including post design services.

  35.  Ship staff training and spares storage are potential bottlenecks to ships coming into operational service. The former can be managed by the increased use of experienced Type 42 crew which would reduce the need for pre-joining training when the Type 45 comes into service; use of computer-based training will reduce disruption to operational programmes. `Just In Time' stock management techniques will also reduce the volume of spares to be held, thus minimising the need for new storage facilities during the transition period. It is planned that a CLS contract will be in place a year before ISD, to provide experience in its operation during trials and validate the in service support solution for the In Service phase.

FRONT LINE, STORAGE AND RESERVE

  36.  Assuming a class of 12 ships, nine or ten would, on average, be available at any one time to the Commander-in-Chief Fleet for tasking, while two or three would be undergoing maintenance, including one or two in refit. It is not planned to hold any ships in storage or as in-use reserves.

INTEROPERABILITY

  37.  Commonality of many of the PAAMS systems and sub-systems, including in particular the Aster missile, will ensure a good level of interoperability with both France and Italy. In the warship context, the requirement for interoperability with Joint and Combined Forces at system and sub system level is a high priority.

DISPOSAL OF EQUIPMENT REPLACED

  38.  The sales potential of Type 42 warships as they are being disposed of is being examined.

IN-SERVICE LIFE

  39.  The Type 45 is planned to have an in-service life of 25 years.

DEVELOPMENT POTENTIAL

  40.  The Type 45's systems and sub-systems will be updated as appropriate throughout the life of the system to take account of developments in the operational environment. It is possible that the Future Surface Combatant programme, currently in the early stages of concept development, will draw on major elements of the Type 45.

THE RAND REPORT ON THE TYPE 45 PROCUREMENT STRATEGY, AND THE WARSHIP SUPPORT MODERNISATION INITIATIVE

  The MoD commissioned RAND EUROPE in April 2001 to investigate potential procurement strategies which the MoD could pursue for its future warship programme over the next 10-15 years with particular reference to the Type 45 Anti-Air Warfare Destroyer. This followed an unsolicited proposal received in December 2000 from BAE SYSTEMS Marine, which proposed assigning construction of twelve Type 45 ships to that company, as well as commitment to other naval programmes. This differed from the Type 45 shipbuilding procurement strategy at that time which saw Vosper Thornycroft building one of the first batch of three ships and competing for later batches. Interim results from RAND's study informed MoD's decision to proceed with a revised procurement strategy for the Type 45, which was announced by the Secretary of State for Defence on 10 July 2001. RAND continued their study, taking a broader look at the foreseeable balance of demand and supply in the sector, and the potential effects of different procurement approaches. The study is now complete and at the time of writing RAND is expected to publish their report shortly. This memorandum sets out the background to the study, RAND's approach, and the results that informed the decisions on Type 45.

  Another issue for MoD in considering the unsolicited proposal was the potential impact on the development of the Warship Support Modernisation Initiative. This memorandum also provides details of this initiative, including the MoD's current views on the relative merits of the proposals put forward by industry and the trade unions.

THE COMMISSIONING OF THE RAND REPORT

  1.  On 11 July 2000 the Secretary of State for Defence announced the approval of the procurement of the first three Type 45s. At that time the procurement strategy envisaged a prime contract placed later that year with BAE SYSTEMS Electronics with back-to-back sub-contracts with BAE SYSTEMS Marine (Marine) (for the assembly of the first and third ships) and Vosper Thornycroft (VT) (for the assembly of the second ship). Marine would also be expected to sub-contract a pre-determined amount of work on the first ship to VT. A substantial element of the total manufacture work on all three ships would be shared between VT and Marine. The precise division of manufacture work was subject to negotiation between the Prime Contractor, and Marine and VT. This strategy was intended to ensure that both yards would have sufficient experience to compete equitably for the second batch of Type 45 (which were planned to be ordered around 2004), and to preserve the potential for competition not only for later Type 45 production, but also for future warship production, such as the Future Aircraft Carrier. In the event, Marine and VT could not agree a risk sharing partnership in time for sub-contracts to be let back-to-back with the prime contract (the Demonstration and First of Class Manufacture contract) which was placed in December 2000.

  2.  Later that month, the MoD received an unsolicited proposal from Marine, through the Type 45 Prime Contract Office. The proposal suggested, inter alia, that Marine should build all twelve planned ships and appeared to offer substantial savings to the MoD over the previous procurement strategy for Type 45. As with any approach which appears to offer value for money, MoD was obliged to consider it seriously. An immediate concern however was that by assigning all the Type 45 work to Marine, the potential for competition for the production of future major warship programmes could have been put at serious risk.

  3.  During the early part of 2001, MoD spent considerable effort in clarifying elements of the proposal, and sought to supplement the internal analysis with appropriate expert advice from outside Government. In April 2001, RAND EUROPE, a wholly-owned subsidiary of the US RAND corporation, was commissioned to study the advantages and disadvantages of alternative procurement strategies for MoD's future warship programmes, and in particular in relation to options for the Type 45, over the next 15-20 years. The study was expected to inform (but not determine) decisions by the MoD on individual programmes with the aim of securing value for money over the warship programme as a whole.

  4.  RAND is a very experienced and influential policy-analysis think tank, and has been conducting analyses of military shipbuilding, industrial base, and competition issues for two decades. Most recently, RAND has completed major studies on the US aircraft carrier industrial base, the US submarine industrial base, and on the appropriate role of competition in the production of the Joint Strike Fighter. In each case, the United States' most senior defence decision makers made policy choices based on RAND's analysis.

  5.  RAND has no commercial interests in the US or UK shipbuilding industries. In this particular study, MoD set the context and defined the problem for RAND. Thereafter, RAND independently developed the study's approach, analysis and conclusions. While RAND considered comments and suggestions from all interested parties along with the way, the report's findings and conclusions are theirs and theirs alone.

RAND'S APPROACH

  6.  RAND conducted a quantitative and qualitative comparison of the advantages and disadvantages of having one or two shipbuilding companies produce the Type 45 over the next 15 years. Options examined included single source procurement, dual source competitive procurement and dual source directed buys, employing either whole-ship or modular (`block') production techniques in one or more shipyards.

  7.  RAND developed a new analytical model of the UK shipbuilding industrial base, which considered all current and future Marine and VT programmes. Using the model RAND estimated workforce, overhead, and investment costs for different options, to display the relative cost impacts on the Type 45 of different acquisition and production strategies, and, in broad terms, to assess the effect of those strategies both on the United Kingdom's shipbuilding industrial base and on the costs of other current and future MoD ship programmes.

  8.  Using historical information and informed by previous studies, RAND also considered the likelihood of competitive pressures in bidding for subsequent batches of Type 45 reducing costs enough to overcome the cost penalties of distributing work among two producers, using break-even analysis. In addition, they considered the risks associated with different production strategies—ie whole ship or block construction.

  9.  RAND were provided with information by the Equipment Capability Customer organisation and Integrated Project Teams in the MoD and by five UK shipbuilders—VT, Marine, Swan Hunter, Appledore, and Harland & Wolff. Much of this information was commercially confidential, and the published report will necessarily exclude such data.

THE INTERIM RESULTS WHICH INFORMED THE TYPE 45 PROCUREMENT STRATEGY DECISIONS

  10.  RAND is expected to publish its report on the overall study shortly (a copy of the report will be placed in the House of Commons Library). The interim results, which informed the decision in July 2001 to alter the Type 45 procurement strategy (described in the separate Type 45 memorandum), were made available to the MoD throughout June and July 2001. The key findings included the following:

—  While subject to a number of assumptions, the RAND results suggested there was roughly an even chance that the pressures of competition, if sustained throughout the production programme, would yield about the same overall cost as single source production. The interim results therefore neither strongly supported nor rejected competitive procurement;

—  For strategies that directed Type 45 work to particular, multiple shipyards, allocation of blocks was more cost-effective than the allocation of whole ships, because the workforce would increase their productivity as they progressively gained more experience building those blocks. Unlike the unsolicited proposal, such a strategy would also have the benefit of keeping both shipbuilders involved in the Type 45 programme and potentially available to compete for future warship programmes. RAND identified risks in the construction, fitting and delivery of blocks, but believed these could be managed;

—  Discounting the possible effects of competitive pressure to produce savings on later batches of Type 45 (which were uncertain and would have depended on both VT and Marine continuing to bid), a revised strategy similar to that announced by the Secretary of State for Defence on 10 July 2001 should offer significant savings over the previous strategy;

—  While a strategy that directed the same blocks over the life of the programme to both VT and Marine was likely to cost more for Type 45 than the unsolicited proposal, the additional costs were likely to be recouped if they enabled competition to be pursued on other warship programmes.

FURTHER WORK

  11.  RAND'S further work on the Type 45 procurement strategy study has included looking at some of the broader capacity and procurement policy issues in relation to the sector. The final report is expected to outline areas which require further investigation. In addition, RAND has been commissioned to assist the MoD in evaluating the build strategy proposals of the two competing primes in the Future Carrier (CVF) programme.

  12.  The Type 45 procurement strategy report is not expected to make specific recommendations concerning procurement strategies for future programmes, although it has helped clarify the issues regarding block production (which is likely to be employed for CVF). The study has also provided an indication of the industrial capacity required to sustain the future programme, suggesting that, while there is a current risk of excess capacity in the shipbuilding industry if MoD orders are not supplemented by export and commercial work, the workforce will need to expand considerably by the end of this decade to accommodate the forward warshipbuilding programme as currently planned.

THE POTENTIAL VOSPER THORNYCROFT MOVE TO PORTSMOUTH

  13.  One issue with implications for the Type 45 programme, beyond the scope of work which RAND were commissioned to analyse in detail, was the potential impact on the Warship Support Modernisation (WSM) Initiative.

THE WARSHIP SUPPORT MODERNISATION INITIATIVE

  14.  Through the WSM initiative, the Department is pursuing changes to warship repair and maintenance arrangements which should help address current over-capacity and achieve significant savings to the Defence budget.

  15.  Memoranda of Understanding (MoUs) outlining the principles within which negotiations would take place were signed in January 2001 with each of the interested companies—Devonport Management Ltd, Babcock Rosyth Defence Ltd, and Fleet Support Ltd. A separate MoU was also signed with VT to pursue the possibility of them moving their steel shipbuilding operations from Woolston, Southampton, to land leased at the Naval Base. The move was a commercial decision by the company and in their view contingent upon ship build procurement decisions—specificially, on the Type 45—by MoD. Such a move would lead to additional revenue to the Department, through the WSM initiative. On 18 February this year, VT announced that activity at their Woolston site would cease in 2003 and that they were going ahead with the move to Portsmouth.

  16.  Agreement has been reached on a 125-year lease with VT for land and buildings within Portsmouth Naval Base. VT are to invest in new steel ship building facilities on an area at the southern end of No. 3 basin, comprising three large dry docks (two of which would be filled in, in order to construct a large shipbuilding hall), extensive workshop facilities, storage facilities and a large office complex.

  17.  This lease is separate from the discussions that have been held over the last year with Fleet Support Ltd, and their proposals for partnering. Its agreement does not pre-empt decisions on the wider WSM Initiative, nor signal that decisions have already been made.

  18.  Final detailed proposals from the trades unions and from each of the companies were received in September 01. The trade union proposals hinged on co-operation with Naval Base management in the implementation of in-house efficiencies and also explored the avoidance of transfers to the private sector through alternative forms of partnering arrangements with industry. The company proposals covered the provision of engineering support plus related logistics activities and facilities and estates management at the Naval Bases. All options have been evaluated and compared for best value for money against an internal Benchmark. The results of this analysis are now with the Secretary of State for a decision on the way ahead.

FUTURE JOINT COMBAT AIRCRAFT—FJCA (FORMERLY FUTURE CARRIER BORNE AIRCRAFT—FCBA)

  The Future Carrier Borne Aircraft (FCBA) was originally planned to replace the capability currently provided by the RN's Sea Harrier, in the second decade of this century. However, following the Strategic Defence Review (SDR) and the formation of Joint Force 2000 (since renamed Joint Force Harrier) it was envisaged that FCBA would also replace the RAF Harrier GR7/9. The aircraft will be operated in a joint force, from both the new aircraft carriers and land bases, in the manner of the current Joint Force Harrier. In May 2001 the programme was re-titled Future Joint Combat Aircraft (FJCA), better to reflect the truly joint nature of the requirement.

  As the Defence Secretary announced on 17 January 2001 we concluded that the US Joint Strike Fighter (JSF) has the best potential to meet our needs. We accordingly decided to join the US as a full collaborative partner in the next stage of the programme—System Development and Demonstration (SDD), formerly known as Engineering and Manufacturing Development (EMD).

  On 26 October 2001 Lockheed Martin was selected as the prime contractor for the JSF programme. UK entered the SDD phase as a full collaborative partner with the US, having participated in the source selection process. The purpose of the SDD phase is to mature, complete and evaluate the detailed design of the aircraft and to integrate key equipment prior to full production.

OPERATIONAL REQUIREMENT

  1.  The FCBA requirement was originally intended to provide the Royal Navy with a new multi-role fighter/attack aircraft to replace the Sea Harrier from about 2012. There has been no significant change to the requirement, in terms of the aircraft's capabilities, since the Staff Target was approved in 1996. The Strategic Defence Review (SDR), however, concluded that we should plan to replace Invincible class carriers with two new larger aircraft carriers and establish the Joint Force 2000 (since renamed Joint Force Harrier), comprising RN and RAF elements. Therefore the FCBA project, now restyled FJCA, envisaged a common aircraft to replace both the Sea Harrier FA2 and RAF Harrier GR7, capable of being deployed in both land and sea based operations.

  2.  Under a Memorandum of Understanding (MOU) signed in December 1995, the UK participated as a full collaborative partner in the JSF Concept Demonstration phase, which began in November 1996 and ended in October 2001. The UK will continue to be the only full collaborative partner during the next phase of the programme—System Development and Demonstration (SDD), formerly Engineering and Manufacturing Development (EMD). Signature of a MOU in January 2001 for EMD allowed us to participate in the Source Selection process that commenced in February 2001 and ended in October 2001 with the selection of Lockheed Martin as the prime contractor. UK/US requirements are largely the same and UK staffs have participated in development of the JSF Joint Operational Requirements Document (JORD), and included UK specific requirements.

TRADE-OFFS

  3.  Trade-offs are an essential part of the acquisition process in the JSF programme, using the `cost as an independent variable' process. This means that, in the evolution of requirements and design solutions, affordability is taken directly into account along with lethality, survivability and supportability. The JSF trade-off studies were completed in the autumn of 2000, in time to allow the competing prime contractors to include results in their respective SDD bids.

NUMBERS

  4.  The current UK planning assumption is for 150 aircraft, but final numbers will depend on the version of JSF (Carrier Variant (CV) or Short Take Off and Vertical Landing (STOVL)) selected and the outcome of ongoing work to confirm overall future offensive air capability requirements.

STRATEGIC DEFENCE REVIEW

  5.  The requirement for FCBA and other future fast jets was closely scrutinised in the SDR. The Joint Force 2000, now renamed Joint Force Harrier, arising from the SDR has brought all Naval and RAF Harrier squadrons under a unified command and control structure, with squadrons capable of operating from ashore or afloat as required. In addition, the SDR noted that the US JSF was a strong contender to meet our requirements for a Future Carrier Borne Aircraft. Current plans envisage that FJCA will start entering service in 2012.

MILITARY CAPABILITY

  6.  JSF is a single seat, supersonic aircraft, incorporating advanced "stealth" technology, that is capable of performing multi-role (strike, reconnaissance and air defence) operations from aircraft carriers and land bases. Our analysis of the available options demonstrated that, on a through life basis, JSF should meet most cost-effectively our military requirements.

EQUIPMENT TO BE REPLACED AND IN-SERVICE DATE

  7.  Pre SDR the FCBA was planned to succeed the Sea Harrier FA2 from 2012. Following the SDR, FJCA will now also succeed Harrier GR7 from 2015. The FJCA in-service date is defined as the ability to conduct sustained operations with eight aircraft and is currently planned for late 2012.

ACQUISITION APPROACH

  8.  JSF is a collaborative programme which runs to US procurement procedures. It could be considered to be in the Demonstration Phase of the Smart Acquisition process. JSF Concept Demonstration was run on a competitive basis between consortia led by Boeing and Lockheed Martin under cost plus fixed fee (subject to maximum price) contracts placed by the US Government. Both consortia involved British companies. By the nature of the competition itself and the contract pricing mechanism, the prime contractors were expected to maximise competition wherever possible at sub-contract level. The US Government also has a contract on a similar basis with Pratt & Whitney for the development of the engine. A contract was also placed on BAE Systems to examine the viability of marinised Eurofighter.

ALTERNATIVE ACQUISITION OPTIONS

  9.  Should the JSF programme fail to deliver a suitable aircraft a number of alternatives could be considered, but this would potentially have implications for factors such as cost and in-service date. These include the possible development of a Short Take-Off But Arrested Recovery marinised Eurofighter; an off the shelf purchase of a conventional catapult-launched aircraft, such as the Rafale M or F/A18 E/F; and options related to an advanced Harrier design.

COLLABORATION

  10.  We contributed $200 million under an MOU with the US, to the $2 billion JSF Concept Demonstration Phase. The UK contribution to the next phase (SDD) will be £1.3 billion, with a further sum, currently estimated at £600 million for additional work on national requirements. The JSF programme is managed from a US Joint Project Office (JPO) in Washington, which has a total of about 150 staff, currently including nine UK staff. There is no formal workshare agreement within the MoU for SDD, but a number of UK companies have competed successfully to win significant work with the US prime contractor. Two other countries have now joined the JSF programme, the Netherlands as a level 2 partner and Canada as a level 3 partner.

  11.  The eventual US production requirement, extending across the US Air Force, Navy and Marine Corps, is around 3,000 aircraft.

EXPORT POTENTIAL

  12.  JSF has a considerable potential to generate export opportunities including for UK Industry. The JSF production run, including exports, may approach 5,000 aircraft estimated to be worth some $400 billion.

INDUSTRIAL FACTORS

  13.  The industrial implications of the alternative solutions to the FJCA requirement were taken into account in determining the UK's choice of aircraft. UK participation as a full collaborative partner in the JSF programme represents a significant opportunity for UK industry. They have won, on merit, substantial high quality work and this is expected to continue in the future production and support phases of potentially the largest military acquisition programme ever.

SMART ACQUISITION

  14.  The JSF programme accords with Smart Acquisition principles. The joint US/UK programme office operates as an integrated project team, including close partnering arrangements between the programme office and the prime contractor, and operational staffs are contributing to the development of the requirement. The concept of "cost as an independent variable" is a further indicator of the iterative approach to the programme, as cost is seen as another "engineering parameter" against which potential technical solutions have to be measured and moderated if they produce unsatisfactory outcomes. The US programme made significant "front end" investment, as evinced by the Technical Maturity Program, a risk reduction measure to prove technology before it was offered to both companies for potential incorporation in their solutions. This early investment was also seen in the Concept Demonstration aircraft flown by both companies. Those aircraft were used to prove various "lean manufacturing " techniques aimed at reducing both build and through life costs. Early consideration is being given to an innovative support philosophy, including a major role for industry in direct support.

ACQUISITION PHASES, MILESTONES AND COSTS

  15.  The JSF Concept Demonstration phase, begun in November 1996, ended in October 2001. On 26 October 2001 Lockheed Martin was chosen as the contractor for the SDD, phase of the JSF programme, in which the Defence Secretary announced UK participation on 17 January 01. SDD started in October 2001 and will last for some 11 years. UK entered the SDD phase as a full collaborative partner with the US, having participated in the selection of Lockheed Martin as the US prime contractor. The purpose of the SDD phase is to mature, complete and evaluate the detailed design of the aircraft and to integrate key equipment prior to full production.

  16.  The main risk areas currently identified for JSF are technology transfer, avionics software, aircraft controllability, thrust/weight ratio, and safety management. A main aim of Concept Demonstration was to reduce these risks to an acceptable level before the programme moved into the SDD phase.

  17.  Approval was given for expenditure of £150m to cover both the contribution to the US JSF Concept Demonstration Phase and UK Feasibility Studies. Expenditure, on the same price basis at the end of 2001-02 is £143m (all figures in resource terms).

  18.  Approval has been given for expenditure of £1.3bn, to cover the UK contribution to SDD and a further sum currently estimated at £600m for additional work on national requirements. This will be paid over an 11 year period beginning in October 2001. (All figures in outturn prices. Resource based figures will be provided in accordance with the required MPR02 timescales.

  19.  Overall numbers and the choice of variant, both of which have yet to be determined, will drive the cost of the programme. It is currently estimated to be in the region of £7-10bn. Peak expenditure is likely to occur in 2013-14 and 2014-15.

IN-SERVICE SUPPORT

  20.  Support arrangements are currently being examined. For JSF, this includes consideration of the extent of collaborative support. Detailed plans for the transition from the current Harrier fleet to FJCA will be formulated nearer the time.

FRONT LINE, STORAGE AND RESERVES

  21.  The numbers have yet to be determined, but the planning assumption is 150 aircraft.

INTEROPERABILITY

  22.  JSF (STOVL or CV) will offer good interoperability with the US and the other NATO allies who buy JSF. It will, of course, be fully interoperable with legacy UK systems.

DISPOSAL OF EQUIPMENT REPLACED

  23.  Disposal has yet to be considered. Either aircraft type may be of interest to existing overseas STOVL customers, but the aircraft are likely to have a limited useful life remaining.

IN-SERVICE LIFE

  24.  FJCA is planned to have a 30-year service life.

DEVELOPMENT POTENTIAL

  25.  It is too early to comment on the potential options for the further development, update or use of JSF.

EUROFIGHTER

  Eurofighter is an agile fighter aircraft that will serve as the cornerstone of the RAF's fighting capability from the early years of this century. The 232 aircraft we plan to acquire will replace the Tornado F3 and Jaguar in air defence and offensive air support roles. Eurofighter is being developed in a collaborative project with Germany, Italy, and Spain Contracts for the production of the first tranche of 148 aircraft, of which 55 are for the RAF, were signed in 1998. The planned date for the first delivery of Eurofighter is June 2002. ***

OPERATIONAL REQUIREMENT

  1.  The original European Staff Target for the Eurofighter—then European Fighter Aircraft (EFA)—was signed in Rome in 1984, by France, Germany, Italy, Spain and the UK. The nations' air forces agreed a requirement for a new fighter aircraft to enter service in the 1990s. EFA was to be agile and designed to fulfil air defence, including air superiority and interception, and air to surface roles. France attached equal importance to both roles; all other nations, while wishing to retain good air to surface capability, recognised air-to-air as the conditioning role. EFA was to be capable of intercepting, fighting in air combat, and destroying a wide range of aerial targets, including cruise missiles, remotely piloted vehicles, and drones at a threat level expected in the mid 1990s and beyond, as well as attacking enemy airfields and enemy surface forces. EFA was to be able to operate in the electronic warfare environment of a late 1990s European scenario by day and by night, in all weathers for air defence, and in poor visibility and low cloud-base for its air-to-surface role. The numerical superiority of hostile air forces was to be compensated for by EFA's superior quality and operational flexibility. Low observability and survivability were key design goals, as were reliability, maintainability and testability.

  2.  Following a 1984-85 feasibility study, the other four nations found it impossible to reconcile all their requirements with those of France, which wanted a lighter aircraft that would not provide the overall operational capability required by the others. France accordingly withdrew from the programme in 1985. The key parameters agreed by the other nations—an unstable, delta-winged aircraft, with canards, to have a "basic mass empty" of 9.75 metric tonnes, a wing area of 50 square metres and two engines each producing a static sea level thrust of 90 kiloNewtons—were incorporated in the European Staff Requirement ESR) and signed by the four Chiefs of Air Staffs in 1985.

  3.  The collapse of the Warsaw Pact and the re-unification of Germany led to a "reorientation" of the programme. The ESR needed to be updated to reflect the radically changed political and military situation in Europe after 1989 and to address the requirement for the year 2000 and beyond, taking account of EFA development work. Amendments were embodied in the European Staff Requirement for Development (ESR-D) of a European Fighter 2000—Eurofighter—signed in 1994. The ESR-D acknowledges that specific threats are no longer predictable in detail, but stipulates that a future European fighter aircraft must be capable of operating effectively in a variety of roles and theatres.

TRADE-OFFS

  4.  ***Numbers

  5.  The original requirement of the four partner nations was for a total of 765 aircraft—250 for Germany, 165 for Italy, 100 for Spain and 250 for the UK. The current requirement is for 620 aircraft—180 for Germany, 121 for Italy, 87 for Spain, and 232 for the UK. Germany, Italy and Spain reduced their numbers during the reorientation. The UK reduced its own requirement following studies that concluded that the UK required 232 aircraft to meet its operational commitments. The UK is now committed contractually to the Tranche 1 production of 55 aircraft. Future production contracts would commit the UK to 89 and 88 aircraft for Tranches 2 and 3 respectively.

STRATEGIC DEFENCE REVIEW

  6.  The SDR confirmed our commitment to acquiring 232 Eurofighter aircraft. The acquisition of Eurofighter will provide a step change in the RAF's ability to achieve air superiority and provide air defence.

MILITARY CAPABILITY

  7.  Eurofighter will bring a significant increase in our air superiority capability as it replaces the Tornado F3. It will also provide a true, adverse weather, multi-role capability. This will allow it to be employed in the full spectrum of air operations from air policing to peace support through to high intensity conflict. Its multi-role capability will also allow it to fulfil the ground attack roles now performed by Jaguar.

EQUIPMENT TO BE REPLACED AND IN-SERVICE DATE

  8.  The Eurofighter will replace the Tornado F3 and Jaguar, the out of service dates for which are 2010 and 2008 respectively. The planned in-service date for Eurofighter, defined as the date of the delivery of the first aircraft to the RAF, is June 2002. *** Industry is continuing to work hard towards achieving this date. We know through our continuous monitoring of industry's progress that this represents for them an increasing challenge, though we have not been formally advised of any delay to delivery. Risk of delay is not unusual for a project of this size and complexity. Nonetheless, we have made it very clear that we expect the prime contractors to take all necessary action to mitigate this risk. Delivery in June 2002 would represent a delay of 42 months against the original ISD of December 1998. The slippage is attributable to procurement delays caused by reorientation; delays in signature of the Memoranda of Understanding for the Production and Support phases (some 22 months slippage); and technical difficulties resulting from the application of complex technologies required to enable the equipment to meet the original Staff Requirement (some 20 months slippage). The definition of the ISD for Eurofighter relates to procurement factors and was agreed internationally some years ago. ***

ACQUISITION APPROACH

  9.  Early work in each participating country by defence contractors working to their national governments was co-ordinated under Memoranda of Understanding between the partner nations. Full collaborative development was launched in 1988. Collaborative Production Investment and Production, including Initial Support, was launched by the partner nations at the end of 1997, following signature of further MoUs and contracts were signed in January 1998. Contracts for production of the first tranche of 148 aircraft, including 55 for the RAF, were signed in September 1998.

  10.  Eurofighter development and production are undertaken by two consortia: Eurofighter GmbH and Eurojet GmbH. Eurofighter GmbH comprises BAE Systems from the UK, Alenia from Italy, EADS (Deutschland) from Germany, and EADS (CASA) from Spain. It is responsible for developing and producing the airframe, avionics and the other aircraft systems and for the integration of the EJ200 engine. The latter is being developed and produced by Eurojet GmbH, comprising Rolls-Royce from the UK, MTU from Germany, Fiat from Italy, and ITP from Spain.

  11.  The purchasing arrangements are shown in the following tables.

DEVELOPMENT

Contractor	Contract Type	Procurement Route
Eurofighter GmbH Airframe consortium comprising: Alenia, BAE Systems, EADS (Deutschland), and EADS (CASA).	Fixed prices for airframe and aircraft equipments, with a target cost incentive arrangement for aircraft equipment integration.	Non-competitive, but with international sub-contract competitive elements, the value of which amounts to some 30 per cent of the overall value of the prime contract.
Eurojet GmbH Engine consortium comprising: FIAT, ITP, MTU, Rolls-Royce.	Fixed price.	Non-competitive, but with international sub-contract competitive elements, the value of which amounts to some 10 per cent of the overall value of the prime contract.

PRODUCTION INVESTMENT/PRODUCTION

Contractor	Contract Type	Procurement Route
Eurofighter GmbH Airframe consortium comprising: Alenia, BAE Systems, EADS (Deutschland), and EADS (CASA).	Overall maximum prices for production investment and production of airframes. Overall firm prices for production investment and production of aircraft equipment.	Non-competitive, but with international sub-contract competitive elements, the value of which amounts to some 30 per cent of the overall value of the prime contract.
Eurojet GmbH Engine consortium comprising: FIAT, ITP, MTU, Rolls-Royce.	Overall maximum prices for production investment and production of engines.	Non-competitive, but with international sub-contract competitive elements, the value of which amounts to some 10 per cent of the overall value of the prime contract.

COLLABORATION

  12.  Government oversight of the programme is exercised through the Board of Directors of the NATO Eurofighter and Tornado Development, Production and Logistics Management Agency (NETMA), which carries out day-to-day management of the international contracts. The Agency has some 300 staff and an annual budget of about 40 million Euro. Funding for the Agency is shared in accordance with the respective participation of each nation in the Eurofighter and Tornado programmes. The UK contribution is about 35 per cent. The UK national project office element of the programme is managed by an Integrated Project Team (IPT), which co-ordinates UK input to the programme and provides national oversight. The IPT comprises some 180 staff but is set to increase to between 190-200 as a result of the transition to an in-service support authority. Its annual budget is currently about £8 million.

  13.  Existing development work and costs are shared on the basis of nations' planned production off-takes, as declared in 1987, giving the UK and Germany 33 per cent shares each, Italy 21 per cent and Spain 13 percent. Production Investment and Production work and cost share are based on aircraft off-take declared at the start of these phases in 1997, giving the UK some 37.5 per cent share, Germany 29 per cent, Italy 19.5 per cent and Spain 14 per cent.

  14.  Seven MoUs commit the four collaborative partners to the various phases of the programme and its management.

EXPORT POTENTIAL

  15.  Several potential customers for Eurofighter have been identified in Europe, the Middle East, the Pacific Rim, and South America. Export sales could run to several hundred aircraft over many years, but there will be competition from a variety of American, French, and Russian combat aircraft types. Eurofighter was selected by Greece for its fourth generation fighter requirement, although the purchase, which could involve at least 60 aircraft, has now been postponed until after the 2004 Athens Olympiad.

INDUSTRIAL FACTORS

  16.  The Eurofighter project is fundamental to maintaining an industrial capability within the UK for the design and build of advanced military aircraft. As the only suitably qualified UK firms to undertake the development and manufacture of advanced fast jet aircraft and engines, BAE Systems and Rolls-Royce were the natural choice as the major UK partners. Similar factors influenced the selection of contractors by our collaborative partners. The project sustains something in excess of 6,000 jobs in the UK, expected to rise to 14,000 jobs at the peak of production. Any export sales will also have a positive impact on these numbers.

SMART ACQUISITION

  17.  The Eurofighter programme embraces several Smart Acquisition features. The UK has an Integrated Project Team with collocated procurement, military customer and logistics staff, including some seconded from industry. The design standard of delivered aircraft will follow an incremental acquisition path, with the first aircraft being delivered to an initial standard—to allow early training—with the full standard delivered later to meet the declaration of operational capability. The prices negotiated with industry have taken account of efficiency improvements by industry; arrangements have been agreed to share further efficiency benefits beyond those already included in the price. Elements of the production contracts include firm, non-revisable prices for the first five years and for subsequent years, Variation of Price formulae based on Producer Output Indices. There is provision for liquidated damages and the right of termination. Development and adoption of innovative support arrangements for Eurofighter in partnership with Industry has identified potential reductions in cost of up to £1.8 billion over traditional arrangements through the life of the aircraft, including the incentivisation of repair and overhaul services; the transfer of risk for reliability to suppliers; and taking advantage of the benefits offered by evolving, more reliable, technologies.

ACQUISITION PHASES

  18.  There are four distinct phases within the Eurofighter programme: pre-development, development, production and support.

  19.  Pre-development comprised a number of activities. Following early concept studies and various efforts to establish a collaborative programme, two key demonstration activities were completed by the UK before development: the Experimental Aircraft Programme (an airframe programme primarily aimed at proving the feasibility of unstable flight control concepts) and the XG40 engine demonstrator programme at Rolls-Royce. The results of these demonstrators and associated studies, and similar work by the other nations, were harmonised in a definition, refinement and risk reduction phase that run from the end of 1985, when the four nations signed the MoU covering this phase, to 1988.

  20.  The main development contracts were signed in November 1988 and amended in November 1995.

  21.  The Eurofighter production contract strategy is based on an "umbrella contract" that secures maximum prices for all production investment and the total order of 620 aircraft. Commitments against this contract are made as a series of supplements against fixed prices within the overall maximum price. The umbrella contract and the first supplement covering production investment were signed in January 1998. The second supplement, covering the production of the first tranche of 148 aircraft, was signed in September 1998. The first production aircraft for the Royal Air Force are now being assembled at BAE Systems, Warton, and production engines are currently being built at Rolls-Royce, Filton.

  22.  Integrated logistic support procedures were embedded in the programme from the outset, to ensure that adequate attention was given to support issues throughout the development phase. Concurrently with the umbrella contract, the first two support procurement contracts were let, following agreement that industry would ensure that support is available when the first aircraft is delivered.

  23.  A reliability maintenance panel meets every three months to monitor progress against the reliability plan. In-service demonstration is also part of the programme.

  24.  The current assessment of risks associated with the timely completion of the programme highlights the flight test programme the achievement of incremental increases to functionality, and the integration of development results into production aircraft as the greatest areas for concern. The first flight of an instrumented production aircraft, which was scheduled for August 2001, is now expected to take place at the end of March. *** The results will provide the evidence to allow series production aircraft to be accepted into service. Risk management processes in industry and MoD, and contractual incentives for industry, aim to ensure that these risks are mitigated as far as possible to protect delivery timescales.

MILESTONES AND COSTS

  25.  The four nations signed the Full Development MoU and consequent contracts in November 1988. MoUs for Production Investment/Production and Support were signed in December 1997. These were followed by signature of the Production Investment/Production and Support overarching contracts in January 1998 and the first tranche of Production contracts in September 1998. The first aircraft is scheduled to be delivered to the RAF in June 2002. *** Commitment to tranches two and three is planned for 2003 and 2007 respectively.

  26.  Expenditure to 31 March 2001 was £5444 million (presented on resource basis at outturn prices). The estimated total acquisition costs as at 31 March 2001 are £18,869 million, some £1,505 million in excess of the totals approved in 1987. This is an increase of £37 million on the projected excess reported last year. The difference is the result of increases arising from obsolescence due to rapid changes in computer hardware technology, latest estimates of the use of QinetiQ testing facilities to support development trails, and greater Interest on Capital charges due to changes in the accounting treatment of the delivery of assets. These increases amount to a projected additional £108 million. Balanced against this is a projected decrease of £71 million. This decrease comprises revised exchange rate and inflation assumptions and savings arising from the deletion of the 1500L fuel tank and the CRV7 rocket from the programme.

  27.  In the event of late delivery, the production contracts with Eurofighter GmbH and Eurojet GmbH both include provision for liquidation damages up to a maximum of three per cent of individual weapon system value. All interim payments made prior to delivery are subject to the achievement of technical milestones. If a milestone is not achieved, payment is not made.

IN-SERVICE SUPPORT

  28.  Support for Eurofighter is being managed collaboratively to reduce life cycle costs. MoUs and International Framing Agreements aim to ensure that all elements of the project are taken forward on an agreed international basis. Costs are shared in proportion to the aircraft off-take of each nation. This is the first major international project to apply integrated logistic support (ILS) procedures, thus enabling all aspects of logistic support to be optimised. Emphasis is being placed on partnership with industry to define the most cost-effective solution.

  29.  For 18 months following the delivery of the first aircraft, Eurofighter will be operated and supported at BAE Systems, Warton. This enables the support arrangements for these aircraft to be optimised through combined use of RAF assets and support from BAE Systems production line facilities and resources, during this period of relatively low flying hours. Additional benefits will be achieved through the close proximity of RAF flying training and BAE Systems test flying at Warton.

  30.  The Eurofighter IPT is maintaining close liaison with the RAF throughout the planning process to ensure that the end users contribute to the development of support policy and have a clear understanding of the developing support concepts. The IPT is also ensuring that, where it is cost-effective, maximum use is made of existing support capability and also that, where possible, any new generic support equipment being procured for in-service aircraft is compatible with Eurofighter.

  31.  The most obvious potential bottleneck is the support infrastructure at the Main Operating Bases (MOBs). As each MOB converts, there will be a short period where both Tornado F3 and Eurofighter will be required to operate together and, as each maintenance facility is converted, the Tornado F3 would potentially be left unsupported. This risk will be overcome by ensuring that the MOBs provide mutual support during the conversion phase. Another potential problem that has been identified is the maintenance of minimum manning levels at the front line whilst training the first tranche of Eurofighter tradesmen and building up the Operational Conversion Unit and the first squadrons. Such potential difficulties are being addressed by a series of working groups. All are currently considered to be manageable.

FRONT LONE, STORAGE AND RESERVES

  32.  The active RAF fleet of Eurofighter will be 137 aircraft, covering the seven front-line squadrons, the Operational Conversion Unit (OCU), and the Operational Evaluation Unit. Each squadron will have one in-use reserve and the OCU will have two in-use reserves, giving a total of nine. The remaining aircraft allow for assumptions of attrition and overall use of the aircraft over the 25 year life of the aircraft, with the last aircraft being scheduled for delivery in 2014. The fleet once in steady state will be managed around engineering requirements, such as scheduled servicing and modification programmes.

INTEROPERABILITY

  33.  Interoperability is fundamental to the Eurofighter design. The Eurofighter programme has adhered to NATO Standardisation Agreements (STANAGs) and protocols to ensure Eurofighter's compatibility with current and future systems, both operational and logistic.

DISPOSAL OF EQUIPMENT TO BE REPLACED

  34.  The aircraft being replaced will be at the end of their productive lives and will probably be scrapped.

IN-SERVICE LIFE

  Eurofighter is planned to be in service for 25 years.

DEVELOPMENT POTENTIAL

  36.  Unlike previous programmes, where major enhancements were incorporated via a major in-service upgrade, we shall, following Smart Acquisition principles, establish a programme for through-life evolution of the RAF Eurofighter fleet. The aim is to acquire and incorporate emerging technology, on an incremental basis, to maintain the capability of the weapon system. Partnership between the MoD and industry will provide the necessary expertise and focus to enable us to identify, prioritise and pursue modifications to Eurofighter that balance operational effectiveness, life cycle costs, and obsolescence issues.

  37.  Further development of Eurofighter derivatives is among the options being considered to meet the requirement for Future Offensive Air Systems (FOAS).

METEOR

  Meteor is an all-weather, beyond visual range air-to-air missile to equip Eurofighter, which is being procured from MBDA (formerly Matra BAE Dynamics) in collaboration with our Eurofighter partner nations (Germany, Italy, and Spain), France and Sweden. It was selected in May 2000, following a competition between MBDA and Raytheon Systems Ltd. Germany has yet to sign the Memorandum of Understanding (MOU) for Meteor due to protracted Parliamentary clearance procedures requiring signature of an acceptable final draft contract before approving signature of the MOU. Other partner nations signed the MOU during 2001. Contract negotiations with MBDA are at an advanced stage. We had hoped to sign the contract in 2001 but this was not possible. We now aim to sign the contract this year Meteor should come into service on Eurofighter around the turn of the decade.

OPERATIONAL REQUIREMENT

  1.  The requirement is for a medium range air-to-air missile for the Eurofighter. Initial planning assumptions were based on the ability of the AIM-120B Advanced Medium Range Air-to-Air Missile (AMRAAM) to meet the longer-term threat, but changes in the operational environment led to the issue of a revised Staff Requirement in 1995. It underlined the need for the fighter to achieve a large "no escape zone" against manoeuvring targets during beyond visual range air-to-air combat, and to maximise the number of firing opportunities. The Staff Requirement also employed the principle of "performance objectives" as opposed to "essential criteria". This was designed to prompt bidders to propose innovative solutions and as wide a range of options as possible.

TRADE-OFFS

  2.  It should be possible to upgrade major missile sub-systems to incorporate more cost-effective technology and to match the evolving threat. The Staff Requirement sought to encourage the designers to share the risk by matching and trading the performance requirements to a realisable and affordable design solution.

NUMBERS

  ***

STRATEGIC DEFENCE REVIEW

  4.  The BVRAAM programme was considered during the Strategic Defence Review, when the difficulties of achieving the in-service date were assessed. It was concluded that BVRAAM remained a key capability.

MILITARY CAPABILITY

  5.  Meteor will be the primary air-to-air weapon for Eurofighter. It will provide a key capability in achieving and maintaining air superiority wherever Eurofighter is deployed Meteor will allow Eurofighter to engage multiple and manoeuvring targets simultaneously, at greater range than before, in all weathers, day or night, and with greater survivability.

EQUIPMENT TO BE REPLACED AND IN-SERVICE DATE

  6.  Meteor will not specifically replace any other programme. Instead, it represents a new generation of weapon designed to equip a new generation of fighter.

  7.  The original "most likely" ISD for BVRAAM was 2005, but this moved in the SDR partly because the technology was insufficiently mature, to a planning assumption of around 2008. Subsequently, however, in assessing the BVRAAM competition, it was recognised that this 2008 assumption for Meteor was unrealistic. Under the new approvals procedures. A 90 per cent confidence ISD of August 2012 was approved for Meteor at Main Gate; the approved 50 per cent date is September 2011. Until Meteor comes into service, Eurofighter will be armed with the Advanced Medium-Range Air-to-Air Missile (AMRAAM), manufactured by Raytheon. An interim buy of AMRAAH missiles would have been required whichever BVRAAM solution was chosen.

ACQUISITION APPROACH

  8.  Competition was maintained throughout the pre-Main Gate phase, both at prime and sub-contractor levels, to ensure best value for money. Bidders were required to submit firm prices for an initial five-year period from award of contract and fixed prices thereafter.

  9.  A Request for Information was issued in 1994 to a wide range of national and foreign government agencies, potential prime contractors and major equipment suppliers. Responses received by the MOD in late 1994 suggested that a project was technically feasible and capable of completion within a suitable timescale. Four potential partner nations. Germany, Italy, Spain and Sweden, agreed in principle in 1995 that the UK BVRAAM specification broadly met their baseline missile requirements for Eurofighter and, in the case of Sweden. JAS 39 Gripen. These nations were invited to assess the bids jointly with the UK, with a view to agreeing on a common solution. In July 1999 France joined the programme, having identified that the BVRAAM specification broadly met their capability requirements for Rafale.

  10.  An invitation to tender was issued in 1995, requesting bids for the full capability missile, as well as proposals for a staged capability (ie an interim capability missile with the potential for upgrade). Two companies, Raytheon Systems Ltd (formerly Hughes) and Matra BAE Dynamics (now MBDA), submitted bids. Raytheon submitted proposals for a Future Medium Range Air-to-Air Missile (FMRAAM), a full capability missile, and the Extended Range Air-to-Air Missile (ERAAM), with a proposed growth path to full capability. MBDA proposed only a full capability missile, Meteor.

  11.  Assessment highlighted areas of major technical risk in each bid, and it was decided not to award an immediate Development and Production contract. Instead, contracts for a Project Definition and Risk Reduction phase were placed with the two bidders in August 1997. Revised bids to meet the requirement were received in May 1998, and these were followed by an additional, unsolicited offer of Raytheon's ERAAM—under the umbrella of a joint UK/US collaboration. Best and Final Offers were received from both companies in September 1999 and, following Ministerial consideration, a decision to buy Meteor was announced on 16 May 2000.

  12.  Since then, we have been in contractual negotiations with the company. We stated in last year's report that we expected to sign the contract around the middle of 2001. This was not achieved. A number of complex technical and commercial issues delayed the contract negotiations. In addition, we are applying lessons learned from the Advanced Short-Range Air-to-Air Missile (ASRAAM) programme. We intend to ensure that both we and MBDA are in full agreement on the requirement and the means by which the requirement will be demonstrated and accepted. We are working with the company to resolve outstanding issues and we expect the contract to be placed this year. The approved ISDs were based on the assumption that the contract would be placed in April 2001. The extent of the delay in achieving this is almost certain to have an impact on the ISD.

ALTERNATIVE ACQUISITION OPTIONS

  13.  No suitable "off-the-shelf" missile was assessed as being able to meet the BVRAAM requirement. Options considered in the early stages but deemed not to have the required performance, were the Matra MICA, the Alenia Aspide, and the British Aerospace Dynamics Active Skyflash.

COLLABORATION

  14.  Meteor is a collaborative project in partnership with Germany, Italy, Spain, France, and Sweden. The UK is leading the programme, with industry responsible for defining work-share based on technical excellence, manageable risk and best value for money, rather than any predetermined formula. It has been agreed that the Meteor collaborative demonstration and manufacture contract will be placed by the MOD under UK contracting law. The UK intend to place a combined full demonstration and manufacture contract with MBDA, with production options included to cover potential partner nations who do not wish to commit to production from the outset. An MOU, setting out the contractual, financial, and management arrangements for the programme, has been agreed. The UK, France and Sweden signed the MOU in June 2001; Italy signed in September 2001; Spain signed in December 2001. As mentioned above, Germany has yet to sign but has signalled a clear intention to do so.

  15.  Missile requirements and in-service dates (ISDs) for the other nations have yet to be advised. An International Joint Project Office (IJPO) has been established within the MOD Defence Procurement Agency under the UK's BVRAAM Integrated Project Team Leader. The salary cost of partner nations' representatives are being borne by their governments.

EXPORT POTENTIAL

  16.  Meteor has excellent prospects for sales, particularly as part of an integrated package on Eurofighter. The opportunities for overseas sales could be widened by possible sales of Gripen and Rafale.

INDUSTRIAL FACTORS

  17.  Industrial factors were taken into account in the assessment of bids. Meteor offered particular advantages in terms of the quality and sustainability of the jobs involved. MBDA stated that a total of 2,400 jobs would be created or sustained in Europe: 1,200 in the UK.

SMART AQUISITION

  18.  The Meteor programme embodies a number of Smart Acquisition principles. Whole life costs formed an integral part of the decision process. The IPT has also entered into a partnering agreement with the Prime Contractor. Emphasis is being placed on continued delivery of value for money, and gain-sharing potential will be kept under continuous review. In addition, the contractor has agreed to a series of four key technological milestones, to demonstrate successful progress during the development phase. If the company fails to achieve any of these milestones, against clearly measurable acceptable criteria, termination of the contract can be initiated, with all money being returned to the partner nations.

Key Technical Risks (used to define key milestones)

The ability of the missile motor to operate in a reliable and repeatable manner throughout the launch envelope.
The ability to maintain sufficient control of the missile to ensure that it intercepts its target.
The ability to minimise missile/launch aircraft navigation system errors.
The ability of the missile to achieve target intercept in a defined set of countermeasure environments.

ACQUISITION PHASES

  19.  The acquisition phases are shown in the table below:

Phase	Date	Activity
Feasibility	February 1994	Request for Information issued. Cardinal Points Specification issued (Apr 94). Invitation to tender issued (Dec 95)
Project Definition and Risk Reduction	August 1997	Reduction of major technical risk
Assessment of tenders	May 1998	Included Best and Final Offers in September 1999, to reflect the late involvement of France
Prime contractor selection	May 2000	Contract negotiation. Drafting of Memorandum of Understanding

MILESTONES AND COSTS

  20.  Expenditure up to 31 March 2001 was £20 million (on a resource basis at outturn prices). The total approved (90 per cent) acquisition resource costs at Main Gate in May 2000 is £1440 million, including the purchase of interim AMRAAM missiles. The expected (50 per cent) cost is £1368 million. The years of peak expenditure are likely to be 2010/11 and 2011/12.

IN-SERVICE SUPPORT

  21.  The aim of the Meteor Integrated Logistic Support strategy is to minimise the support costs whilst maintaining weapons availability. The weapon is being designed under an "all up round" principle to reduce through life logistic support. MBDA will be responsible for the first 10 years of logistics support. Very little maintenance will be required on the Meteor system in service. Missiles and support equipment will be returned for repair to MBDA once any fault has been confirmed. Contracts after the initial 10-year period will be subject to negotiation.

  22.  Discussions between the UK, MBDA, and our partner nations on support are now complete. All partner nations have indicated that they would like to pursue a collaborative logistic support contract for Meteor with the benefit of greatly reducing each partner nation's support costs. The draft 10-year logistic support contract has been worded to enable any partner nation to join in this combined support contract as they commit to production.

  23.  Provision of initial operator and maintainer instructor training and the associated training package are the responsibility of MBDA. Future continuation training will be undertaken with in-service resources. A number of ground-handling training missiles, telemetered operational missiles and explosive ordnance disposal training missiles will be procured. Technical publications will be produced in full electronic format.

FRONT LINE, STORAGE AND RESERVE NUMBERS

  ***

INTEROPERABILITY

  25.  The BVRAAM programme was conceived exclusively for Eurofighter, where the main carriage method is semi-recessed under the fuselage—a key design driver. Meteor will be integrated on Gripen (for Sweden) and Rafale (for France) and will therefore be interoperable with these nations in addition to our Eurofighter partners. Whilst the extant UK requirement provides only for integration on Eurofighter, integration issues with respect to the Joint Strike Fighter variant selected as the UK's Future Carrier Borne Aircraft will also be assessed.

IN-SERVICE LIFE

  26.  Meteor has a required 25-year design life.

DEVELOPMENT POTENTIAL

  27.  Through-life development of the missile will be considered as the project progresses.

ADVANCED SHORT RANGE AIR-TO-AIR MISSILE (ASRAAM)

  The Advanced Short Range Air-to-Air Missile (ASRAAM) is a highly agile, passively guided anti-air weapon, manufactured by MBDA (formerly Matra BAE Dynamics). It is due to be deployed on the Tornado F3 to replace the Sidewinder AIM-9L missile and it will also be fitted to Eurofighter. ASRAAM entered service at an interim standard in January 2002 and is planned to be available for operational deployment this summer. Incremental improvements will lead to a full operational capability for ASRAAM, which we aim to achieve by the end of 2003.

OPERTIONAL REQUIREMENT

  1.  The requirement for a highly agile missile with good infra-red countermeasures resistance was driven by the need for short-range air superiority in visual combat. Such a missile was to provide Eurofighter with a substantial advantage against the forecast threat at the turn of the century, and would be complementary to Skyflash and Meteor (see separate memorandum). The missile would, additionally, be an important factor in the overall capability of the Tornado F3.

  2.  Initially, the UK sought to meet the national requirement for a short-range air-to-air missile through participation in a collaborative development for a family of weapons. In accordance with a Memorandum of Understanding between the UK, the US, and Germany, signed in 1980, a tri-national Staff Requirement was agreed in October 1984. Subsequent budgetary pressures, technical and management problems, and changes to US requirements caused our partners to withdraw from the project. The Staff Requirement was re-endorsed as a UK national programme in 1990 without any significant changes since the original approval.

TRADE-OFFS

  3.  We have accepted that, for a short period of time, the missile will be beneath the exacting performance standard we specified. We have agreed to this only after having established a clear and robust route map towards achieving the missile's full operational capability. There is no additional cost to the Department for the work that MBDA will have to do to achieve this. Notwithstanding this, the missile that has entered service is the best in its class.

NUMBERS

  ***

STRATEGIC DEFENCE REVIEW

  5.  The Strategic Defence Review did not affect the requirement or existing orders.

MILITARY CAPABILITY

  6.  ASRAAM will provide a significant contribution to achieving and maintaining air superiority, as well as providing critical self-defence capability for a variety of current and future UK air assets. It will be employed in the full spectrum of air operations from air policing to peace support through to high intensity conflict.

EQUIPMENT REPLACED AND IN-SERVICE DATE

  7.  ASRAAM will replace Sidewinder AIM-9L on Tornado F3, Harrier GR9, and Sea Harrier FA2 in a delivery programme that started in January this year and is the planned short-range air-to-air weapon for UK Eurofighters.

  8.  The ISD set at ASRAAM's Main Gate equivalent was December 1998. ASRAAM entered service in January this year, 37 months late. The achievement of ISD marked the successful resolution of a contractual dispute between MOD and MBDA. Prior to this, ASRAAM had been expected to enter service in April 2001 but, as stated in last year's report, we could not accept the missile as a number of specified performance standards had not been met. The performance shortfalls were in the areas of lethality, target acquisition, tracking, and resistance to countermeasures. The Department worked closely with MBDA to agree a clear and robust route map to full operational capability, enabling the new ISD to be set.

  9.  The incremental route to full operational capability comprises a number of stages. The missiles accepted for ISD are at an interim standard that is higher than that offered by the MBDA for the ISD of April 2001. Even though improvements over and above this standard are required, the missile's level of performance at ISD standard is far superior to that of AIM-9L and it is the best short-range air-to-air missile available. Delivery of production missiles at a higher interim standard is to begin in mid-2002. The ASRAAM development programme will continue with further software upgrades that will lead to full operational capability. We hope to achieve this by the end of 2003 but certainly by no later than 2005. ASRAAM is available for use now, if needed, but safety, training, integration and other clearance activities mean that we are unlikely to deploy the missile before this summer. The delay has had no impact on Eurofighter's operational capability.

ACQUISITION APPROACH

  10.  Under the provisions of the 1980 MoU, the US was to develop an advanced medium air-to-air missile, and the UK and Germany, along with Norway and Canada, who had subsequently joined the programme, were to develop the short-range system. The European programme was managed by a joint project office, with Bodenseewerk Geratetechnik GmbH and British Aerospace Dynamics Ltd as the principal contractors. Difficulties with the programme led to the withdrawal of Germany from the programme in 1989 and the US, Norway, and Canada in 1990.

  11.  Once ASRAAM had been re-endorsed as a UK national programme, an invitation to tender was issued in 1991. It called for a package deal, covering development, production, and associated logistic support of the missile and its associated training variants. We also stipulated the minimum use of Government Furnished Facilities and Equipment, and the earliest possible ISD.

  12.  A number of candidate weapons were considered. British Aerospace Defence Ltd; Raytheon; a consortium of GEC, Marconi, and Matra; Bodenseewerk Geratetechnik GmbH. (BGT); and Loral Aeronutronic all expressed an interest in the competition. In the event, Raytheon and Loral did not respond to the ITT. The BAE bid of ASRAAM, the GEC Marconi/Matra bid of MICA ASRAAM, and the BGT AIM9L IRIS were considered as options in early 1992. Other weapons, including a further BGT bid, the AIM 9LI (an improvement over the standard (AIM9L) and a number of US options either in service or in development were also considered, but were not assessed as capable of meeting the UK requirement.

  13.  The BAE bid met the Staff Requirement and offered a number of advantages over the BGT and GEC Marconi/Matra bids. BAE Defence Ltd (now MBDA) was awarded a fixed price contract in 1992.

EXPORT POTENTIAL

  14.  ASRAAM won its first order in December 1998 when it was selected for the Royal Australian Air Force, with whom we are working closely. Like us, they have now decided to accept that the missile will enter service with an interim operating capability and an incremental path towards full operating capability. There is also interest from a number of other nations, including Greece, Switzerland, Spain, South Korea and Canada. Missiles with similar capabilities are being built in the USA, Germany, Russia, Israel, France, and South Africa.

INDUSTRIAL FACTORS

  15.  The decision on the main development and production contracts took account of the employment implications for the UK. MBDA has estimated that more than 80 per cent of the work in total would be in the UK, securing some 7,000 jobs. The GEC Marconi/Matra bid offered only 50 per cent of work in the UK, although they estimated that this would rise to 70 per cent if potential sales were achieved.

SMART ACQUISITION

  16.  MBDA proposed in September 1998 a number of Smart Acquisition "gain sharing" initiatives. These included the introduction of a more powerful processor into the missile, enhancing the potential for future performance upgrades and eliminating an obsolescence problem at no cost to the MOD, and better alignment of missile production deliveries with candidate aircraft platforms. A contract amendment was agreed in September 1999. The contractual MOD and MBDA was resolved by tackling the issues head-on and the outcome, an incremental route map to full operational capability; follows Smart Acquisition principles. Lessons from our experience of the ASRAAM programme are informing our acquisition from MBDA of the Meteor beyond-visual-range air-to-air missile. (See separate Meteor memorandum).

ACQUISITION PHASES

  17.  The acquisition phases are shown in the table below:

Phase	Date	Activity
Pre-feasibility	January 1981	Endorsement of UK support to NATO operational objectives for ASRAAM & AMRAAM
Feasibility	June 1982	Systems studies including IR detectors, transparent materials and sub-systems
Project definition	December 1984	Design of prototype missile and launcher sub-systems
Project Definition Amendment (re- definition 1)	December 1987	Confirmation of image processing algorithms: manufacture of inert safety and arming units and design of strap down software
Project Definition Amendment (re- definition 2)	July 1988	Study into detailed proposals for an integrated missile configuration and more efficient management structure
Development & Production	March 1992	Full development and production of ASRAAM starts

MILESTONES AND COSTS

  18.  Expenditure to 31 March 2001 (on a resource basis at outturn prices) totalled £584 million, comprising £72 million on Feasibility and £512 million on Development and Production. Total approved costs are £866 million. The expected final cost is £857 million. The delay in achieving ISD resulted in the Department incurring approximately £7 million additional costs. These include extra intramural expenditure and costs arising from the need to maintain Sidewinder missiles in service.

  19.  Delays to the programme have triggered liquidated damages. The majority of these have already been collected in the form of consideration payments totalling some £19 million. The amended contract (see paragraph 16) makes provision for further liquidated damages up to a maximum of 6 per cent (approximately £23 million) of the value of deliverable items. MOD will continue to claim any liquidated damages that fall due. We have, however, accepted the company's claim that some of the programme delay has been caused by the need to dedicate significant resources to MOD/company negotiations. Accordingly as part of the overall agreement to bring ASRAAM into service, a period of grace has been allowed in the schedule determining liquidated damages. But any further delays by MBDA could negate the benefit the company derives from this period of grace.

IN-SERVICE SUPPORT

  20.  ASRAAM is an industry-supported missile, with the bulk of its maintenance to be undertaken by the prime contractor. Although Eurofighter aircraft delivered to Germany, Spain, and Italy will be able to fire ASRAAM, these nations are not committed to buying ASRAAM. At least initially, therefore, in-service support costs will fall to the UK.

  21.  Most of the support equipment and handling procedures for ASRAAM will be the same as for the current AIM-9L weapon. However, as the design has been completed under the "all up round" principle, there will be a substantial reduction in routine servicing requirements at the front line and all major servicing will be undertaken by industry. Having identified potential storage difficulties (the result of ASRAAM stocks building up without equivalent reductions in AIM-9L stocks), we undertook a Weapon Loading and Storage Study. The recommendations are now being implemented and we are confident that no significant problems will arise. Since the operational and training missiles both have classified software, unlike the current air-to-air weapons, of which only the operational weapons are classified, modified handling procedures have been put in place.

FRONT LINE, STORAGE AND RESERVES NUMBERS

  ***

INTEROPERABILITY

  23.  ASRAAM has demonstrated its compatibility with earlier AIM-9L launch equipment and interfaces. It is capable of being carried and fired, with minimum modification, by all UK and other allied air forces' aircraft that can carry and employ AIM-9L. The system is compatible with the rail launchers on Eurofighter. It is also designed to be employed using multiples sensors, such as the infra-red search and track systems and helmet-mounted sights planned for Eurofighters, as well as radar.

DISPOSAL OF EQUIPMENT REPLACED

  24.  Surplus Sidewinders may have potential for re-sale. Missiles that cannot be sold will have no operational use and will be scrapped.

IN-SERVICE LIFE

  25.  ASRAAM is planned to be in service for 25 years.

DEVELOPMENT POTENTIAL

  26.  We continue to work, in partnership with Australia, to establish a programme of through-life development. The programme is primarily to ensure a useful service life of 25 years and could involve the acquisition of emerging technology on an incremental basis.

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Prepared 10 July 2002