Report by the Comptroller and = Auditor General NATIONAL AUDIT OXICE
Ministry of Defence: Collaborative Projects
Ordered by the House of Commons to be printed 26 February 1991 .London: HMSO E8.95 net 247 This report has been prepared under Section 6 of the National Audit Act, 1983 for presentation to the House of Commons in accordance with Section 9 of the Act.
John Bourn Comptroller and Auditor General National Audit Office 22 February 1991
The Comptroller and Auditor Generalis the head of the National Audit Office employing some 900 staff. He, and the NAO, are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies: and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies use their rasourcas. MINISTRY OF ,,EFENCE: COLLABORATIVE PRO~CT.5
Contents
Pages Summary and conclusions 1
Part 1: Background and scope of the National Audit Office study 6
Part 2: The Department’s consideration of collaboration 7
Part 3: Advantages and disadvantages of collaboration 13
Part 4: Central management of collaborative projects 19
Part 5: External audit arrangements 23
Glossary 26
Appendices
1. Collaborative projects involving the United Kingdom as at 1 March 1989 28
2. Background information on the projects examined by the National Audit Office 31
3. Structure and organisation of the Conference of National Armaments Directors and the Independent European Programme Group 52
4. SPY0 Howitzer 54
5. European Defence Industry Study - Independent European Programme Group Action Plan 56 MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS
Summary and conclusions
Background
1. The Ministry of Defence spend some g8.5 billion a year on defence equipment. In 1989-90 El.4 billion of this total was spent on equipment procured in collaboration with other NATO countries. The Department were then involved in some 41 collaborative projects (Appendix 1). The Department expect international collaboration to remain a major feature of their procurement strategy in the years to come.
2. In view of the significance of collaborative projects in the Department’s equipment procurement programme, the National Audit Office have examined the Department’s general approach to collaboration and the results they have obtained. This investigation builds upon an earlier National Audit Office examination of the subject, dealt with in my predecessor’s Report “Ministry of Defence: International Collaborative Projects for Defence Equipments” (HC 626/1983-84).
3. In consultation with the Department the National Audit Office selected for detailed examination ten collaborative projects with aggregate estimated total United Kingdom procurement costs of more than !Z20 billion (Appendix 2).
Findings
4. The issues examined and the National Audit Office’s main findings are summarised below.
On the consideration given to collaboration and to widening opportunities for purchasing from overseas (Part 2) (a] Subject to an overall policy of obtaining maximum value for money, the Department now expect most significant new equipment developments to be collaborative (paragraph 2.2).
@) Factors which can create difficulties for collaboration include the long term influence of previous procurement decisions, and the lack of common equipment requirements and timescales (paragraphs 2.12-2.14).
(c) Within the Conference of National Armaments Directors and the Independent European Programme Group, the Department have played a leading role in efforts to increase the opportunities for collaboration (paragraph 2.17). (d) Efforts in the major multilateral fora have achieved only limited success in establishing joint Staff Requirements and collaborative projects based on them. It is too early to judge whether recent
1 changes in procedures intended to improve performance will result in an increase in the number of collaborative projects (paragraphs X2-2.27). (e) If a programme has been too small for collaboration to be economic the Department have not until recent years fully considered the alternative of purchasing equipment abroad. However, in common with most other European NATO nations, they now publish details of contract opportunities to potential foreign and domestic suppliers. They have also concluded a bilateral arrangement with the French Defence Ministry which has met with some success (paragraphs 2.3, 2.4, 2.28-2.32).
On success in securing the advantages and minimising the disadvantages of collaborative projects (Part 3) (f) The Department’s working assumption, which is tested case by case, is that in collaborative projects any higher production costs are more than offset by development cost savings. However, analysis by the National Audit Office suggested that development cost growth on collaborative projects has on average been higher than for non- collaborative projects. This draws into question whether collaborative projects have delivered cost savings overall compared with national projects. If confirmed, the finding could have significant implications for decisions to adopt collaborative procurement routes, and the National Audit Office recommend that the Department conduct a broad-based review of their experience of project cost growth and make its results available to those responsible for investment appraisals comparing the likely merits of collaborative and non- collaborative procurement options [paragraphs 3.6-3.9). (g) The Department stress the importance of interoperability but have no systems for monitoring the degree of interoperability achieved in practice. The Department have not fully addressed interoperability in many of the projects submitted to the Equipment Policy Committee (paragraphs 3.10-3.13). (h) The Department’s experience on the In-Service Support of equipments procured collaboratively has been mixed (paragraphs 3.14-3.19). (i) Collaborative projects are prone to delays due to the time taken for international resolution of issues such as contract terms and workshare arrangements, as well as other specifically collaborative factors. The Department aim to make appropriate allowances for these factors in project planning (paragraphs 3.20-3.22). (j) The Department have generally negotiated arrangements which relate cost and work shares to production offtake. Where they have had to balance their objectives of minimising costs and maximising the amount of work allocated to United Kingdom industry, the cost minimisation objective has usually prevailed. However, cost share on Long Range TRIGAT was greater than that implied by production offtake, and on MLRS the Department invested funds in facilities in order to acquire a share of a particular work package (paragraphs 3.24-3.31).
2 MINISTRY OF DEFENCE: COLLABORATIVE PRO,ECTS
(k) The Department have found it advantageous to exercise their right to withdraw from certain projects. But in others they have agreed to restrict their ability to withdraw without cost penalty in order to reduce the ability of other nations to withdraw (paragraphs 3.32-3.34).
On the management of collaborative projects and the Department’s success in securing their preferred approach to procurement (Part41 (1) Despite informing the Committee of Public Accounts in 1986 that they intended to update their 1980 guidance on collaboration, the Department did not update their main guidance document until 1990 (paragraph 4.6). (m) The Department accepted the Committee of Public Accounts’ recommendation in 1984-85 that they should give more urgency to reviews of experience on collaborative projects. However, the “lessons learned” mechanism set up to achieve this has been used in only one of four relevant cases (paragraphs 4.84.10). (n) Competition at prime contractor level was obtained for only two of the projects examined (COBRA and MLRS III). In some recent projects there has been significant competition at sub-contractor level; and provision for development contractors to compete for production contracts (paragraphs 4.144.17). (0) The Department have argued vigorously, and with success, for the incorporation of taut contracting terms into recent collaborative contracts. But the earlier EHlOl contract did not originally have a maximum price: and the EFA contract terms do not place an absolute limit on the customer’s liability although they do provide contractors with strong incentives to minimise costs (paragraphs 4.184.21). (p) In two of the four full development projects examined (COBRA and TRIGAT), the outstanding level of technical risk on entering full development was greater than would have been accepted for a national project. These development contracts were fixed price which, given the high level of outstanding risk, may have resulted in the agreed prices including a large contingency element, although competitive pressures militated against this possibility in the case of COBRA (paragraph 4.23). (q) In April 1989 the Conference of National Armaments Directors published its own views on procurement policies for collaborative projects. These are broadly in line with those put forward by the Department. This represents a large measure of agreement by the NATO nations to the United Kingdom’s preferred approach to maximising value for money from defence equipment procurement (paragraph 4.31).
On the adequacy of external audit arrangements (Part 5) (r) The National Audit Office do not have statutory rights of access to collaborative project offices. In general, their examinations are therefore based upon information held by the Department,
3 MINISTRY OF DEFENCE: COLLASORATlVE PROJECTS
supplemented as appropriate by further information and assurances obtained directly from the overseas external audit body which has rights of access (paragraphs 5.1-5.5).
(s) In the National Audit Office’s view, the scope and penetration of the National Audit Office’s examination of collaborative projects could be extended by the provision of direct access to collaborative project offices. The arrangements to be applied will be for individual agreement with the Department in each case. In particular cases where it is agreed that the National Audit Office require direct access the Department will seek to negotiate arrangements with other participants (paragraphs 5.6-5.10).
(t) In the case of the EFA project, a side letter to the Memorandum of Understanding provides access to the NATO project management Agency by the supreme audit institutions of the participating nations. In conjunction with their counterparts in the other countries, the National Audit Office have exercised this access. The National Audit Office see the exercise of access to the EFA management Agency as of considerable importance in extending the scope and penetration of their value for money audit of the Department’s administration of the EFA project. They recognise however that the access arrangements for EFA were stated by the participating Defence Ministries to be exceptional and without precedent for other programmes (paragraphs 5.12-5.14).
(u) The Department have accepted that the National Audit Office should have access to the COBRA and TRIGAT International Project Offices and are seeking to negotiate appropriate arrangements with other participants (paragraphs 5.15-5.17).
General conclusions
5. Collaborative projects have played an important part in the Department’s equipment procurement activities in recent years, and this importance is expected to increase over the next decade and beyond. The collaborative Tornado aircraft, which is the single most costly equipment programme ever to be entered into by the Department, is currently the mainstay of the Royal Air Force’s air defence and bomber aircraft fleets. Major collaborative projects currently under development such as EFA and EHlOl will play vital roles in the United Kingdom’s defences in the years to come. Like national projects, collaborative projects have varied in the degree of success achieved. However, in only one case - the SP70 self-propelled howitzer - has a collaborative programme been abandoned in Full Development. And several collaborative projects, such as the Jaguar and Tornado aircraft, have proved their worth in export markets.
6. The Department have been able to draw on a long experience of collaboration when considering and setting up new collaborative projects. However, the Department need to address the weaknesses in their current arrangements for the dissemination of lessons learned from collaborative projects. Otherwise, they risk making inadequately informed decisions and judgements and repeating past mistakes.
4 MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS
7. In recent years the Department’s procurement policies have put more emphasis on competition, and on making contractors responsible for delivering the equipment on time and at minimum cost. The Department have made considerable progress in persuading their collaborative partners of the importance of these principles. This should make it easier to establish and run collaborative projects and permit more effective programme control.
8. Major equipment programmes run for several decades; and for the largest, the interval between early concept studies and the completion of development alone can exceed ten years. Differing responses by NATO governments to the recent changes in the political and security climate in Europe may place collaborative project arrangements under strain as may financial constraints. For example, the United Kingdom’s partners have withdrawn from the ASRAAM project, leaving the Department to pursue a national procurement route, and the Federal Republic of Germany has reviewed whether it should continue to participate in the EFA project. In the short-term the challenge for the Department will be to maintain the participation and momentum of existing projects and ensure successful conclusions. In meeting their longer term requirements by collaborative means they will need to evaluate carefully the risks that partner nations may alter their views as to the military priority they attach to collaborative equipment programmes.
9. The new reciprocal purchasing arrangements offer the prospect of increasing competition and thus achieving improved value for money where programme sizes make collaboration uneconomic. As a nation with an advanced but highly concentrated defence industry the United Kingdom stand to gain from the opportunities thus presented. However, the progressive re-structuring of the defence industry and its increasing internationalisation will inevitably affect these arrangements. The Department will need to monitor events carefully and remain alive to the danger that industrial concentration on a European scale will dilute the impact of these arrangements.
5 MINlSTRY OF DEFENCE: COLLABORATIVE PROJECTS
Part 1: Background and scope of the National Audit Office study
General - how far the Department have succeeded, in practice, in securing the potential advantages 1.1 The United Kingdom Secretary of State for and minimising the potential disadvantages of Defence has identified four factors which demonstrate collaborative projects (Part 3); the need for greater international collaboration in - whether the Department’s management of Defence procurement. These factors are: collaborative projects is satisfactory with military - NATO’s fighting effectiveness is particular regard to central organisation, support seriously handicapped by the variety of and guidance, and how far they have succeeded equipment fielded by the individual Alliance in securing the implementation of their preferred nations; approach to procurement on collaborative projects [Part 4); and economic - defence budgets are static or shrinking but the equipment required is - whether external audit arrangements for becoming more expensive: collaborative projects are adequate (Part 5).
industrial - independent national 1.4 The National Audit Office obtained views and developments cause wasteful duplication of information from various branches and specialist development effort within NATO, and national areas within the Department. They were also assisted markets are often individually too small to in an advisory capacity by Professor R. P. Smith of sustain truly efficient production runs; and Birkbeck College, London. In addition, the National political - there is a need for the Alliance as a Audit Office consulted two trade associations and whole to demonstrate its cohesion, and for the several United Kingdom defence contractors with European allies to demonstrate their interests in collaborative projects. A visit was also determination to maximise the European made to the Ministry of Defence of the Federal contribution to NATO. Republic of Germany.
1.2 In 1989-90, the Department were involved in 41 1.5 Following consultation with the Department, the collaborative projects, of which 17 were in National Audit Office selected for detailed production, and the remainder in development or examination ten collaborative projects in which the earlier study phases (Appendix 1). The Department’s Department are involved. They also selected and expenditure on these collaborative projects in that examined a supplementary sample of four in-service year amounted to f1.4 billion - 15 per cent of their equipments which had been procured collaboratively. total equipment budget. Detailsof theseprojects are provided at Appendix 2. The selection was spread across the three Services Scope of the National Audit Office and contained projects at all stages from project examination definition, through development and production, to in-service. Communications projects were specifically 1.3 The National Audit Office examined four key excluded, however, as they are to be the subject of a issues: separate National Audit Office investigation. The National Audit Office’s project examination - whether the nnpartment have given concentrated upnn recently completed project stages adequate consideration to collaboration when and those future stages for which contractual making procurement decisions and the action arrangements have recently been finalised; it did not they have taken to improve the opportunities for include detailed consideration of events that took effective collaboration in future (Part 2): place many years ago.
6 MINISTRYOF DEFENCE:COLLABORATIVE PRO,IXTS
Part 2: The Department’s consideration of collaboration
2.1 In recent years the Department have sought to judge each case on its merits. However, they do achieve greater value for money from defence accept that below a certain programme size equipment procurement through wider and more collaboration may be uneconomic. In these cases they effective collaboration. This Part considers whether increasingly look to other forms of international the Department have given adequate consideration to procurement, particularly direct purchase from collaboration when making procurement decisions overseas. During 1987, they made two attempts to and the action they have taken to improve the establish the minimum programme size for which opportumties for effective collaboration in future. collaboration was economic but these attempts did not lead to specific guidelines. Choice of procurement routes 2.4 Before the initiatives of the past few years for 2.2 The Department’s primary objective in making widening bidding opportunities, the Department procurement decisions is to obtain the equipment considered purchase from abroad only when there needed at the right time and with maximum value for was insufficient competition among domestic money. They now aim to buy off the shelf wherever suppliers. However, the Department have acted to development has already been funded by others. For increase the opportunities for purchasing from most significant new equipment developments they overseas by meas of initiatives to widen bidding expect to collaborate, so sharing development costs opportunities and by linking overseas purchases with and obtaining the benefits of joint production. arrangements that provide for a return of work for United Kingdom industry (paragraphs 2.28 to 2.33). 2.3 The Department use value for money as the 2.5 Figure 1 shows the proportions of the prime criterion for determining whether collaboration Department’s expenditure from 1985 to 1990 on each or a purely national solution should be adopted. They method of procurement. Figure 1
Analysis of methods of Defence Procurement 1984-85 to 1989-90
United
Source: Statement on the Defence Estimates 1990
7 MINISTRYOF DEFENCE:COLLABORATIVE PROJECTS
2.6 In August 1987, the Department estimated the collaborative expenditure in 1987. Among the proportions of the defence equipment budget that had underlying causes of these wide variations are: been spent, or were likely to be spent, collaboratively. differences between the Services in their need to Figure 2 shows these figures for each of the Systems operate closely with the corresponding Services of Controllerates. other nations; and a tendency towards greater collaboration on the more expensive and technologically complex equipments where 2.7 Both Figures 1 and 2 overstate the collaborative development costs account for a relatively high proportion of expenditure. This is because proportion of total procurement costs. collaborative projects are counted as wholly collaborative, whereas they usually contain an element of national work outside the common Investment appraisal programme. Taking an extreme example, the common production programme for the Royal Navy’s version of the EHlOl helicopter will account for only half the 2.9 In their Fifth Report, Session 1984-85 (HC84) value of all production work. the Committee of Public Accounts concluded that the Department had not always used formal investment appraisal techniques to evaluate the costs and 2.8 The estimates made in 1987 show considerable benefits of alternative courses of action. The differences between the three Systems Controllerates subsequent Treasury Minute confirmed that, in in the collaborative proportions of their expenditure. future, the Department’s policy would be to apply Indeed Air Systems accounted for 95 per cent of all relevant investment appraisal techniques, including Figure 2 Collaborative proportions of equipment expenditure: 1983/84-1985/86 (outturn), 1986/87-1990191 (forecast]
Percentage 40
30 ‘1 : * .,,; .! i ; *
7.0 *?, :*,a y‘ f ~?C *i :: 0 .*,-*,. :: :p:,* ::i / z 10 ,.,,,,,,,) ,f,&i 1” “<$ A.i *.a 7 83184
I SeaControllerate 0 Land Controllerate m Air Controllerate
Source: Chief of DefenceEquipment Collaboration Annual Report 1987
8 MINISTRY OF DEFENCE: COLLABORATlVE PROJECTS discounted cash flow analysis (Cmnd 9464). - lack of common requirement where other Guidelines to this affect were introduced by the nations had different requirements or no Department in 1986 and revised early in 1989. requirements at all; and
- lack of common timescale, where the 2.10 The Equipment Policy Committee of the United Kingdom’s desired In Service Date was Department is responsible for ensuring that out of phase with those of other nations, or equipment programmes are in line with Defence where other nations already had their own policy, meet operational requirements and are cost- p*0g*ammes. effective in terms of their military worth. It considers all proposals for major equipment expenditure (that 2.14 The results of the National Audit Office’s is, projects with estimated development costs of more review are summarised in Table 1. This shows that than f50 million or estimated production costs of the lack of common requirements and timescales have more than El00 million). The Committee is composed been a problem throughout this period and, while the of senior military and civilian members of the incidence of these factors fell in 1986, it has not Department. Kepresentatives of certain other reduced further since then. government departments also attend its meetings.
Table 1 2.11 Seven of the ten collaborative projects Incidence of main factors preventing collaboration examined by the National Audit Office had been for Defence equipments 1984-1988 considered by the Equipment Policy Committee since the Committee of Public Accounts’ examination in 1985. The National Audit Office found that .i ?: . ,, :,,, ,, ., ,,,; ‘~ ,.,,,,,,,,, Ye& F :;,‘* ,: 19841985‘, 1986 $987 1988 investment appraisal techniques had been applied in each case, and Discounted Cash Flow analysis had EPC Papers in which 10 11 6 5 8 been used where appropriate. The potential relevance collaboration was rejected to such investment appraisals of any historic trends in comparative rates of cost growth on collaborative and non-collaborative projects is dealt with at Factors Preventing paragraphs 3.7-3.9. Collaboration: Lack of Common Scope for collaboration Requirement 4 2
Lack of Common 2.12 The Equipment Policy Committee’s procedures Timescale 1 2 require that all submissions on new projects include a thorough evaluation of the scope for collaboration, and, where appropriate, the likely implications. The Other factors (such as 3 1 Department reviewed decisions made by the security considerations) Committee during 1986, and concluded that the scope for collaboration was being restricted by the Rejected for early phase 2 - long-term influence of previous procurement but to be considered for decisions. For example, the new development later stages programmes approved for Vertical Launch Sea Wolf and Rapier Field Standard C built upon in-service equipments which had been developed nationally. The National Audit Office recognise that updating of Source: National Audit Office analysis of Equipment existing equipment will sometimes offer better value Policy Committee papers for money than embarking upon a new collaborative development.
2.13 To identify any trends in the factors preventing collaboration the National Audit Office reviewed all submissions made to the Committee in the period 1984 to 1988. They found that where collaboration had been rejected the most common factors were: MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS
2.15 In 1986 the Department considered whether needed. In 1985 a study by the Conference of the timing of submissions to the Committee and the National Armaments Directors came to broadly the procedures in force had prevented collaborative same conclusion and the Ministers of NATO proposals from being fully examined. They concluded countries called for extra efforts to harmonise that major collaborative projects were generally able requirements and to find improved ways of increasing to comply with Committee procedures, but that collaboration. pressure to meet an international timetable could limit the level of scrutiny by the Committee. 2.20 The harmonisation of requirements begins with the exchange of information and proceeds to Harmonisation of operational requirements agreement of a joint Outline Staff Target (NATO or European depending on the organisation in which it 2.16 The two main factors preventing collaboration originated]. Further harmonisation work may progress in Table 1, namely the absence of a common this to a joint Staff Target, and, after that, a joint Staff equipment requirement and the absence of an agreed Requirement, which can serve as the basis for a timescale, amount in effect to the absence of a collaborative Project Definition study. This aims to harmonised operational requirement, which the define the scope for collaborative development and Department have long recognised as an important production of the equipment concerned. The obstacle to successful collaboration. Indeed, the harmonisation activities of the Conference of National United Kingdom Secretary of State for Defence has Armament Directors and the Independent European stated that greater harmonisation of national Programme Group have succeeded in establishing operational requirements is essential as a sound basis many joint Outline Staff Targets, but have been less for collaborative procurement. successful in developing these into joint Staff Requirements. 2.17 The Department further the harmonisation of lil\ , The achievements of the Conference of National requirements by participating in various fora, Armaments Directors including the two main organisations: 2.21 Within the Conference of National Armaments - The Conference of National Armaments Directors, work on harmonisation is mainly the Directors is a major NATO organisation responsibility of the subsidiary Armaments Groups responsible for promoting greater armaments [Appendix 3). Each Group has sub-groups which co-operation among all NATO nations. exchange information on national equipment programmes so as to identify opportunities for collaboration. However, it is largely left to individual - The Independent European Programme nations to initiate discussions on potential Group was formed in 1976 to give greater collaborative opportunities on a case-by-case basis. emphasis to collaboration between European Schedules recording the nations’ equipment allies. The United Kingdom chaired the Group requirements and their timing have been compiled, in 1989 and 1990. but have played no significant part in the harmonisation process. The National Audit Office found that the Department have played a leading role in both these bodies and 2.22 To make the existing arrangements for that they can justifiably take some of the credit for harmonisation more systematic, NATO Ministers tbe progress that has been achieved. The structure agreed in December 1987 to create a Conventional and organisation of the two bodies is shown at Armaments Planning System. The System was Appendix 3. intended to facilitate collaboration by providing a framework within which individual nations’ long- 2.18 A primary objective of both bodies is to term armanents goals could be analysed. It completed identify and promote opportunities for collaboration. a two-year trial in November 1989, and this has been The Department minimise the duplication of their extended for a further four years. efforts by utilising the same central policy and Operational Requirements staff to assist both bodies, 2.23 The Conference of National Armanents and by concentrating their efforts upon whichever Directors currently have some 60 Outline NATO Staff body seems most likely to produce worthwhile results Targets and NATO Staff Targets under consideration. in relation to particular types of equipment. The Department are involved in many of these studies, for example those on the NATO 2.19 The Independent European Programme Group Identification System [Appendix 1). But progress concluded in 1984 that a more active process of towards the agreement of NATO Staff Requirements harmonising requirements and timescales was and the establishment of collaborative Project
10 MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS
Definition studies has been limited. The Department artificial split of responsibilities between those joined Project Definition studies on NATO Improved concerned with agreeing an Outline Target, and those. Link 11 (a naval communications project), NFRSO, concerned with establishing a Staff Requirement. This and the Modular Stand-Off Weapons programme, but position was rectified in January 1989 as part of a withdrew from the last two of these during 1989. major restructuring exercise, introduced because the Group recognised that it would, more than ever, be 2.24 The Department have recognised a need for judged on the number of collaborative projects it fewer sub-groups and a management structure that managed to initiate. The Group adopted new terms of gives National Armaments Directors greater influence reference which emphasised identifying programmes within the organisation. In October 1988 the with the best chance of developing into viable Conference of National Armaments Directors collaborative projects. Again, it is too early to assess approved a reduction in the number of sub-groups; the impact of these changes on the establishment of other measures aimed at improving the management collaborative projects. structure are under consideration. It is too early to judge whether these changes will result in an increase Initiatives to widen bidding opportunities in the number of collaborative programmes established. 2.28 In December 1987 the Department established a Reciprocal Purchasing Initiative with the French (ii) The achievements of the Independent European Ministry of Defence. Under this initiative the Programme Group opportunity to bid for contracts placed by each 2.25 The Independent European Programme Group’s Defence Ministry was, within certain limits, opened work on harmonising requirements is guided by the up to the industry of the other country. All bids were compilation each year of Equipment Replacement to be given full and impartial consideration regardless Schedules. These identify those occasions when of their country of origin. nations expect to replace similar equipments at about the same time. They are reviewed at an annual 2.29 Bulletins containing details of forthcoming bid meeting of national staffs, who subsequently produce a report indicating potential areas for collaboration. opportunities are published on behalf of both Ministries. Several conferences of defence This is considered nationally and within the Group. In October 1987 the Group reviewed this process. manufacturers and Defence Ministry officials have been held to present forthcoming requirements, They concluded that while the existing procedures formed a sound for identifying collaborative explain national procurement procedures, and publicise contact points. opportunities, some opportunities were being missed because the Schedules were based on inaccurate and incomplete data and because not all countries were 2.30 A Joint Anglo-French Committee oversees the represented at annual review meetings. The National application of the arrangements and reviews the Audit Office noted that attendance improved at the number and value of contracts awarded. Between review of the 1988 Schedules and the participants December 1987 and March 1989 the value of regarded it as a success. While the Department have contracts awarded by each Defence Ministry to the led efforts to improve the accuracy and completeness defence industry of the other country was of the of the Schedules, they still consider there to be scope order of E6O-E70 million. No single contract had for further improvements. exceeded 65 million in value and the Department were unable to state with any certainty the proportion 2.26 The Independent European Programme Group of these contracts that was due to the Initiative. Given have produced 17 Outline European Staff Targets the long lead-times involved in procurement, it will since 1985, compared with none in the previous eight take some time for the full effect of this initiative to years. To date, however, they have failed to convert be felt. There has already been a substantial increase any of these into Staff Requirements. The main reason in industry - to industry links, but a major growth in has been disparities between the nations’ programmes cross-purchases has yet to be demonstrated. and priorities. In many cases, no further work is planned. In others, the Group are currently looking to 2.31 More broadly, the Department have progress the Staff Targets. For example, the United participated in initiatives by the Independent Kingdom are co-ordinating work on a European Staff European Programme Group to open the European Requirement for a Microwave Landing System. defence equipment market to international competition. By March 1990 all member nations had 2.27 In October 1987 the Group attributed its lack of nominated focal points in their Defence Ministries success in progressing Outline Staff Targets to an through which foreign companies might register
11 MINISTRYOFDEFENCE:COLLABORATIVEPRO,ECTS interests in bidding for contracts: and nearly all “Offset” arrangements member nations, including the United Kingdom, were publishing regular contracts bulletins announcing 2.33 It is the Department’s policy, when considering their defence contracts opportunities. It is too early to placing contracts valued at over El0 million overseas, say whether this European initiative will meet with to seek offset arrangements whereby the overseas SUCCC?SS. contractor gives UK defence companies opportunities to bid for work on a competitive basis. To date, 2.32 The actions described in paragraph 2.31 were recommended by the European Defence Industry nearly all such agreements have been with United Study report (19861, which was commissioned by the States contractors. There are ten current agreements Independent European Programme Group. The report with a total offset value of El,300 million, most of concluded that the future efficiency and which is accounted for by the Airborne Warning and competitiveness of the European defence industry Control System case. The Department’s Defence depended on comprehensive, systematic co-operation Export Services Organisation monitors among European nations. This would involve implementation of offset arrangements. Participating minimising the duplication of research and foreign companies are required to make six-monthly development efforts and promoting competition reports as to the value and nature of contracts placed. across the European defence industry. A list of the These returns are evaluated by the Department to main actions taken by the Group in response to the ensure that each contract placed is for genuinely new report is at Appendix 5. work of sufficiently high quality.
J ; MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS
Part 3: Advantages and disadvantages of collaboration
3.1 Collaborative procurement offers potential A further difficulty with collaboration is that the advantages over national procurement but it also Department may not convince partner nations of the introduces difficulties and constraints. The National merits of their own national approach to seeking Audit Office set out to establish how far the maximum value for money in defence equipment Department had succeeded, in practice, in securing procurement. This issue is considered in Part 4 the potential advantages and minimising the potential (paragraphs 4.124.31) of this Report. disadvantages of collaborative projects. For this purpose the National Audit Office’s examination (a) Cost savings focused upon a sample of 10 collaborative projects, supplemented by information obtained on a further 3.3 In theory, collaborative projects offer cost four in-service equipments (paragraph 1.5 and savings through the sharing of non-recurring costs, Appendix 2). particularly in development, and through economies of scale in production. The National Audit Office 3.2 Of the four factors favouring international noted that in the 10 projects that they examined collaboration identified by the Secretary of State for forecast cost savings featured prominently among the Defence (paragraph l.l), two - the “industrial” and reasons for pursuing a collaborative procurement “political” factors - relate to general benefits of route. For example, the Department entered the collaboration which cannot be easily measured. The EHlOl collaborative project after they had concluded, remaining two - “economic” and “military” - relate from early studies of a national design, that a national to the specific benefits likely to be obtained in development was u&fordable. Similar conclusions individual collaborative projects. The National Audit were arrived at on MLRSIII and COBRA. Office’s examination focused on the specific benefits 3.4 As regards development costs, the Department’s and in particular: analysis of aircraft projects suggests that collaborative (a) cost savings compared to national development costs increase in rough proportion to alternatives; the square root of the number of participants: that is, (b) interoperability - the ability of the United global costs for a four-partner project will be about Kingdom to operate their equipment alongside twice those of a single-nation project. This “square that of their allies; and root formula” implies a net saving to each nation which, in the four-partner case, would be about half (c) in-service support - cost savings and the cost of national development. British Aerospace operational benefits of collaborative procurement (Military Aircraft) Ltd told the National Audit Office and centralised holdings of spares. that they thought the formula was not entirely unrealistic, but that it probably tended to understate The negotiation of collaborative arrangements the collaborative development cost savings achieved. acceptable to all parties, and the co-ordination of procurement, usually involves some compromise of 3.5 As regards production costs, the Department’s national positions. The National Audit Office analysis of collaborative aircraft projects in which therefore selected for examination the following three they have taken part indicates that economies of scale areas relevant to those negotiations where at the production stage may not be achieved in disadvantages might occur: practice. Indeed, there are indications that the unit (d) delays - the impact of collaborative factors production cost of a collaborative programme might on project timescales; be higher than a national equivalent. For example, for NFRSO the Department estimated that they would (e) cost share and work share - the problems incur some ~36 million additional production costs as associated with reconciling national objectives: compared with a national project. This represented and about 1% per cent of the total estimated production (f) withdrawals - the constraints upon the costs for 12 ships and was more than offset by Department’s freedom to withdraw and the estimated savings in development costs of El60 impact of withdrawal by partner nations. million.
13 3.6 The Department’s working assumption is that in assumption concerning the cost savings available collaborative projects any higher production costs are under collaborative arrangements. The National Audit mrxe than offset by the savings resulting from shared Office therefore set out to compare the average development costs. This assumption is tested case-by- development cost growths on national and case when the relative merits of national, collaborative projects. collaborative and off-the-shelf solutions are assessed. However, when a collaborative project is chosen in 3.8 Cost growth data are included in the Major preference to a national project on cost grounds, it is Projects Statement, which is considered annually by not possible subsequently to review this assumption the Committee of Public Accounts. For these major in the light of experience since there will be no collaborative and non-collaborative projects the national option for comparison. estimated development cost growth against original approval, drawn from the Major Projects Statement for 1989, is shown in percentage terms in Figure 3. 3.7 Detailed estimates of development costs are prepared by the Department to assist decisions on 3.9 Figure 3 shows a wide range of cost growth whether to proceed with a project and whether to do outcomes, with collaborative projects so by collaboration. Although these estimates try to distributed over most of the range. If the individual make a realistic assessment of the relative costs of percentage cost increases are weighted to take collaborative and national solutions, they do not account of the value of each overrun, the average specifically seek to differentiate between these increase for non-collaborative projects is 14 per cent solutions on grounds of likely cost growth during the and for collaborative projects 24 per cent. The life of a project. If development cost growth on weighted average for collaborative projects is high collaborative projects is higher than for national largely because the large Tornado aircraft projects this would draw into question the collaborative project experienced high development Figure 3 Major Project Statement Equipments estimated total development cost ovehnderruns as a percentage of, approvals 100 -
1m Collaborative 1 z 80- 2 E 2 60- 1 ‘;, ; z 40- 8 % 5c 20-
Source: Major Projects Statement 1989 Notes: 1. Average 1989/90 outturn prices 2. Tornado excludes Foxhunter ;;,,,;,,,,, ~;. ,a’,,,.,, j”~.. I /T : ,., ,,,,, 1?,, , : ,_, ,,,* ,..il +.,., s,). ,* -: _ ,. ._,,,,,*,, ;,;; Fig&e ,3,,shaw$.c& :&&i~~&&&)st &+& on,maj~~~~~d;j~~s?~~~~~~~~~~~~~~”~,C‘i(,*a*?\*s-* “,“,“,‘“;‘;;:- cbst ;.,,: prowth;on:;;: _, ~3 ,,;, *2 *: l”,$ som+;: yy I_,: p$ects to cost growth of more than 50 per cent on others. Collaborative projects are distributed cwer most of the range.
14 MNISTRY OF DEFENCE: COLLABORATIVE PROJECTS
cost growth (44 per cent). The fact that weighted equipments. Furthermore, they found that the average development cost growth on collaborative German and United Kingdom Tornados had different projects is higher than on national projects suggests weapons carrying equipment which necessitated both that collaborative cost savings predicted when that types being held on airbases to ensure route is adopted may not in practice be achieved. If interoperability. this finding were to be confirmed by a bruadar-based study of the Department’s experience of project cost (c) In-service support arrangements growth in recent years, it would be a relevant input to the investment appraisals which the Department use to compare the likely merits of collaborative and 3.14 The Department’s general experience is that non-collaborative options (paragraph 2.11). while there are some benefits of scale in joint spares production, these can be eroded, or offset, by (b) Interoperability different support philosophies, spares holding policies and progressively diverging modification states. 3.10 The Alliance’s effectiveness is seriously handicapped by the disparate variety of equipment fielded. Accordingly, the Department see increased 3.15 Two of the National Audit Office’s main standardisation and interoperability as priority sample of ten projects have reached the in-service objectives. Collaboration is one way of achieving stage - Tornado and Harrier GR5. The National them. The procedures of the Equipment Policy Audit Office examined the available information Committee lay down that standardisation and concerning in-service support on these and certain interoperability should be considered in all project other in-service equipments, namely FH70 field submissions when Staff Targets and Requirements are howitzer; the Sidewinder air-to-air missile; the Anglo- dealt with. French helicopters (Puma, Gazelle and Lynx): and the MILAN anti-armour missile. 3.11 In the National Audit Office’s sample of projects there had been nine submissions to the 3.16 In three of these six cases - Tornado, Equipment Policy Committee for which detailed Sidewinder and FH70 - the partner nations have consideration of standardisation and interoperability made arrangements for consolidated procurement of was required. In one of these submissions - on spares in order to obtain price advantages. In the MLRSIII - there was no statement on standardisation cases of Sidewinder and FH70 the Department and interoperability. In the other papers the coverage thought that useful economies of scale had been varied but in no case had all the considerations noted achieved, although for Sidewinder this was at the in the Department’s guidance been specifically expense of flexibility in the procurement timescale in addressed. certain instances. In the case of Tornado, the disadvantage of larger holding levels due to long lead 3.12 The Department explained to the National times had been found to outweigh any price Audit Office that they are active across a broad front advantage, and as a result aggregated ordering had in promoting the achievement of interoperability. For been discontinued. example, work on standardisation agreements for materials and consumables has important 3.17 Of the six cases examined, only for Sidewinder consequences for the interoperability of both and FH70 were centralised holdings of spares collaborative and non-collaborative projects. They maintained. In both cases the Department are satisfied also said that MLRSIII is expected to achieve a high that reduced holdings had been achieved as a result. degree of interoperability. Mutual support arrangements had also been made for the supply of spares for Tornado and engines for the 3.13 Systematic analysis of the interoperability Anglo-French helicopters. achieved between the equipments in service in the United Kingdom and other nations would provide 3.18 In four of the six cases examined, no significant useful information. However, the Department problems had been experienced by the United consider that it is not practicable to monitor Kingdom as a result of reliance on overseas suppliers. interoperability. Consequently, the degree of However the Harrier GR5/7 project had encountered interoperability achieved by in-service equipments difficulties over intellectual property rights held by cannot be fully known. The National Audit Office United States suppliers; and for Sidewinder a noted, however, that Harrier GR5/7 interoperability national UK repair facility was established both on was reduced because sume United States items were the grounds of cost effectiveness and ensuring replaced, for industrial reasons, with United Kingdom priority in a national emergency.
15 MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS
3.19 Typically, in-service projects had provisions - TRIGAT: the In-Service Dates have slipped both for the co-ordination of modifications and for the by several years, mainly due to extended adoption of different national modifications when negotiations with industry on contract terms. necessary. Non-common modifications had Reconciliation of national procurement practices compromised the scope for collaborative mid-life contributed to the delay. update of the Puma and Gazelle helicopters, if ever required. 3.22 Several of these projects - for example, ASRAAM, EHlOl, and TRIGAT - had suffered (d) Delays delays due to national approval and funding procedures (paragraph 3.20). However, the National Audit Office also noted other factors, in particular the 3.20 The Department’s studies of collaborative time taken to reach inter-governmental agreement on aircraft projects involving the United Kingdom have contract terms (COBRA] and on cost and work share found no hard evidence that they take longer to bring arrangements (EHlOl, MLRSI). These factors will be to fruition than purely national ones. Nevertheless, less significant in future cases if the Department and the potential for delay is a serious concern of the their partners are able to build upon the agreement Department. In their view the main factor recently reached between National Armaments contributing to delays is the time taken by Directors on the fundamental principles to be applied participants to secure national approval and funding to collaborative programmes (paragraph 4.31). for each project stage. They aim to anticipate such difficulties by making full allowance in project planning for the national approval procedures of the (e) Arrangements for cost shares and work participants. In the EHlOl and EFA programmes “risk shares reduction” work was included between major development stages so that industrial continuity was 3.23 Cost share is the proportion of total maintained while national approvals were awaited. collaborative project costs borne by each nation’s defence procurement agency, while work share is the proportion of the collaborative project work carried 3.21 In six of the ten projects examined by the out by each nation’s industry. The cost and work National Audit Office collaboration had clearly share arrangements negotiated for a collaborative caused delays and slippage of the United Kingdom project have major implications for the Department’s in-service date: costs and the return to United Kingdom industry. - ASRAAMz the In-Service Date has slipped Further issues may arise when imbalances emerge by several years, due to a number of difficulties between the agreed allocations of cost and work and including resolution of configuration issues, the the outturns. impact of national approval processes and weaknesses of the international industrial The negotiation of cost and work shares management. 3.24 In common with their partners, the Department - NFRSO: following completion of feasibility try to minimise costs while maximising the quality study work, over three years passed before and quantity of work allocated to domestic industry. project definition work began:difficulties in In their Thirty-fifth Report of Session 1985-86 (HC reaching unanimous agreement among the 296) the Committee of Public Accounts supported in nations involved in the project contributed to principle these twin objectives. They recognised that this delay. the Department have to balance the objectives when - deciding what cost and work shares to adopt, and EHlOl: extensive negotiations with Italy on recommended that where the objectives were cost and worksharing for the full development incompatible, the Department should determine in contract and delay in funding approval on the advance the weight and priority to be given to each. Italian side delayed the start of the full The Treasury Minute (Cmnd 9917) gave the development by around 6 months. Department’s view that within the framework of securing best value for money, a flexible and - MLRSI: lengthy workshare negotiations delayed the collaborative arrangements for pragmatic approach was needed, with each case being production. treated on its merits.
- COBRA: the In-Service Date slipped by one 3.25 For stages prior to production the Department year as a result of negotiations of the Full normally aim to take shares which are broadly in line Development contract. with the United Kingdom’s estimated proportion of
16 production offtake. In practice such proportions production off-take represented 20 per cent of cannot he predicted accurately since the production the total production declared by the partners. requirements of the United Kingdom and of other The overall production quantities will need to be nations may change as the project progresses. As re-confirmed and a further Memorandum of precise matching is not feasible, the division of cost Understanding signed before production can and work often follows simple principles such as the begin. A change in other nations’ production 50:50 split between the United Kingdom and Italy for off-take will alter the United Kingdom’s EHlOl, or one third each to the United Kingdom, percentage share. In negotiating the production France and the Federal Republic of Germany on Memorandum of Understanding the United TRIGAT. Such divisions can have the advantage of Kingdom will seek to have its cost and putting participating nations on an equal footing workshare in proportion to its production off- within a project, and are particularly attractive in take. For the smaller Medium Range version the early project stages when the amount of expenditure United Kingdom cost and work share percentage is relatively small and the production offtake forecasts is estimated at 30.3 per cent and the production are conjectural. offtake at 36 per cent.
3.26 The National Audit Office compared the agreed 3.27 As a general rule, cost and work shares in cost and work shares with the latest available production are in proportion to offtake. This principle forecasts of production offtake for those projects in was applied to the production projects examined by their sample not yet in production. In several cases the National Audit Office, with the following there were significant differences: exceptions: - ASRAAM: When Norway joined the - Harrier GR5/7: The exact workshares programme at the start of the project definition achieved are governed by industrial phase the cost and work shares were set at arrangements between British Aerospace and the United Kingdom 45 per cent, Federal Republic United States contractor McDonnel Douglas. The of Germany 45 per cent, Norway 10 per cent, Department have calculated that the United which were in line with forecast production Kingdom’s workshare substantially exceeds its offtake. Forecast offtake for all countries has proportion of production offtake; changed during the course of the progmmme. Before the withdrawal of the Federal Republic of - Tornado: Changes in offtakes and economic Germany, United Kingdom forecast offtake stood conditions have continued to create imbalances at 36 per cent. The United Kingdom is in workshares. Earlier imbalances have been proceeding on a national basis following the corrected, but a new deficit of United Kingdom withdrawal during 1990 of its remaining work has emerged amounting to around DM partners. 1,200 million. At 1990 Tornado budget exchange - COBRA: The cost and work share rates this equates to some E400 million. The percentages (20 per cent) were close to the Department consider that it is too early to offtake proportion (18 per cent). The Department estimate how much work can be transferred, but considered the possibility of taking 33 per cent studies are in hand to assess the scope for transfer. The main difficulty is that work transfer instead of 20 per cent cost and work shares for industrial reasons, but concluded that the to the United Kingdom could increase overriding objective was to minimise equipment programme costs (see Appendix 2). procurement costs. 3.28 Where the Department have had to balance - EHlOl: The United Kingdom’s share of the their objectives of minimising costs and maximising maximum expected production offtake (66 per the amount of work allocated to United Kingdom cent) exceeds the cost and work share industry, the cost minimisation objective has usually percentages (50 per cent] due to an increase in prevailed. Lower work shares were accepted in order forecast offtake during development. Italy has to secure lower cost shares on COBRA (paragraph agreed that there will be no adjustment of 3.26); and the Department have preferred to tolerate a development cost shares, and in return the shortfall of United Kingdom work on Tornado rather Department have accepted an equal division of than see project costs increased (paragraph 3.27). production work (see Appendix 21. However, cost share on Long Range TRIGAT - TRIGAT: In the development phase of Long (paragraph 3.26) was greater than that implied by Range TRIGAT the United Kingdom’s cost and production offtake. The Department confirmed to the work-share is 33.3 per cent. At the time of the National Audit Office that their present policy is to signature of the development Memorandum of give higher priority to the cost minimisation Understanding in 1968 the United Kingdom’s objective.
17 MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS
Detailed aspects of certain workshare arrangements Memoranda commit nations to one project stage at a 3.29 Economies of scale at the production stage are time. Proposals to proceed to further stages - for maximised by worksharing arrangements which example., from project definition to full development provide for a single site for each activity. If activities - are considered within the Department by the are carried out at more than one site, as in the case of Equipment Policy Committee and by Ministers Tornado final assembly, the cost benefits of according to normal Departmental procedures collaborative production may be eroded. Trade (paragraph 2.10). associations consulted by the National Audit Office thought that generally single site final assembly was 3.33 A consequence of the Department’s freedom to likely to be more economical and one trade withdraw from a collaborative project is that the other association pointed out that single site final assembly partners enjoy it as well - with the danger that the was the norm for civil aircraft programmes where the Department’s procurement plans may be put at risk. customer had no objectives for the industrial welfare Of the ten projects examined by the National Audit of particular companies. However, British Aerospace Office, the Department withdrew from one - the (Military Aircraft) Ltd told the National Audit Office NFRSO - without financial penalty, after expenditure that in most cases final assembly represents a of some f5 million on this and earlier phases of the relatively minor element within the final unit price. project. Conversely, Germany, Canada and Norway have withdrawn from ASRAAM and the United 3.30 MLRSI provides an example, however, of cost Kingdom is now pursuing a national programme premia that may arise from dual-sourcing of having regard to the terms of the Family of Weapons production work. The Department insisted upon Memorandum of Understanding. dual-sourcing of one of the work packages, to secure a portion of the package for United Kingdom industry 3.34 Memoranda of Understanding contain rather than other lower technology work. The additional cost, which the other parner nations provisions regulating the ability of a nation to withdraw before completion of the project stage refused to share, was El83 million. The Department decided to contribute f9.4 million to the cost of the concerned. Some - such as those for NFRSO project facilities needed by the United Kingdom supplier to definition, Tornado full development, and EHlOl full do the work. The supplier bore the remainder of the development - provide for withdrawal at specified additional cost. The Department judged that the long- review points without further payment. Others - term industrial benefits made their contribution a such as the full development Memoranda for COBRA sound investment. and EFA - provide a strong disincentive to withdrawal by requiring the withdrawing nation to 3.31 There is a risk when collaborating with nations meet all costs arising as a result of withdrawal but whose Defence industries are not as advanced as the that the cost liability will not exceed the nation’s total United Kingdom’s, but which obtain orders on commitment for the phase of the programme workshare grounds, that the Department will be concerned. The United Kingdom’s withdrawal from paying prices which reflect a lower average standard NFRSO was facilitated by the withdrawal provision in of competitiveness. In the TRIGAT project, however, the Memorandum of Understanding. In the case of arrangements had been made to prevent a lower EFA, where there is a restrictive withdrawal clause, standard of competitiveness among the minor the Department considered that the United Kingdom’s participants (“associate nations”) from increasing position is properly protected by the main project costs. When associate nations join the project, development contracts which each contain a binding their work will be priced no higher than the prices specification and a rigorous acceptance procedure. In already offered by the industries of the pilot nations. the event that it became evident that development (f) Withdrawals costs or performance shortfalls were unacceptable, the Department felt that such a major development would 3.32 Collaborative projects are usually governed by almost certainly require all the participating nations international Memoranda of Understanding. Such to consider the future of the programme.
18 MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS
Part 4: Central management of collaborative projects
4.1 The Department are accountable for the cost and reviewing and providing advice on Memoranda of value for money of collaborative projects in the same Understanding. way as they are for national projects. This part of the Report examines whether the Department’s Guidance documents management of collaborative projects is satisfactory with particular regard to central organisation, 4.5 Guidance for collaborative projects is contained support, and guidance, and how far they have in several general contracts guides such as the succeeded in securing the implementation of their Defence Contracts Handbook and the Pricing preferred approach to procurement, Notebook. The specific handbook relating to collaboration is the “Guidance Document on Organisation International Collaboration” which was released in 1980 as a repository for practical experience and 4.2 As with national projects, the key person within guidance. In 1980 the Department issued additional the Department responsible for the management of a instructions concerning Memoranda of collaborative project is the Pruject Director. Specialist Understanding. advice on technical and policy matters is provided to Project Managers by central branches of the 4.6 In 1986 the Department informed the Committee Department, whose organisation is considered in the of Public Accounts that they were “looking to update following paragraphs. their detailed advice on how to negotiate and manage international collaborative projects” (HC 296/1985- 4.3 In March 1985 the Department established the 86). However, the Department did not begin to revise post of Chief of Defence Equipment Collaboration to their instructions on Memoranda of Understanding head the Directorate of Defence Equipment until 1988, while updating of the main collaborative Collaboration, and to chair the newly established Guidance Document was not undertaken until 1990. Defence Equipment Collaboration Board. The The delay in updating the Guidance Document has Directorate became responsible for the development seriously undermined its practical usefulness as it is of policy on the Department’s aims, priorities and now over ten years old and out of date. The National preferred methods for international collaboration, in Audit Office found that some Project Managers relation to which the Board was to play a strategic showed little awareness of the Document and those role. The Department told the Committee of Public who did seemed not to have found it useful. Accounts in 1986 (HC 296/85-86) that the Board would also have responsibility for seeing that lessons 4.7 In lYW3 the Department also informed the learned from negotiations on collaborative projects Committee of Public Accounts that guidance was were properly disseminated within the Department. being prepared for staff about to embark on The Committee welcomed these new arrangements. international projects (HC 296/1985-86). In 1987 the Defence Equipment Collaboration Board issued an 4.4 The National Audit Office found that the Board’s internal Departmental memorandum on the effective contribution to enhancing collaboration had procedures to be followed, and organisations to be been limited and short lived. At the end of 1987 the consulted. The memorandum did not, however, Defence Equipment Collaboration Board and the post contain any information on practical experience of Chief of Defence Equipment Collaboration were gained from collaborative projects. abolished. Staff working in this area were transferred to the Directorate of Procurement (International). Post project reviews Their responsibilities - policy on international relations and co-operation in the procurement of 4.8 In their Fifth Report, Session 1984-85 [HC 84) defence equipment - remained largely unchanged. In the Committee of Public Accounts observed that in practice, the branch mainly works on international only one case had the Department carried out a efforts to promote collaboration although there is a formal post-project review of a collaborative project. small cell within the Directorate responsible for The Committee recommended that the Department
19 give more urgency to the evaluation of completed Howitzer project was terminated in 1986 after United projects with a view to comparing results against Kingdom expenditure of s88 million - a history of original plans and expectations and to disseminating the project is at Appendix 4.) In 1988 the Air Systems the lessons learned to all those with responsibilities Controllerate reviewed their experience cm the in this field. The Government’s Treasury Minute in Tornado project with the specific objective of response to this Report stated that the Department informing the United Kingdom’s participation in the accepted the value of undertaking post-project EFA development programme. reviews and would conduct more such reviews in future to supplement current review procedures Departmental Procurement principles as (Cmnd 9464). applied to collaborative projects
4.9 In 1986 the Defence Equipment Collaboration 4.12 In recent years the Department have sought to Board concluded that post-project reviews were not improve the value for money obtained horn their the best way of ensuring that the lessons to be learnt Defence equipment expenditure by a number of from one collaborative project were made available to changes in their procurement approach. These have others. They felt that such reviews would take place notably included increased emphasis on competition, too late after the event, when the officials directly taut contracting, technical risk reduction, and prime involved were likely to have moved to other duties, contractorship. In March 1988, in a paper presented and recommended instead that reviews should be to the Conference of National Armaments Directors, conducted at the end of each project stage. the Chief of Defence Procurement set out his views Accordingly, from early 1987 all papers submitted to on how these basic principles should be applied to the Equipment Policy Committee on collaborative collaborative programmes. He also made two further projects had to state whether the project stage just points concerning the status of the prime contractor completed had matched Departmental expectations and the number of participants. and, in so far as it had not, what lessons there might be for the future. 4.13 For the ten projects examined, the National Audit Office considered how far the collaborative 4.10 The National Audit Office noted that this arrangements adopted were consistent with these initiative did not apply to completed projects but procurement principles. In considering this issue they only to those requiring further Equipment Policy recognise that collaborative arrangements are Committee consideration. Furthermore, they found inevitably a compromise between the preferred that although four of the projects included in their approaches of the participating nations. sample should have been reviewed, only one review had taken place (TRIGAT]. In this case, no mention [a) Competition was made of the review in the Committee’s minutes, 4.14 Competition is an essential element in the and its circulation was left to those attending the Department’s more commercial approach, and since meeting rather than organised on a wider and more 1983-84 the proportion of national contracts let systematic basis. The three Equipment Policy competitively has significantly increased. Where no Committee papers which did not contain reviews competition at prime contractor level is possible the dealt with COBRA, MLRSIII and EFA. In these cases, Department aim to maximise competition for sub- while the papersdrew comprehensivelyupon earlier contracts. project stages to inform consideration of progress to the next stage of the project, there was no specific 4.15 The National Audit Office observed that of the attempt to extract lessons of general interest and ten projects they examined only two had competition make them available to all collaborative project for the main contract at the current project stage. managers. In August 1990 the Department began to These were COBRA, where a fixed-price full distribute, at intervals of two months, a newsletter to development prime contract was awarded Project Managers. They see this as one way of alerting competitively; and MLRSIII, where competition was Project Managers to potential problems and sources of based on cost estimates rather than fixed-price offers. advice and information on all aspects of project For NFRSO, more than 20 major companies were management, including collaborative matters. invited to bid to be the United Kingdom nominated industrial participant, but there was only one 4.11 Outside the above procedure the National response, from a consortium of nine of these Audit Office found two reviews which had been companies. In the other seven cases, the companies conducted within Systems Controllerates. In 1987 the were selected without competition and with the Land Systems Controllerate reviewed their experience exception of MLRSI were the only domestic choices on FH70, SP70, TRIGAT, and MLRS. [The SP70 available.
20 4.16 The Department’s competition statistics do not prices, three (ASRAAM, MLRSIII and MLRSI) had take account of competitive sub-contracting, and the maximum prices, and Tornado contracts were placed National Audit Office were unable to determine the on a maximum price basis, firm prices being agreed exact degree of competition at this level on later. The remaining two casts arc discussed below. collaborative projects. But the National Audit Office found evidence of progress in securing sub-contract - EHlOl: the Department had been unable at competition for several projects: the outset to negotiate a maximum price with the United Kingdom contractor (Westland), for - EFA and TRIGAT: both these projects had their share of common development work significant sub-contract competition. The although Italy had succeeded in agreeing a proportion awarded after competition on maximum price with the Italian contractor TRIGAT was more than 30 per cent: (Agusta). However, Westland were persuaded, for the first time, to accept incentive contractual - MLRSI: some 95 per cent of sub-contract terms based on a target price with provision for work was subject to competitive tender. the company to bear a share of any cost over- However, workshare requirements determined runs. The Department have told the Committee that work could not in every case be awarded to of Public Accounts that they would not now the lowest bidder. Some years later there was a accept arrangements in a new contract of this very high proportion of competitive sub-contract size which did not place a limit on the work on MLRSII, an associated project, Department’s liability (HC 531/1987-88). A reflecting the increased emphasis on competition maximum price was negotiated in 1990. rather than workshare. subsequent to completion of the National Audit Office’s examination and when development 4.17 A notable feature of four recent development was well advanced and cost forecasts for the contracts - MLRSIII, EFA, COBRA, and TRIGAT - project had shown some growth war original was the provision for competition at the subsequent estimates. production stage between the development contractors and other possible producers. - EFA: the development contracts are similar to the EHlOl in that (although they were termed [b) Taut contracting “maximum price”) they did not place an 4.16 On national projects the Department now aim absolute limit on the customer’s liability. for contract terms that give contractors the greatest However they did provide contractors with possible incentive to perform efficiently and deliver strong incentives to minimise costs. on time and to cost. They prefer “firm” prices, where the amount paid is specified in the contract and not 4.21 The Department have been successful in subject to adjustment. If this is not obtainable, they incorporating interim payment arrangements linked to seek a “fixed” price, which is adjusted only for performance milestones for EFA, COBRA, MLRSIII inflation. Where the work needed is not clear, they and TRIGAT, although for the latter two projects the seek an overall maximum price with incentives to terms negotiated were not as taut as those that the encourage the contractor to minimise costs. Since Department would aim for on a national project. 1986 they have provided further incentives to timely and satisfactory performance by linking interim (c) Technical risk reduction payments more closely to achievement. 4.22 The Department’s procedures for the progressive reduction of technical risks during the 4.19 The National Audit Office found that the development stages of equipment projects are based Department had argued vigorously for the on the recommendations of the Downey Report incorporation of taut contracting terms into recent (1966). These emphasised the importance of reducing collaborative contracts. For example, the United risks to acceptable levels before commitment to full States Department of Defense had agreed to a development. In 1987 the Department informed the maximum price for MLRSIII development, although Committee of Public Accounts that they attached the this was contrary to its normal procurement utmost importance to compliance with these procedures. procedures (Treasury Minute on 6th Report of the Committee of Public Accounts, Session 1986-87, Cm 4.20 The National Audit Office reviewed the 138). One benefit of adequate risk reduction work in contractual arrangcmcnts for the project stages project definition is that full development contractors current, or recently completed, at the time of their can then be persuaded to share in, or to assume examination. One project had a firm price (NFRSO), completely, the residual risks without including three (COBRA, TRIGAT and Harrier GR5/7) had fixed unacceptably large contingencies in their prices.
21 MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS
4.23 Of the four projects examined by the National 4.28 In practice, for nine of the ten projects Audit Office which were at the full development examined in detail by the National Audit Office, the stage, EFA and EHlOl were considered by the prime contractor was not a single company, but a Department to have embarked upon full development trans-national consortium created for the purpose of with a satisfactory level of residual technical risk. But contracting for the project. In the remaining case - for COBRA and TRIGAT, the outstanding level of ASRAAM - a consortium company was set up technical risk was greater than would have been initially but was subsequently replaced as prime tolerated for a national project. As the full contractor by one of its member companies [see development contracts for COBRA and TRIGAT are Appendix 2). both fixed price, there may be a danger that the prices agreed include an unduly large contingency (f) Number of participants element. However, in the case of COBRA the fact that 4.29 The Chief of Defence Procurement has stated the fixed price was achieved though competition that the involvement of large numbers of nations militates against any excessive contingencies. could place the efficiency of projects, especially (d) Prime contractorship development projects, at risk. Nations should be more ready in future to stand aside from projects which are 4.24 It has long been the Department’s policy that well supported and efficiently managed, and devote responsibility for the co-ordination and integration of the resources which they would have allocated to work in industry should, wherever practicable, be them to meeting some other military need which is with one industrial prime contractor rather than the less well supported. Department. The Department told the Committee of Public Accounts in 1986 that the importance of implementing this policy was one of the main lessons 4.30 For the projects they examined, the National emerging from the failure of the Nimrod AEW project Audit Office found no clear signs that efficient (HC 104/1986-87). management had been compromised by the participation of an unmanageably large number of 4.25 Of the projects examined in detail by the partner nations. However, a large number of National Audit Office, only EHlOl lacked a system participants was a feature of the NFRSO project from prime contractor. The Department are seeking to which the United Kingdom has recently withdrawn. appoint a prime contractor for the EHlOl Royal Navy Indicative of current policy are the MLRSIII project, helicopter system who will be responsible for where a nation’s application to join has been rejected integrating the mission systems into the air vehicle because there were already sufficient partners; and supplied by the Anglo-Italian consortium. The TRIGAT, where two classes of participant have been National Audit Office noted that since Italy has distinguised - pilot nations and associate nations - decided not to follow this approach, the Department with the latter having only a limited role in have adopted a national course of action. collaborative decision making. 4.26 For the COBRA project the United Kingdom have managed to extend the principle of prime International agreement on Procurement contractorship so that the consortium prime principles contractor is responsible for integration of national equipment falling outside the common programme. 4.31 In 1988 the Chief of Defence Procurement submitted a Paper to the Conference of National (e) status of prime contractor Armaments Directors seeking approval of the 4.27 In the Department’s view prime contractors principles discussed in paragraphs 4.12-4.30. In April should as far as possible be “real” companies rather 1989 the Conference of National Armaments Directors than trans-national consortia brought together for a endorsed these principles, apart from the proposed particular programme. For very large projects, where limits on the number of participating nations. This this may not be possible, the consortium company response represents a very large measure of should be vested with sufficient authority by its agreement by NATO nations to the United Kingdom’s parent companies to run the collaborative programme preferred approach to maximising value for money effectively. from defence equipment procurement.
22 MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS
Part 5: External audit arrangements
5.1 The management of a collaborative programme international committees and organisations that by an outside organisation or agency represents a oversee project offices, and so are able to participate considerable delegation by the Department of their in the management process and monitor progress and normal activities. However, the Department are as costs. Through that participation the Department accountable tu Parliament for the financial and value receive information on the projects and their for money aspects of their participation in management. Such information is available for collaborative projects as they are for national projects. examination by the National Audit Office under the provisions outlined in paragraph 5.2, as are, where 5.2 The Comptroller and Auditor General’s rights of appropriate, reports by the International Board of audit access under s.28 of the Exchequer and Audit Auditors for NATO. The Department have informed Departments Act 1866 and s.8 of the National Audit the National Audit Office that any reports on project Act 1983 extend only to the accounts and records activities made by the supreme audit institution of held by the Department. He has no statutory rights of the project office host nation will also be made access to the accounts and records held by those available to the National Audit Office. outside organisations or agencies which manage and control collaborative projects. Other than where the 5.5 As part of normal professional procedures for United Kingdom is host nation, the Department’s placing reliance upon the audit work of other external Internal Audit have no right of access and cannot audit bodies, the National Audit Office may cover these aspects in their reports. communicate directly with the body which has issued a report, in order, for example, to secure a full 5.3 There are three types of management understanding of the tests and enquiries which arrangements for collaborative projects: underlie its conclusions. -NATO Agencies: that is project offices which are legal entities under the NATO Charter, 5.6 In view of the increasing significance of accountable to the NATO Council and audited collaboration as a means of procuring defence by the International Board of Auditors for equipment, the National Audit Office have reviewed NATO. the audit access arrangements for collaborative projects. The supreme audit institutions of some other --International Project Offices: these are NATO countries have similarly reviewed their internationally staffed and attached to the arrangements. Defence Ministry of one of the partner nations but not subject to their direct instruction. Contracts are placed on behalf of such offices by 5.7 The National Audit Office recognise that the the host Defence Ministry. arrangements to be applied will depend upon the features and circumstances of programmes and will -Directly managed projects: that is bilateral or be for individual agreement in each case. As a general multilateral projects where the project office is rule the National Audit Office expect to obtain most an integral part of the lead nation’s Defence of the information they require from Departmental Ministry. files, supplemented as appropriate by information and assurances obtained directly or indirectly from the Most large collaborative projects fall to be International Board of Auditors for NATO or the host administered under NATO Agency or International nation supreme audit institution. A recent working Project Office arrangements. group drawn from NATO member states noted encouraging signs that the information obtained from Availability of information for external the International Board of Auditors for NATO was audit purposes becoming increasingly useful. However, the National Audit Office have concluded that, to extend the scope 5.4 The day to day management of collaborative and penetration of their examination on behalf of projects is thus undertaken by project offices which Parliament, they will usually need to have rights of are not under the direct control of the Department. direct access to the records of collaborative project However, the Department are represented on the offices. This would enable them to:
23 MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS
-access the primary records maintained by the the records of collaborative project offices. Against collaborative project offices rather than rely this background the National Audit Office have exclusively on secondary information held by agreed the following arrangements with the the Department; Department: -validate the accuracy, timeliness and [a) At an early stage the Department will completeness of information held by the supply the National Audit Office with copies of Department and used by them in their decisions draft Memoranda of Understanding for relating to particular projects; collaborative projects entered into by the United Kingdom which involve the establishment of a -obtain information directly from collaborative NATO Agency or an International Project Office. project office staff concerning, for example, practical aspects of administering the contracts (b) This will enable the National Audit Office and managing the project; and to offer comment on arrangements for external audit and for access to the Agency or Project -directly obtain information concerning any Office by national supreme audit institutions. major problems identified by the auditors appointed to undertake the financial audit of (c) As a general rule, external audit collaborative project offices, on whose work the arrangements will provide that the supreme National Audit Office place a measure of audit institution of the host nation - or the reliance. International Board of Auditors for NATO in the case of projects managed under NATO agency Discussions with the Department concerning arrangements - will, subject to appropriate audit access arrangements safeguards for the protection of certain categories of information, make available to other national 5.8 The National Audit Office have discussed with supreme audit institutions such information or the Department how their respective interests in assurances as they may require to fulfil their accountability to Parliament for collaborative responsibilities for the examination of national expenditure might be furthered. The Department are expenditure. concerned that, if not carefully managed and co- (d) In particular cases where it is agreed by the ordinated, direct access to project management bodies National Audit Office and the Department that by the National Audit Office and other supreme audit the National Audit Office require direct access institutions might place an excessive burden upon for the purposes of auditing the United Kingdom project management officials. They also emphasise contribution to the project, the Department will the importance of establishing one clear responsibility seek to negotiate with the other participants for external audit, rather than diffusing such appropriate provisions in the Memorandum of responsibility among a number of audit institutions. Understanding. And they point out that more information should be available to their Internal Audit service - and hence (a) Where such arrangements are agreed to be to the National Audit Office - in future. They are necessary, they will be based on the following negotiating, through the forum of a NATO Group, for principles: Internal Audit staff to extend their audit function to (i) By taking full account of the NATO agencies, possibly and also to collaborative information available to them on the projects managed independently of NATO, on a case- Department’s files, including that flowing by-case basis (subject always to the agreement of all from the pruposed improved arrangements the participating nations). for Internal Audit, and of information and assurances obtained from the institution 5.9 The National Audit Office acknowledge the with external audit responsibility for a weight of the considerations set out in paragraph 5.8. project management body, the National They agree with the Department that external audit Audit Office will minimise the occasions responsibility for collaborative project management upon which they visit overseas project bodies should normally rest with the supreme audit management bodies. institution of the host nation, or the International Board of Auditors for NATO in the case of NATO [ii) Where the National Audit Office Agencies. However, the National Audit Office draw a decide to visit an overseas project clear distinction between responsibility for external management body, visits will be conducted audit and the provision of audit access. Their view is in accordance with the procedures set out that, for the reasons set out in paragraph 5.7, they in the relevant Memorandum of would usually need to have direct access to Understanding, or agreed by the
24 international committee or organisation respective national administrations. This access was responsible for the oversight of the body. subject to a number of conditions, and was explicitly These procedures will include safeguards stated to be an exceptional measure, and without for the protection of certain categories of precedent for other programmes. information. [iii) In arranging such visits, the National 5.14 The National Audit Office have worked closely Audit Office will liaise with the institution with their counterparts in the other countries, and responsible for external audit of the body, with the International Board of Auditors for NATO, to which will take the lead in co-ordinating co-ordinate their requirements and undertake joint the visit with its own work and with visits visits to the Agency in Munich. The first joint visit by other national supreme audit took place successfully in October 1989 and the institutions, so as to minimise the burden results are reflected in the Comptroller and Auditor upon project management staff. Such General’s Memorandum to the Committee of Public arrangements have already operated Accounts on the European Fighter Aircraft. The successfully in the case of the EFA project National Audit Office see the exercise of access to the (paragraphs 5.12-5.14). EFA management Agency as of considerable importance in extending the scope and penetration of 5.10 The arrangements referred to in paragraph 5.9 their value for money audit of the Department’s will apply to future International Project Offices and administration of the EFA programme in the years to NATO Agencies. Where it is agreed by the National come. Audit Office and the Department that such arrangements are required in the case of an existing Access to COBRA and TRIGAT projects project, the Department will seek to negotiate these with the other participants, either by amending the 5.15 The National Audit Office have held relevant Memorandum of Understanding or by discussions with the supreme audit institutions of the securing the agreement of the management committee other participating nations, namely France and or organisation concerned. Germany, with a view to agreeing programmes of co-ordinated audit work on the COBRA and TRIGAT 5.11 Collaborative projects managed directly by projects. partner nations are all relatively small and are usually subject to audit examination by the supreme audit 5.16 In the case of COBRA, the three supreme audit institution of the host nation. For such projects the institutions have agreed that audit work at the National Audit Office are therefore content to rely International Project Office in Koblenz should be led upon the information held by the Department as by the supreme audit institution of the host nation supplemented by assurances from the supreme audit (the BundesrechnungshofJ, and allow for access by institution of the host nation. the staff of the National Audit Office and the French Cour des Comptes. For TRIGAT, the three supreme Access to the EFA project audit institutions have agreed that audit work at the International Project Office in Paris should be led by 5.12 As with all other aspects of a collaborative the Cow des Comptes and allow for access by the project, the audit arrangements have to be negotiated staff of the National Audit Office and the between all the participating Governments. This was Bundesrechnungshof. the case in the EFA Memorandum of Understanding. 5.17 The National Audit Office have informed the 5.13 The Defence Ministries of the United Kingdom, Department that they require access to the COBRA Italy, Spain and the Federal Republic of Germany and TRIGAT International Project Offices. The decided, in a side letter to the 1988 EFA Department have accepted that the National Audit Development Memorandum of Understanding, to give Office should have access and are seeking to negotiate their supreme audit institutions direct access to the appropriate arrangements, as outlined in paragraph NATO Agency for the purposes of auditing their 5.10, with other participants.
25 MINISTRY OF DEFENCE: COLLABCIRATIVE PROJECTS
Glossary
Glossary of Terms and Abbreviations
Anglo-French Three helicopters (Lynx, Puma, Gazelle) produced in collaboration with France. Helicopters
ASRAAM Advanced Short-Range Air-to-Air Missile.
COBRA Counter Battery Radar.
Costshare The proportion of total collaborative project cost borne by each partner nation’s defence procurement agency.
EFA European Fighter Aircraft.
EHlOl Military/civil helicopter programme.
Feasibility Study A study undertaken to assess in broad terms the feasibility of meeting a Staff Target, to identify alternative solutions and to provide detailed information for project definition studies and Staff Requirement purposes.
FH70 A 150mm Field Howitzer.
Firm price contract The amount to be paid is specified in the contract and is not subject to adjustment.
Fixed price contract The amount to be paid is specified in the contract and is subject to adjustment only for inflation.
Full Development An agreed programme of design engineering leading to establish the final design so that production may proceed.
Harrier GRW7 Short Take-Off and Vertical Landing offensive support aircraft
In-Service Support The provision of support services for an equipment once it has entered service.
Interoperability The ability of systems, units or forces to provide services to and accept services from other systems, units or forces and to use the services so exchanged to enable them to operate effectively together.
Maximum price contract Contract containing terms placing an absolute limit on the customer’s liability.
Memorandum of An international agreement which commits the collaborative partner nations to a Understanding stage of the procurement process, and defines the arrangements for that stage.
MILAN Anti-armour weapon.
MLRSI Multiple-Launch Rocket System Phase I
MLRSIII Multiple-Launch Rocket System Phase III.
IWRSO NATO Frigate Replacement for the 1990s.
26 MINISTRY OF DEFENCE: COLLABORATI”E PROJECTS
Prime contractor An industrial firm IX consortium, responsible for the co-ordination and integration of industrial work.
Project Definition An investigation, normally by Industry, of sufficient depth to explore areas of technical uncertainty in a Staff Requirement.
Sidewinder An air-to-air missile.
Staff Requirement A detailed statement describing the function and performance of a proposed new weapon system or equipment and the environment in which it is to operate.
Staff Target A statement expressing in broad terms the functions and desired performance of a new weapon system.
Standardisation The process of developing concepts, doctrines, procedures and designs to achieve and maintain the most effective levels of compatibility, interoperability, interchangeability and commonality in the fields of operations, administration and material.
Tornado Multi-role combat aircraft.
TRIGAT Third Generation Anti-Tank Guided Weapon.
Workshare The proportion of a collaborative project’s work that is carried out by each partner nation’s industry. MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS
Appendix 1
Collaborative Projects involving the United Kingdom as at 1 March 1989 bp;:);,;;;,,,,!;,I :‘:,,:;.,>,; ,,;’ ; ‘: y : ., ;:y ,i i ‘<‘; :~“” - ” .’ ‘Other Partici~a~~~~~~~~~~~~~~‘~;‘/ ,i <‘” , ,, _,,_., _ _*,, .~ .: ..,I, ,: j IT:( ,; ,:,~ f :’ ,:;~;!;: Project\z:* r.,.. l,i.: 2: ,, In production or in service
Naval Equipment: Sea Gnat Decoy System Denmark, United States Barra Sonobuoys Australia
Land Equipment: FH70 Howitzer Federal Republic of Germany, Italy M483Al Artillery Shell Netherlands, United States Scorpion Reconnaissance Vehicle Belgium Multiple-Launch Rocket System Phase 1 France, Federal Republic of Germany, Italy, United States (MLRSI)
Missiles: Martel Air-to-Surface France Sidewinder Air-to-Air Federal Republic of Germany, Italy, Norway, United States Milan Anti-Tank (including improvements) France, Federal Republic of Germany
Air Systems: Jaw- France LF Puma I France
Federal Republic of Germany, Italy United States Joint Tactical Information Distribution United States system
Other Equipment: Midge Drone Canada, Federal Republic of Germany In project definition or full development
Naval Equipment: NATO Frigate Replacement for the 1990s Canada, France, Federal Republic of Germany, Italy, (NFRSOJ’ - Netherlands, Spain, United States NATO Improved Link 11 Canada, France, Federal Republic of Germany, Italy, Netherlands, Spain, United States
Land Equipment: COBRA (Counter Battery Radar) France, Federal Republic of Germany Multiple-Launch Rocket System France, Federal Republic of Germany, United States Phase III (MLRSIII)
28 MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS
Missiles: TRIGAT (Third Generation Anti-Tank France, Federal Republic of Germany Guided Weapon) Advanced Short-Range Air-to-Air Missile Federal Republic of Germany, Norway (ASRAAM) Family of Anti-Air Missile Systems France, Italy, Spain
Air Systems: European Fighter Aircraft (EFA) Federal Republic of Germany, Italy, Spain EHlOl Helicopter Italy RTM322 Helicopter Engine France
Other Equipment: Universal Modem for Satellite United States Communications
In feasibility study or earlier stages
Naval Equipment: Ships Low-Cost Inertial Navigation System Canada, Netherlands, Spain Talisman - Surface Ship Torpedo Defence United States system
Missiles: Modular Stand-Off Weapons’ Federal Republic of Germany, Italy, Spain, United States NATO Anti-Air Warfare System’ Canada, Federal Republic of Germany, Netherlands, Spain, United States Medium Range Surface-to-Air Missile’ France, Federal Republic of Germany, Italy, Netherlands, Norway, Spain
Air Systems: Airborne Radar Demonstrator System France, United States A129 Light Attack Helicopter2 Italy
Other Equipment: NATO Identification System (NIS) Belgium, Canada, Denmark, France, Federal Republic of Information Exchange Germany, Greece, Italy, Spain, Turkey, United States NIS Question & Answer Component France, Federal Republic of Germany, Italy, United States Development Ada Computer Language Project Support Canada, Denmark, France, Federal Republic of Germany, Environment Italy, Netherlands, Norway, Spain, United States Multifunctional Information Distribution Canada, France, Federal Republic of Germany, Italy, Spain, System1 United States Tactical Communications Systems for the Canada, Frame, Federal Republic of Germany, Italy, Land Combat Zone post 2000 Netherlands, Norway, Spain, United States
29 MINISTRY OF DEFENCE: COLIABORATI”E PRO,ECTS
Other Equipment contd: Allied Data Systems Interoperabillty France, Federal Republic of Germany, Netherlands, Agency NATO Procedural Interoperablity Norway, Spain, United States Standards
Notes: 1. The United Kingdom withdrew from these projects during 1989/90.
2. This project was terminated in 1990.
Source: Statements on the Defence Estimates 1989 and 1990.
30 I Appendix 2
Background information on the projects examined by the National Audit Office
The National Audit Office’s main sample, drawn from projects in project definition, full development, and production, was composed of the following ten projects.
Project definition ASRAAM: Advanced Short-Range Air-to-Air Missile MLRSIII: Multiple Launch Rocket System Phase III NFRSO: NATO Frigate Replacement for the 1990s
Full development COBRA: Counter Battery Radar EFA: European Fighter Aircraft EHlOl: Anti-Submarine Warfare Helicopter TRIGAT: Third Generation Anti-Tank Guided Weapon
Production Harrier GR5/7: Short Take-Off Vertical Landing offensive support aircraft MLRSI: Multiple Launch Rocket System Phase I Tornado: Multi-role combat aircraft
Detailed histories of these ten projects follow. Costs, which are stated unless the information is confidential, are at average 89-90 outturn prices. In addition the National Audit Office examined the In-Service Support arrangements for four other projects. These were:
FH70: a 155mm howitzer, produced in collaboration with the Federal Republic of Germany and Italy.
Sidewinder: an air-to-air missile which was developed by the United States and was also co-produced by a Euroconsortium under licence.
Milan: a bi-lateral development by France and the Federal Republic of Germany which was manufactured in the United Kingdom under licence.
The Anglo-French Helicopters [Lynx, Puma, Gazelle) produced in collaboration with France.
31 MINISTRY OF DEFENCE: COLLABORATIVEPROJECTS !
ASRAAM: Advanced Short-Range Air-to-Air Missile
Partners Current Stage (for Project Definition) Federal Republic of Germany Between Project Definition and Full Development NlWWay United Kingdom Canada (not full participant]
Description
1. ASRAAM is being developed to arm NATO air defence, air superiority and offensive support aircraft types.
2. The ASRAAM project is part of a “Family of Weapons”, comprising the short-range ASRAAM missile developed in Europe and the medium-range AMRAAM missile, which has been developed by the United States. Each development party is bound by the Family of Weapons Memorandum of Understanding not to engage in parallel development of a weapon similar to that being developed by the other; and each has the right to procure, by import or licensed production, the missile developed by the other, without payment of Research and Development levies. France has observer status in the Family of Weapons Memorandum of Understanding, but decided not to participate in the ASRAAM project. Project Timetable
3. Pm-Feasibility studies commenced in 1979 in the United Kingdom and the Federal Republic of Germany, and a joint Feasibility Study was then undertaken between these two nations. Norway joined at the start of Project Definition in 1985 and Canada was also a limited participant from this time. Germany withdrew in 1989, Canada at the beginning of 1990 and Norway in the Spring of 1990.
4. The original project definition work demonstrated difficulties in producing a missile configuration which would satisfy adequately the requirement. Further definition and risk reduction was carried out and this resulted in a missile design and configuration which was acceptable. The outcome of this work is still under consideration and the project is currently between the project definition and full development stages.
5. The In-Service Date has slipped by several years due to a number of difficulties including resolution of configuration issues, the impact of national approval processes, and weakness of the international industrial management.
6. Estimated United Kingdom costs are fXX million for development and EXX million for production
Management structure
7. Implementation of the Family of Weapons Memorandum of Understanding is overseen by a Program Steering Committee which covers both ASRAAM and AMRAAM. Within the ASRAAM project the European Steering Committee, now known as ASRAAM Steering Committee, provides overall supervision and guidance. For most of project definition the defence procurement agency of the Federal Republic of Germany acted as the executive agency and hosted an ASRAAM Joint Project Office. In July 1988, following the appointment of British Aerospace [Dynamics) as prime contractor, it was agreed that the United Kingdom should take over as Lead Nation and would host the International Project Office.
Industrial structure
8. At the outset of project definition it proved impossible to appoint a single company as prime contractor as neither the United Kingdom’s nor West Germany’s nominated company would accept subcontract status with respect to the other. A consur~ium was therefore set up, which in prncticc did not have sufficient authority to
32 MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS provide strong independent management. Towards the end of project definition, the two national companies were invited to compete for the role of prime contractor. The United Kingdom contractor (British Aerospace (Dynamics)) won this competition and assumed the role of prime contractor.
Contractual arrangements
9. The prime contract for project definition was awarded to the consortium of nominated companies on a maximum price basis. Subcontract competition was limited.
Cost share and work share
10. When Norway joined the programme at the start of Project Definition the cost and work shares were set at United Kingdom 45 per cent, Federal Republic of Germany 45 per cent, Norway 10 per cent, which were in line with forecast production offtakes. Forecast offtake for all countries has changed during the course of the programme. Before the withdrawal of the Federal Republic of Germany, United Kingdom forecast offtake stood at 36 per cent. Following the withdrawal of Germany, Canada, and Norway, the United Kingdom is pursuing a national programme having regard to the Family of Weapons Memorandum of Understanding.
Interoperability
11. ASRAAM is designed to be capable of being launched from a wide variety of aircraft types and will make a significant contribution to the ability of NATO air forces to arm their aircraft from other nations’ weapon stocks.
In-service support
12. The equipment is not yet in service
Withdrawals
13. As is usual, commitments to the project were limited to one stage at a time. The ASRAAM project had completed project definition and a full development contract was being negotiated when the Federal Republic of Germany and other nations withdrew from the Project.
33 MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS
MLRSIII: Multiple Launch Rocket System Phase III
Partners Current Stage Federal Republic of Germany United States System Demonstration Substage France (roughly equates to late Project Definition] United Kingdom United States
Description
1. MLRSIB consists of rockets dispensing terminally guided anti-armour submunitions, to be fired from the MLRS self-propelled launcher loader system currently in production.
Project Timetable
2. The Component Demonstration Substage contract was awarded in 1984 following international source selection among three competing proposals. The System Demonstration Substage commenced in 1989. Since the inception of the project the In-Service Date has slipped by three years due to a change in the perceived threat and to technical difficulties. The equipment is expected to enter service with the British Army in the late 1990s. costs
3. Estimated United Kingdom costs are El75 million for development and %300 million for production. The project was agreed on the basis that a purely national development was unaffordable.
Management structure
4. There is an international joint steering committee. The United States is the Pilot Nation, and major customer. The United States Army Missile Command is the contractual agency. The European nations may satisfy their production requirements by European co-production.
Industrial structure
5. The international consortium prime contractor (United Kingdom member Thorn-EMI) was formed for this project. The performance of the prime contractor has, in the past, given the Department cause for concern. However, following intervention by the Department, the performance of the prime contractor has improved significantly. Contractual arrangements
6. The most recent contract for the Systems Demonstration Substage is incentivised with a taut milestone i arrangement. It also has a maximum price, even though maximum prices are not normally used by the United States Department of Defense for this type of contract. Provision has been made for competition at the subsequent production stage between the development contractor and other possible producers.
Cost share and work share
7. Cost and work share has been split in proportion to expected offtake, which for the United Kingdom amounts to 20 per cent of total production. Work share is also designed to encourage technology transfer between national industries; early difficulties having been resolved, the United Kingdom is now expected tu benefit from this.
Interoperability
8. The rockets held by each nation will be capable of being fired by other nations’ MLRS launchers.
34 MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS
In-service support
9. MLRSIII requires no maintenance, but common in-service stockpile surveillance arrangements will be made.
Withdrawals
10. There have been no withdrawals from the project. The Memorandum of Understanding for the development phase of MLRSIII provides that a nation withdrawing during a development stage (i.e Component Demonstration Sub-Stage, System Demonstration Sub-Stage, Maturation) shall give 270 days notice of its intention. It must bear its share of the development costs incurred up to the effective date of the termination or completion of a stage or substage, whichever occurs sooner.
35 MINISTRY OF DEFENCE COLLABORATIVE PROJECTS
NFR 90: NATO Frigate Replacement for the 1990s
Partners Project Stage Canada Project Definition France Federal Republic of Germany Italy Netherlands Spain United Kingdom United States
Description
1. The United Kingdom requires a new frigate towards the end of the 1990s to replace the Type 42 destroyer, capable of deploying the Support Defence Missile System at sea and thereby fulfilling the Royal Navy’s anti-air warfare role. The NFRQO project, intended to meet this requirement, is the first significant naval collaborative project that the United Kingdom has participated in. As each country has a different overall requirement, the project was to establish a baseline ship, onto which individual nations could add a number of variants.
2. The operational requirement for the ship requires it to carry the Support Defence Missile System, for which there were two competing projects, the so-called NATO AAW System and the Family of Anti-Air Missile Systems, both at the Feasibility Study stage in 1989. The United Kingdom entered NFRSO project definition on the understanding that it could withdraw at the first Baseline Review if there appeared to be insufficient alignment between the frigate and the missile systems. It subsequently exercised this right to withdraw in September 1989. Since then, following the completion of their Feasibility Studies, a decision has been taken to withdraw from the NATO AAW system programme and to negotiate joining the project definition phase for the Support Defence Missile System component of the collaborative Family of Anti-Air Missile Systems project for the frigate which it eventually procures. It is currently exploring possibilities for collaboration in such procurement.
Project Timetable
3. The Memorandum of Understanding for the feasibility study was signed in 1984. Feasibility work was completed in late 1985, but it then took over two years to finalise a common Staff Requirement and agree a Memorandum of Understanding for project definition. A further year passed before a contract for project definition work was signed in January 1989. Difficulties in reaching unanimous agreement among all the nations involved in the project contributed to this delay. Following the withdrawal of the United Kingdom in 1989 several other nations also withdrew and the project was cancelled in 1990.
4. The United Kingdom withdrew from the project having spent a total of E5 million, including its share of the cost of the Feasibility Study.
Management structure
5. The project was managed by an eight-nation international project office located in the Federal Republic of Germany and subject to oversight by an international joint steering committee.
Industrial structure
6. An international consortium was established as prime contractor, comprising separate consortia or individual contractors from each of the eight participating nations. United Kingdom industry was represented by a consortium of nine companies. In all, some 44 companies were involved.
36 Contractual arrangements
7. The project definition contract was awarded without competition and provided for a fixed price, with 55 per cent of the contract value linked to performance milestones. Project definition work was designed so as to optimise the scope for competition at later stages. The United Kingdom attempted to select its nominated contractor by competition, but out of over 20 companies invited to bid, there was only one response, from a consortium of nine contractors.
Cost share and work share
8. For joint project definition work, cost and work was to be shared equally among the participating nations. The United Kingdom’s stake was therefore 12.5 per cent, compared with an expected production offtake of 20 per cent. It was not clear how much collaboration there would be during full development.
Interoperability
9. Significant interoperability was expected to be achieved by the commonality of weapons related to NFR 90, provided these were reasonably well aligned.
In-service support
10. An Integrated Logistic Support System was planned.
Withdrawals
11. The Memorandum of Understanding provided for withdrawal, without further payment, at a review point part-way through project definition. As a result, the United Kingdom did not incur any penalty on deciding to withdraw.
37 MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS
COBRA: Counter Battery Radar
Partners Current Stage France Full Development Federal Republic of Germany United Kingdom
Description
1. COBRA is a long range weapon locating radar which detects shells and rockets in flight and computes the firing location.
Project Timetable
2. There was no formal feasibility study. After nationally funded preliminary work the participants agreed to award three contracts for parallel project definition studies in 1966. The resulting competing proposals for full development were subjected to joint assessment and the winner was selected unanimously. The full development contract was awarded in 1990. The In-Service Date has slipped by several years from that identified prior to project definition. A contributory factor was the time taken to negotiate the full development contract. The equipment is expected to enter service with the British Army in the late 1990s. costs
3. Estimated United Kingdom costs are fXX million for development and fXX million for production.
Management structure
4. For project definition a Trilateral Steering Committee directly controlled the three consortia undertaking the work. For full development a Trilateral Steering Committee will control the consortium through a trilateral project office in the Federal Republic of Germany.
Industrial structure
6. The competitively selected consortium (United Kingdom member Thorn-EMI) is responsible for the common programme and the integration of national equipment.
Contractual arrangements
6. The full development contract is fixed-priced and links payments to performance milestones. On entering full development, the outstanding level of technical risk was greater than the Department would have tolerated for a national project. There may therefore be a danger that the fixed price agreed includes a large contingency element, although the competitive fixed price militates against any excessive contingencies.
7. There is provision for competition at the subsequent production stage between the development contractor and other possible producers.
Cost share and work share
8. Cost and work share for project definition were split equally; for full development they are roughly equivalent to expected offtake proportions, which in the case of the United Kingdom is 18 per cent. The Department considered the possibility, which would have been acceptable to its partners, of taking 33 per cent of total work share. United Kingdom industry pressed for the higher percentage because it would secure more high technology work, but the Department concluded that this factor did not outweigh the importance of minimising equipment procurement costs. The Department considered 20 per cent to be the lowest practicable participation figure.
36 Interoperability
9. The United Kingdom’s COBRA units will supply information to the British Army’s communications network (Battlefield Artillery Target Engagement System). Due to the standardisation of message sets and the existence of interoperability programmes between national communications networks, targetting information acquired by each nation’s COBRA units can be transmitted to adjacent forces of allied nations.
In-service support
10. The equipment is not yet in service.
Withdrawals
11. There have been no withdrawals from the project. The Memorandum of Understanding for full development contains terms which require a partner nation to meet all costs arising as a result of withdrawal but that the cost liability will not exceed the nation’s total commitment for full development.
39 EFA: European Fighter Aircraft
Partners Current Stage Federal Republic of Germany Full Development Italy Spain United Kingdom
Description
1. EFA is an advanced agile fighter aircraft, intended to enter service in the second half of the 1990s.
Project Timetable
2. The Governments of the United Kingdom, the Federal Republic of Germany, Italy and Spain agreed in 1985 to proceed with development. France, which had been involved in the early studies on EFA dropped out of the programme at this stage. Following a project definition and risk reduction phase, the partners approved full development in November 1988. costs
3. Estimated United Kingdom costs are f2,337 million for development and fXX million for production. There has been no increase in cost estimates so far other than for inflation.
Management structure
4. A NATO Agency, NEFMA, has been established to manage the project.
Industrial structure
5. The partner nations have designated two international consortia as prime contractors to carry out EFA development - one for the airframe, general and avionics equipments, and weapon systems, and one for the engine. To limit the risk in not having a single prime contractor, Eurofighter and Eurojet (the EFA prime contractors) have agreed to an Interface Control Document which defines the technical interface between the airframe and the engine. Both companies have also entered into an Associated Contractors agreement which defines their commercial relationship.
Contractual arrangements
8. The development contracts, although termed “maximum price”, do not in fact place an absolute limit on the partner nations’ liability, although they do provide contractors with strong incentives to minimise costs. Contractual payments are linked to performance milestones.
7. The EFA airframe and engine development prime contracts were awarded without competition. There was extensive competition at sub-contract level for equipments. The development contracts provide for competition at the subsequent production stage between the development contractors and other possible production contractors.
40 Cost share and work share
8. United Kingdom cost and work shares are 33 per cent.
Interoperability
9. EFA is expected to achieve high interoperability in terms of compatibility with command and control systems, ability to be supported from a wide range of operating bases, and ability to carry weapons from many nations’ inventories.
In-service support
10. The equipment is not yet in service.
Withdrawals
11. The Memorandum of Understanding for full development requires a nation withdrawing from the project to meet all the costs arising as a result of withdrawal but that the cost liability will not exceed the nation’s total commitment for full development.
41 EHlOl: Anti-Submarine Warfare Helicopter
Partners Current Stage Italy Full Development United Kingdom Description
1. EHlOl is an integrated civil/military programme. Three variants are planned to meet: [a) United Kingdom/Italian anti-submarine warfare requirements [replacing the Royal Navy’s Sea King li helicopters); (b) civil market requirements; (c] the need for a military utility helicopter. Project Timetable
2. Feasibility study work started in 1975, and full development commenced in 1984. The start of full development was delayed by around 6 months due to extensive negotiations with Italy on cost and worksharing and delay in funding approval on the Italian side. The helicopter is expected to enter service with the Royal Navy in the mid 1990s. costs
3. Estimated United Kingdom costs are fl,lOO million for development and IFXX million for production. The project was entered into after the Department had concluded, from earlier studies, that a purely national design was u&fordable. Development costs have grown by 33 per cent, due in part to additional mission integration work (see paragraph 7).
Management structure
4. Procurement of the naval variant of the EHlOl is overseen by an International Project Team, attached to the United Kingdom Ministry of Defence. The Team is responsible to a Management Committee.
Industrial structure
5. EHlOl has no overall system prime contractor. The air vehicle project is controlled by the two leading firms - Westland and Agusta - through a management company (EH Industries).
6. The Department are concerned that the parent companies for the EHlOl have not given the consortium the authority and resources needed to manage the programme efficiently. The companies have not implemented the Chief of Defence Procurement’s suggestion that the consortium should appoint a Chief Executive with overall responsibility for the Project. They have however set up a small management group of Directors from Westlands and Agusta to exercise better control over the activities of the parent companies and, as a result, the Department have seen signs of improvement.
7. The Department are currently seeking to appoint a prime contractor for the EHlOl Royal Navy helicopter system who will be responsible for integrating the mission systems into the airframe supplied by the consortium. This is a national initiative: the Italian Defence Ministry have chosen to improve performance progressively in service rather than adopt the system integration approach.
Contractual arrangements
8. The Department were unable at the outset to negotiate a maximum price with the United Kingdom contractor (W&land], although Italy had succeeded in agreeing a maximum price with the Italian contractor (Agusta). However Westland accepted incentive contractual terms based on a target price, with provision for the company to bear a share of any cost overruns. They finally negotiated a maximum price in 1990, when
42 MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS
development was well advanced and cost forecasts for the project had shown some growth over original estimates. Westland and Agusta were selected without competition and sub-contract competition is limited.
9. The Department have told the Committee of Public Accounts that they would not now accept arrangements in a new contract of this size which did not place a limit on the Department’s liability.
Cost share and work share
10. The United Kingdom’s share of the maximum expected production offtake (66 per cent] exceeds its development cost and work share (50 per cent) due to an increase in forecast offtake. As a result the Department now expect to take two thirds of the production, while meeting only one half of the development costs. Italy has not sought to renegotiate the development cost shares. Similarly, the Department have not sought to adjust the production work share plans, which continue to be based on a 50:50 division of work. This has been accepted by the Department because of its linkage to the development cost share issue and because of industrial agreements between Westland and its Italian partner Agusta. These agreements cover the entire civil/military EHlOl programme, and provide that any adjustment of military EHlOl production work sharing arrangements would have to be balanced elsewhere in the work done by the two companies - accordingly there was no prospect of any industrial benefit from changing the military EHlOl production work share arrangements.
Interoperability
11. Maximising commonality between the air vehicle variants was stated as a major objective of the programme. However, the United Kingdom and Italian anti-submarine warfare helicopter systems will use different national sensors and weapons and operate in different theatres: the scope for interoperability between them is therefore limited.
In-service support
12. Plans for in-service support have not been formulated yet, but the Department will aim for common arrangements.
Withdrawals
13. There have been no withdrawals from the project. The Memorandum of Understanding includes provisions for a nation to withdraw, without paying compensation, at a specified review point in full development. TRIGAT: Third Generation Anti-Tank Guided Weapon
Partners Current Stage Pilot Nations (Medium Range and Long Range) Full Development FlXIlce Federal Republic of Germany United Kingdom
Associate Nations (Medium Range only) Belgium Netherlands
Description
1. Two versions are in development: a medium range, man-portable, system to replace MILAN in the mid-1990s and a long range version, fired from a vehicle or helicopter platform, to replace Swingfire and TOW in the late 1990s.
Project Timetable
2. The initial Memorandum of Understanding was signed in October 1976. The project progressed through various study and evaluation phases, eventually emerging from project definition in January 1986. Full Development did not commence until September 1988.
3. Medium Range TRIGAT is expected to enter service in the mid-1999s; the Long Range version in the late 1990s. The In-Service Dates for both versions have slipped by several years, mainly due to extended negotiations with industry on contract terms. Reconciliation of national procurement practices contributed to the delay, costs
4. Estimated United Kingdom costs for development and production are El300 million for medium range TRIGAT and El,900 million for long range TRIGAT. Estimated development costs have increased slightly since original approval.
Management structure
5. The management of the project is the responsibility of an international project office situated in Paris. The office is on French Defence Ministry property but operates independently, reporting to an international joint steering committee. In an attempt to limit the additional bureaucracy and cost associated with a large number of partners, the management arrangements provide for two classes of participant: pilot (France, the Federal Republic of Germany and United Kingdom) and associate (Belgium and Netherlands). The associate nations have a limited role in decision making.
Industrial structure
6. The prime contractor is a consortium comprising one major contractor from each pilot nation (United Kingdom member British Aerospace [Dynamics]). Associate nations’ industries will be involved as sub- contractors. Arrangements have been made to prevent their involvement increasing the overall cost of the project - work allocated to them is required to be priced no higher than the prices already agreed with pilot nations’ industries.
Contractual arrangements
7. The development contracts provide for fixed prices and the linking of interim payments to performance milestones. On entering full development the outstanding levels of technical risk were greater than the United Kingdom would normally expect for a purely national project.
44 MINISTRY OF DEFENCE: COLLABORATIVE PRO@CTS
8. The prime co&actor was appointed without competition. Thirty per cent of sub-contracts have been awarded competitively and the main development contracts provide for competition at the production stage.
Cost share and work share
9. In the development phase of Long Range TRIGAT the United Kingdom’s cost and work share is 33.3 per cent. At the time of the signature of the development Memorandum of Understanding in 1988 the United Kingdom’s production offtake represented 20 per cent of the total production declared by the partners. The overall production quantities will need to be reconfirmed and a further Memorandum of Understanding signed before production can begin. A change in other nations production offtake will alter the United Kingdom’s percentage share. In the negotiation of the production Memorandum of Understanding the United Kingdom will seek to have its cost and work-share in proportion to its production offtake. For the smaller Medium Range version the United Kingdom cost and work share percentage is estimated at 30.3 per cent and the production offtake at 36 per cent.
Interoperability
10. The weapon system will be common to all participating nations. This should allow the issue of missiles and provision of repair facilities within these nations to be optimised.
In-service support
11. The equipment is not yet in service.
Withdrawals
12. There have been no withdrawals from the project. For Long Range TRIGAT a withdrawing nation will bear its share of development phase costs up to the date of effective withdrawal plus any identifiable charges upon its national contractors and sub-contractors from the transfer of work. For Medium Range, a withdrawing nation will bear its share of costs up to the date of effective withdrawal, plus any identifiable charges resulting from the transfer of work, up to the total amount the withdrawing nation would have contributed during the development phase.
45 MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS
HARRIER GRW’: Short Take-Off and Vertical Landing offensive support aircraft
Partners Current Stage United Kingdom In service, production continuing United States
Description
1. The Harrier GR5 is the Royal Air Force version of the Harrier AV8B aircraft on order for the United States Marine Corps. Harrier GR7 is the night-capable version of Harrier GR5.
Project Timetable
2. The Memorandum of Understanding between the two nations was signed in July 1981. Harrier GR5 aircraft are now in service with the Royal Air Force.
3. The Harrier GR5 programme was delayed by twelve months due to the loss of an early production aircraft before delivery to the Royal Air Force, and to problems with the inclusion of certain United Kingdom equipments.
costs
4. Estimated total United Kingdom development and production costs are EXX million.
Management structure
5. There is no lead nation or International Project Agency but contact is maintained between the two governments’ project offices.
Industrial structure
6. British Aerospace is the United Kingdom prime contractor. All United Kingdom production contracts are placed on British Aerospace; they subcontract work to the American firm McDonnell Douglas, who build major component parts of the Harrier GR5/7. Similarly McDonnell Douglas subcontract major component elements of the AV8B to British Aerospace.
Contractual arrangements
7. The main contractual arrangements are based on industrial agreements worked out between McDonnell Douglas and British Aerospace. For development and the first production order, target cost, incentivised, maximum price contracts were awarded. The second contract was fixed price and the third contract has not yet been finally negotiated. There was no competition at prime contractor level, and the degree of subcontract competition is unknown.
Cost and work share
8. Cost shares are proportionate to production offtake. There is no inter-governmental agreement on Harrier GR5/7 production work share, which is governed by industrial arrangements between McDonnell Douglas and British Aerospace. However, the Department have calculated that the United Kingdom’s work share substantially exceeds its production offtake.
Interoperability
9. The Department does not monitor interoperability, so the degree of interoperability achieved for the Harrier GR5 is not fully known. Interoperability has been reduced as a result of some United States equipments being replaced, for industrial reasons, with United Kingdom equipments.
46 MINISTRY OF DEFENCE: COLLABORATIVE PRO@CTS
In-service support
10. In-service support for the Harrier GR5 is provided on a national, as opposed to collaborative, basis although United States suppliers are used. Difficulties have been experienced with some United States suppliers concerning Intellectual Property Rights. In addition the Royal Air Force has inherited a significant number of modifications it did not necessarily need, which have led to in-service difficulties.
11. Information on aircraft defects is shared, although it has sometimes been difficult to apply the information gained from the United States to United Kingdom experience.
Withdrawals
12. The Memorandum of Understanding does not provide for the withdrawing nation to compensate its partner for any consequent increase in the partner’s costs.
, 47 MLRS I: Multiple Launch Rocket System Phase I
Partners Current Stage (for European co-production) Federal Republic of Germany European co-production France Italy United Kingdom
Description
1. Phase I of the MLRS weapon system consists of the self-propelled loader launcher and bomblet-dispensing rockets. The equipment was developed in the United States and is in production there and in Europe. Project Timetable
2. The European co-production nations were signatories to the 1979 Basic Memorandum of Understanding, but all development took place in the United States. In 1985 it was agreed that the European nations would jointly produce MLRSI, rather than directly purchase the system from the United States. The United Kingdom has procured a small number of equipments from United States production lines for training purposes.
3. Lengthy work share negotiations significantly extended the time taken to determine collaborative arrangements for production. The equipment will enter service with the British Army in the early 1990s.
costs I
4. Total United Kingdom costs are, at f550 million, within original estimates. Although the Department were ! signatories to the Development Memorandum of Understanding, their direct contributions to development costs were modest. Development levy is also paid to the United States developer by the co-producing nations.
Management structure
5. The Federal Republic of Germany is the lead nation for European co-production. The German Defence Ministry acts as executive agency for the project, which is subject to oversight by an international joint steering committee. In 1990 an International Project Office was established in Germany to continue the procurement of MLRS Phase I and to manage the eventual procurement of Phases II and III from European collaborative producers.
Industrial structure
6. The prime contractor for European co-production is an international consortium formed for the project (United Kingdom member Hunting Engineering]. The performance of the prime contractor has given the Department some cause for concern.
Contractual arrangements
7. A maximum price was agreed for the prime contract, which was awarded to a consortium of nominated companies. Some 95 per cent of subcontract work was subject to competitive tender, although the proportion of work actually awarded on a competitive basis was less due to work share considerations.
Cost share and work share
8. In general, the partner nations’ cost and workshares match their expected offtake, which for the United Kingdom amounts to 26.5 per cent of production. However, an exception to this arose when the Department insisted upon dual-sourcing of one of the work packages, to secure a portion of the package for United Kingdom industry rather than other lower technology work. The additional cost, which the other partner nations refused to share, was f18.8 million. The Department decided to contribute f9.4 million to the cost of
48 MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS the facilities needed by the United Kingdom supplier to do the work. The supplier bore the remainder of the additional cost. The Department judged that the long-term industrial benefits made their contribution a sound investment.
Interoperability
9. There are only minor variations between the equipments to be fielded by the services of the partner nations. Each nation’s launchers will be able to fire other nations’ ammunition. In-service support
10. The NATO Maintenance and Supply Organisation will be used, both by the European partners and by the United States Army for their European based fleet.
Withdrawals
11. The Memorandum of Understanding provides that a withdrawing nation will bear the cost accruing to the other participants as a direct result of its withdrawal.
49 MINISTRY OF DEFENCE COLLABORATIVE PROJECTS
TORNADO: Multi-Role Combat Aircraft
Partners Current Stage Federal Republic of Germany In service, production continuing Italy United Kingdom
Description of the equipment
1. Tornado is produced in two variants. The Interdictor Strike variant has been procured by all three partners to carry out a variety of attack roles. Additionally the Luftwaffe has selected an electronic combat and reconnaissance Tornado based on a modified Interdictor Strike design. The other variant is the Air Defence Variant which was designed as a long range interceptor for the United Kingdom.
Project Timetable
2. The first Memorandum of Understanding was signed in July 1968. Definition and development work followed, culminating in July 1976 in the initial production contract. The first Royal Air Force squadron was equipped with Tornados in 1982. The United Kingdom In-Service Dates for the Interdictor Strike and Air Defence Variant Tornados were respectively three and two years behind target. costs
3. Estimated total United Kingdom costs are f11.700 million. Development costs, covering both the Interdictor Stike and Air Defence Variant Tornado, are 44 per cent above original estimates in real terms: however estimated production expenditure in real terms is 18 per cent below original estimates. [These figures exclude the United Kingdom’s Foxhunter radar expenditure which is a purely national project.)
Management structure
4. The project is managed by an international agency set up under the NATO charter: the NATO Multi-Role Combat Aircraft Development and Production Management Organisation.
Industrial structure
5. There were three development prime contractors: the international consortium Panavia (United Kingdom member British Aerospace (Military Aircraft)): the international consortium Turbo Union (United Kingdom member Rolls Royce]; and the German firm Mauser. From the second production batch onwards, Pan&a has acted as production prime contractor.
Contractual arrangements
6. Of the original prime contractors, only Turbo Union was selected by competition. Development was carried out using a mixture of cost plus, fixed price and incentivised price contracts. Current production contracts are placed on a maximum price basis, subject to subsequent agreement of firm prices.
Cost and work share
7. Initially it was agreed that each government would meet the cost of work carried out in its own country, and that the common work would be shared in relation to expected offtake. However in practice imbalances emerged, with the United Kingdom paying less than its agreed share of costs, and obtaining a correspondingly reduced share of work. These imbalances are currently being rectified by United Kingdom industry doing work for the Federal Republic of Germany and Italy.
8. When agreeing the arrangements to rectify these historic imbalances, the partners also agreed that in future each nation would pay for its own work regardless of location. Thus no further cost share imbalances can arise: however further work share imbalances have arisen, amounting to a deficit of some DM1200 million for
50 the United Kingdom (at 1990 Tornado budget exchange rates this equates to some f400 million). Panavia is formulating proposals to correct this imbalance but it is too early to estimate how much work can be transferred. The obstacle to correction is the extra cost of transferring work to United Kingdom industry. The Department’s view is that while equitable work share is an important goal, the overriding consideration must be the minimisation of cost.
Interoperability
9. The degree of interoperability gained for each version of the Tornado is not known. However the National Audit Office noted that in one instance West German and United Kingdom Tornados had different weapons carrying equipment for the same weapon which necessitated both types of equipment being held on airbases to ensure interoperability.
In-service support
10. The partner nations made arrangements for the consolidated procurement of spares, but the disadvantage of larger holding levels due to long lead times outweighed the price advantage and as a result aggregated ordering has been discontinued. Stores are not held in common but there are mutual support arrangements whereby scarce items in one nation’s inventory can be quickly replenished from a partner’s,
Withdrawals
11. The Memorandum of Understanding provided a review point in full development at which nations could withdraw from the project without compensating partners for the consequent increase in their costs. If a nation withdraws during production, or reduces its offtake, it has to compensate its partners for any increases in their costs.
51 MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS
Appendix 3
(i) Structure and organisation of the Conference of National Armaments Directors
Conference of National Armaments Directors
Meetings at Ministerial and National Armaments Director level
Cadre Groups NATO Industrial Defence 7%Service Group Naval Air Force bY (e.g AC1313 on Advisory Group Research on Communications Armaments Armaments Armaments Acquisition Practices1 Group and Electronic Group Group Group Equipment I I
Sub-groups on equipment areas and individual projects
Source: Conference of National Armaments Directors Organisation Chart
52 MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS
(ii) Structure and organisation of the Independent European Programme Group
Independent European Programme Group
Meetings at Minister and National Armaments Director level
Harmonisation of Research and Technology Defence Economics Requirements and Oversight and Procedures of Equipment Projects
Source: National Audit Office’s analysis of the Group’s Activities
53 MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS
Appendix 4
SP70 Howitzer
Introduction
1. SP70 was designed as an armoured self-propelled howitzer. It was a trilateral project between the United Kingdom, the Federal Republic of Germany and Italy, with Germany having the role of Lead Nation. The project was considered a good candidate for collaboration, especially given the success of the earlier FH70 towed Howitzer project, on which the same three nations collaborated, and upon which the design of the SP70 ordnance was based.
Project history
2. Collaborative studies by the Federal Republic of Germany and the United Kingdom began in 1969. Italy joined the project in 1971, when an In Service Date of 1981 was set. Phase A development began in 1973. By this time the In Service Date had slipped to 1983.
3. In 1977 the Phase A development programme was suspended due to technical problems. There followed concept definition and feasibility study work which led to fresh technical proposals and a subsequent alteration in the workshare arrangements. Phase B development began in 1978 when the revised In Service Date was 1987.
4. Progress on Phase B development was slow, mainly due to the introduction of substantial modification programmes to werccme design problems. By 1984 the In Service Date had again slipped, this time to 1990. In early 1985 the Department decided to reduce funding of the project until the design problems had been assessed and international commitment to the project clarified. Proposals to improve international industrial management were rejected as inadequate by the partner nations, and the Federal Republic of Germany ceased its funding of the programme.
5. The nations subsequently reviewed the project and concluded that proposals for the completion of development should be requested from potential West German prime contractors, involving United Kingdom and Italian firms. However the response to this initiative was deemed inadequate, and the nations agreed in November 1986 to cancel the project. The Department’s total contribution to the programme was smne f88 million. The United Kingdom is now procuring the nationally developed ASSO. Italy and the Federal Republic of Germany have also opted for national rather than collaborative solutions.
Departmental analysis of the failure of the project
6. The Department reviewed the project to identify the factors which had contributed to its failure. These were found to include technical difficulties, weaknesses in United Kingdom procurement practice, and inadequacies in the collaborative arrangements used. The major problems experienced are detailed below.
(a] Inadequacies in the Collaborative arrangements 7. There was no single design and development authority such as an International Project Office, empowered with the responsibility and authority to control and direct work. Although the Federal Republic of Germany was nominated as the Lead Nation, her Programme Director lacked the necessary delegated authority.
8. Neither was there an industrial Prime Contractor for the project, and the lack of contractual links between the design agencies of the participating nations hampered industrial co-ordination. Furthermore the allocation
54 MWISTRY OF DEFENCE: COLLABORATIVE PROJECTS of the design and development to meet the workshare arrangements led to separate parts being developed in each country with insufficient attention being given to the performance of the total system.
[b) Weaknesses in United Kingdom procurement practices 9. In the United Kingdom, the Royal Armament Research and Development Establishment acted as both Development Agency and Technical Advisor. This led to the unsatisfactory position of the Establishment having to comment on designs that were effectively their own.
10. As the Royal Armament Research and Development Establishment were part of the Department, them was no contractual basis for their design and development of United Kingdom workshare, nor any form of competition 01 incentive.
(c) Technical difficulties 11. Initially, insufficient work was carried out during Project Definition to enable development to meet the established timetable. Similarly project definition work was lacking prior to Phase B development. Consequently system design concepts were neither adequately specified nor tested.
55 Appendix 5
hgpean Defence Industry Study - Independent European Programme Group Action
e’-,‘l.,i ^ I:-:.:‘::~:;;: ,;~.I,; ~,&~, -;. .,‘-‘I.*: i, -,-* *,+ ;i; 1 ‘* “~(_ ,+‘,.,‘a :, a, I ,ii‘,, ‘,A: ,,*ii ,/ ,i ‘hi &. ?i “~,~,\:‘~~:.~~L-m:X,I,~,~;,~- .i, ,,;; _ i >: ( A;p#&$d~j;Actie)y. ,,. ., ,: $ ,_ :, ,, .;2 ‘: ‘;~z;;,;T:; ,::,J~Measure :z ‘s>s~+%:~:‘i; -.’ ,; “.I” ” ‘, ,: * ,, ,,,:*,, ,: ,,~>...~!, ,_ 1 ., ,. : ,,. .’ ‘,S~~.~.~ Border-Crossing Competition 1. Awareness of bid opportunities Identification of a focal point, Action complete. and registration of interest by within each nation’s contracting potential bidders authority, to which companies of all Independent European Programme Group nations can register their interest as potential suppliers. The publication of bidding opportunities by each The target date for completion of Independent European Programme this task was October 1989; 11 out Group nation. of 13 nations now publish bulletins.
2. Compatibility of contractual Establishment of agreed criteria for Broad principles for contract award procedures. the award of contracts. were outlined in the “Coherent Policy Document” designed to underpin the operation of the open market, which was endorsed by Ministers in November 1990.
3. Arrangements for collaborative Development of guidelines to Initial guidelines have been issued projects ensure that work sharing covering the inclusion of requirements are applied with collaborative projects in contracts suitable flexibility. bulletins and the application of the principles of cross-border competition to them.
4. Monitoring Contracting authorities to agree a See progress on “Juste Retour” common format for recording bid below. opportunities and contract awards.
Juste Retour (balancing, where Establishment of a system to record The target completion date for this appropriate, each country’s imports details of contracts involving cross- task was October 1989. A system of and exports) border transactions at prime and recording cross-border contracts is sub-contractor level and currently being devised, but will 1. Recording (to monitor trade identification of imbalances. not be fully operational until mid- flOWS) 1991.
2. Correction of imbalances Consideration of different means of Covered in the Policy Document. correcting imbalances. Discussion continues on a pragmatic and transitional means of implementing corrective measures.
56 MINISTRY OF DEFENCE: COLLABORATIVE PROJECTS
Technology Transfer 1. Exchange of information Study into the most effective arrangements for establishing a consultative process.
2. Facilitation of transfer of Review of existing practices In the Policy Document. Work is technology [particularly terms and safeguards) continuing. and revision of guidance as necessary.
Co-operation in Research and Technology 1. Encouragement of greater Development of a European The European Co-operative Long co-operation Technology Plan with an agreed Term Initiative for Defence was funding mechanism. launched in June 1989. A Programme Memorandum of Understanding was signed in November 1990. It is aimed to award the first contracts during 1991.
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