Procurement Process I (up to 30 January 2003) –
Rivalry to Alliance

Under its original procurement strategy, the MoD planned to award parallel competitive Assessment Phase Stage 1 (Analysis of Options) or AP1 contracts to three companies or contractor teams by the end of 1999.  It issued Invitations to Tender in January 1999 to British Aerospace, Boeing, Lockheed Martin, Marconi Electronic Systems, Raytheon and Thomson-CSF, however by the closing date of 5 May 1999 it had only received bids from two strong industrial teams: British Aerospace (teamed with its new subsidiary Marconi Electronic Systems) and France's Thomson-CSF (teamed with Raytheon Systems Company and British Marine Technology).   The US firms Boeing and Lockheed-Martin, elected not to bid in the face of the major UK companies being tied into a single consortium. 

The two teams (the first was now BAE Systems following the merger of British Aerospace Land & Sea Systems and Marconi Electronics Systems In August 1999) were both awarded competitive £5.9 million contracts by the Defence Procurement Agency (DPA) on 23 November 1999 to undertake an initial package of Analysis of Options work (AP1).  Also, following an open competition, Mr Ali Baghaei, formerly the Production Director at the Kvaerner Govan shipyard in Glasgow, was appointed to lead the Integrated Project Team in August 1999.

In the period immediately after the AP1 contracts were awarded, the composition of both teams changed somewhat with additional partners joining, the final line up in August 2002 is recorded here.  Also Thomson-CSF Naval Systems became Thales Naval Ltd (part of Thales Defence Ltd in the UK, which in turn is part of the French owned Thales Group). 

Between November 1999 and January 2003, the two industry teams led by BAE Systems and Thales Naval UK Limited competed for the prime contractorship of the CVF programme.  In keeping with 'Smart Acquisition' principles, the consortia were given considerable latitude to look at innovative processes and new technologies as they strive to demonstrate their ability to deliver the required capability on schedule and at cost.  They also scrutinised the design, engineering and production resources available to them across the whole of the UK industrial base.  

The characteristics or criteria judged by the CVF IPT as being mandatory were relatively few: that the carrier will be non-nuclear; of a single-hulled design; capable of embarking up to 48 aircraft; and be designed and built in the UK.  Affordability was also seen as the critical issue for CVF - rigorous cost/capability trade-offs, maximum use of suitable off-the-shelf solutions, and judicious use of commercial engineering standards were seen as essential if the new carriers are to come within budget.  It was recognized that achieving cost targets would, at the same time, demand technical innovation, new business practices imported from adjacent markets, and fresh approaches to supply-chain management.  For example, both teams looked at how 'best practice' from merchant shipbuilding, offshore industries and commercial fleet-management operations could be used to simplify build, and reduce maintenance and repair costs through-life.  It also has to be borne in mind that CVF is a lot more than just about shipbuilding, the programme represents a complex "system of systems" integration challenge, with the end user anxious to have an asset embodying a real 'swing' capability, enabling it to operate successfully - and cost-effectively - across a range of mission types and roles.  It will have a key role as a C4I node, and is an obvious host platform for a joint force headquarters facility. 

The key functional requirements imposed by the Ministry of Defence (MOD) for AP1 related to the needs for a sortie-generation profile, battlespace integration, and ship speed sufficient to ensure both rapid deployability and the conduct of air operations.  Non-functional requirements included availability, survivability, adaptability, enough stowage space for both ship and aircraft fuel, and adequate stores.  The AP1 activities encompassed cost/capability/programme trade-offs; risk analysis; and concept development; and provided information to feed into parallel studies to determine the choice of JCA to be embarked aboard the new carriers.  As part of the AP1 studies, both industry teams investigated key enabling technologies and developed six indicatively costed concept ship design studies for large (40 aircraft standard) and small (30 aircraft) variants of generic short take-off vertical landing (STOVL), short take-off but arrested recovery (STOBAR), and conventional take-off and landing (CTOL) designs.  The work took account of issues like the type and number of aircraft to be carried and the survivability of the ships.  The BAE team added to its submission a seventh un-solicited study in to a STOVL hybrid design - although primarily intended to operate the STOVL version of JSF, it added an angled deck, arrestor gear and a single waist catapult to allow the operation of conventional fixed wing aircraft such as the Northrop Grumman E-2C for AEW.  The design was quickly rejected as not being on the "exam paper". 

The AP1 design studies (eventually totalling some 300 "deliverables") were initially submitted to the Defence Procurement Agency (DPA) in May 2000 and their evaluation was completed by June 2001.  Following the announcement in January 2001 that the Joint Strike Fighter (JSF) will fulfil the FCBA (now JCA) role, assessment work for the CVF programme focused on the two JSF variants available; Short Take Off and Vertical Landing (STOVL) and the Carrier Variant (CV) conventional take off and landing - the STOBAR configuration for CVF being dropped. 

In October 2001 Lockheed Martin won the competition to build JSF with their F-35 aircraft.  The output from the CVF Assessment Phase work will fed into the parallel JSF/F-35 selection studies and helped to inform the decision on the choice of F-35 variant be embarked board the new carriers- the STOVL variant being selected in September 2002.

The delay in JCA selection (or rather selection between the F-35 CV and STOVL variants) from the original date of late 2000 left a hole in the Assessment Phase timescales as trying to design in detail a carrier without fixed knowledge of the air element and its mode of operation is impossible.  The JCA decision deferment resulted in changes to the scope and timing of the CVF assessment phases, and the completion of AP1 which was originally scheduled for December 2000, was allowed to slip to June 2001.  

By Spring 2001, BAE Systems and Thales Naval were expecting to be awarded the Assessment Phase Stage 2 (AP2) contracts in June or July 2001, but this was delayed amidst reports of hard negotiations between the MOD and the two contractor teams, and a belief by the contractor teams that the value of the contracts on offer was insufficient for the amount of work and risks involved.  Unfortunately a rather adversarial relationship began to develop between the MOD & DPA, and the contractor teams, and it was admitted by all sides that a challenge during AP2 would be to develop a more positive and productive partnership ethos.

On 22 November 2001 it was finally announced that the MOD had awarded BAE Systems and Thales Naval Ltd competing 12 month contracts worth around £30 million (actually £25m plus VAT) each for AP2.  Revised and shortened compared with original plans, Assessment Phase Stage 2 (Risk Reduction and Cost Capability Trades) was to scheduled to last until 20 November 2002 and run over six phases, these involving risk reduction and detailed work to develop parameters for the detailed design, build and support of the preferred carrier option.  The work outputs were to provide the basis for the choice of a preferred prime contractor by the MoD.  

In the Assessment Phase Stage 1 (Analysis of Options) little emphasis had been put on restricting the cost of the proposed designs, during AP2 keeping within budgets and cost constraints became a more important factor.  The CVF IPT also sought to identify differentiators between the two proposals that would enable the downselect decision. 

Initially both STOVL and CTOL carrier designs had to be considered in AP2, a BAE spokesmen stated in early 2002: that “We've agreed with the MoD that we'll do a certain amount of twin tracking.  If anything can be generic that's fine but at certain points the variants diverge.  We'll take both designs to a level of maturity by the third quarter of this year.”  

In September 2002 the selection of the STOVL variant of the Lockheed Martin F-35 JSF was announced, and it seemed that the two consortia could finally focus on a single design concept - STOVL.  However given that the new carriers are planned to have a service life of up to fifty years - longer than that expected for the aircraft - BAE Systems and Thales, were simultaneously asked by the MOD to opt for a design which could be adapted to operate more conventional (CTOL) aircraft types if it became necessary later in the ships' lives.  To this end, the ships had to have the capability to be fitted with catapults and arrestor gear, although they would initially be built with a "ski-ramp" for STOVL operations.

Under the adopted evaluation approach, the IPT conducted monthly audits and quarterly programme reviews to progressively evaluate and score the work of the two contractor teams.  A software package developed with the assistance of Telelogic supported the real-time assessment of work to date.  "Throughout the assessment phase we have a clear understanding of everything the companies are doing, with full traceability and auditability," says Ali Baghaei, CVF IPT leader.  "The result is that the moment AP2 ends in November [2002] we will be able to send our final recommendation to ministers for their consideration."

On 20 November 2002, AP2 was completed with the last deliverables being submitted.  The CVF IPT completed its evaluation work at the beginning of December, its report showing that the Thales proposal was technically and financially superior to the BAE proposal in a number of areas.  The MOD's Investment Approvals Board (IAB) discussed the report at its meeting in mid-December, and at two more meetings during January, and finally endorsed a recommendation that the prime contract should go to Thales - the increasing possibility that the French Navy would then order a third similar unit, which would help cut costs, perhaps being an additional if external influencing factor.  The MOD's preference for Thales was leaked to the press in late January and unleashed considerable controversy - the carrier programme becoming one of the most controversial and politically charged defence contracts of recent years.  Wrapping itself in the Union Jack, BAE Systems responded with a major lobbying campaign and trade unions complained about the certain loss of jobs to France (Thales being one third owned by the French government).  In a typical press report, Jack Dromey, of the Transport and General Workers' Union, is quoted as saying: "Ministers should buy British, boosting the Scottish shipyards.  No French Government would ever buy British aircraft carriers." BAE fuelled the flames by "coincidently" announcing plans to cut 1,045 jobs in its shipbuilding business.  But set against this was serious MOD dissatisfaction with BAE's performance on the already awarded Astute submarine and Nimrod maritime patrol aircraft contracts.

On Thursday 23 January 2003 a small cabinet sub-committee convened to discuss the CVF contract, it was chaired by Prime Minster Blair and attended by: Minister of Defence Hoon; Gordon Brown, the Chancellor of the Exchequer; and Patricia Hewitt, the Trade and Industry secretary.  It was agreed that it was politically impossible to award the contract outright to Thales (Defence Analysis, a defence industry newsletter, later claimed that the Prime Minister was influenced against Thales by his disagreements with the French over Iraq and other major issues) and that a compromise solution involving both teams was necessary.  The BAE and Thales bid teams were approached by MOD officials the next day and joint meetings continued over the weekend as an outline deal was hammered out.  But as one MoD adviser put it: “After two years and millions of pounds, the Prime Minister appears to have decided to rewrite the deal in a week.  I can see another disastrous compromise on the cards.”

On 30th January 2003 the Ministry of Defence (MOD) thus surprised only a few people by failing to select between the rival proposals from teams lead by BAE Systems and Thales Naval for building the two new aircraft carriers.  Instead the MOD proposed a triumvirate “alliance approach”, with a partnership to be known as the "Future Aircraft Carrier Alliance" (or "CVF Alliance", also commonly called the "Aircraft Carrier Alliance" and eventually simply the "Carrier Alliance") led by BAE Systems as the preferred prime contractor, and responsible for project and shipbuilding management, plus Thales UK as a key supplier and responsible for the ship design.  The MOD said that it would also participate actively in the Alliance, managing appropriate risks and contingencies, as well as ensuring the provision of necessary assets such as trained manpower and the aircraft which the carriers will embark.  The very sketchy agreement was announced in the House of Commons as follows: 

"Subject to detailed final negotiations, BAE Systems will take the leading position as preferred prime contractor, with Thales UK performing a major role as key supplier.  The project will develop the carrier design put forward by Thales UK.  ...  The MOD carefully analysed work carried out by BAE Systems and Thales UK in the Assessment Phase, and concluded that both teams had done much good work and their key skills were largely complementary.  BAE Systems had demonstrated a better understanding of the programme and its complexity and had developed a good relationship with the key shipyards.  Thales UK had provided a robust technical solution and a strong flexible design.  We need the strengths of both companies to ensure that the Navy gets the Carriers it needs.  ....  The MOD therefore approached both BAE Systems and Thales UK to discuss a possible alliance with the MOD on the programme.  Both companies have accepted the logic of the approach.  Detailed contractual discussions will now start to determine formally how the Alliance will operate. "

The Geoff Hoon, Secretary of State for Defence, gave more details in a letter to the Commons Defence Select Committee that was later released:

"I have decided that, subject to further discussions with all parties, the best means of delivering the carrier programme is through an alliance approach in which BAE SYSTEMS is the preferred Prime Contractor and Thales UK assumes a major role as the Key Supplier. The Ministry of Defence will also engage in this alliance to manage risks, contingency and provide assets for which we are rightly responsible....

I have reached this decision based on two key results from the Continuous Assessment process. First, to meet the required in Service Dates for the Carriers, extra design resources will be required to carry out the further work necessary before we the manufacturing stage can begin. To achieve this objective in the timescale required, both BAE SYSTEMS and Thales UK would need to augment substantially their available design resources or capability.

Second, both BAE SYSTEMS and Thales UK have performed to a very high standard. BAE SYSTEMS has displayed a good understanding of the complexities of the project, in terms of project management and prime contracting and have developed a good relationship with all of the key shipyards, Thales UK meanwhile provided a robust technical solution that offers good design flexibility. To deliver value for money and provide the best capability in the future, it is therefore essential that we harness the strengths of both contractors. I believe that the alliance approach will provide an effective and innovative way forward. The Alliance will have both customer and suppliers working collaboratively to achieve challenging targets, whilst sharing the risks and rewards of the programme. BAE SYSTEMS and Thales UK have indicated their willingness, in principle, to participate in an Alliance, and further work will now begin with both companies to establish the contractual details of how such an arrangement would operate. The programme will now move forward to the next stage of the Assessment phase, which will take CVF through the main investment decision and the award of the build contract, as originally planned, in Spring 2004. If, at that point, the alliance structure is judged to be operating successfully, the Alliance will be permitted to move into the demonstration and manufacture phase—and possibly beyond for the through life support of the vessels. We remain fully committed to achieving the declared in-service dates for both ships, namely 2012 and 2015 respectively.

In terms of the shipbuilding element of the carrier programme, we have concluded that the Carriers should be built by a combination of four yards, namely: BAE SYSTEMS Marine at Govan, Vosper Thornycroft at Portsmouth, Swan Hunter on Tyneside and Babcock BES at Rosyth. However, we would not, at this stage rule out the potential involvement of other yards. The precise arrangements will need to be the subject of discussions with the yards to determine value for money and workload capacity before we are able to commit to a build contract in April 2004. Nonetheless, the benefits for the UK shipbuilding industry and its related supplier chain across the country are enormous. This project represents a vast programme of work and should create or sustain up to 10,000 jobs in the UK."

The general reaction from analysts and the media was that the deal was a political fudge that would inevitably mean delays getting the ships in to service and increased costs.  For example, the Daily Telegraph suggested that the Ministry of Defence had caved in to concerted pressure from an alliance of BAE Systems and trade unions, while The Independent newspaper in an scathing editorial noted: 

"Quite how it can be good news for the defence of the nation to select Thales to design the biggest warships ever built in a British yard, but then give the prime contractor's job to the rival bidder BAE Systems is a mystery known only to the Defence Secretary. 

...  This blatantly political fudge is a recipe for disaster as the chief of defence procurement Sir Robert Walmsley surely knows only too well.  But then he retires in two months time and will be long gone when the Franco-British alliance begins to crack.  Sir Robert's political masters have promised the French a third of the work.  But no one seems to have told the prime contractor BAE which began telling the world there will be no such thing as guaranteed workshares before the ink was even dry on yesterday's hastily cobbled together entente cordiale. 

BAE wants to build the giant carriers in three separate bits, but Thales' design calls for them to be constructed in five pieces.  The French will also be in charge of something called the "ship-air interface", even though BAE and not Thales is building the F35 fighter jets which will arm the two carriers. 

The list of contradictions goes on but Mr Hoon seems more interested in the 10,000 jobs the contract will safeguard than whether it will be remotely good value for the taxpayer.  Rashly, the Ministry of Defence has decided to take a 10 per cent stake in the "industrial alliance, hoping to share in the cost-savings when the contract comes in under budget.  Experience suggests it will be cost overruns the taxpayer will be sharing in.  No wonder Sir Robert says he doesn't expect this method of procurement to be repeated in a hurry."

Industry reaction was also largely sceptical.  A comment from one senior defence executive working as a supplier on the carrier programme was typical.  "I have never seen anything like it," he said.  "Thales won this on design and price but BAE got the prime contractor role because of politics." Francis Tusa, editor of Defence Analysis, said: "Having run an open competition, the government has made it a travesty at the last stage.  There is a great possibility this will come back to haunt the government."  And it was claimed that "Thales is believed to be less enthusiastic and worried about its long-term involvement."

If either team’s proposal had been selected then the bidders, partners, shipyards and suppliers would have known their agreed role, workload and timescales – but the MOD’s decision meant that suddenly everything was again uncertain and “up for grabs”. 

Justifying the imposed alliance, officials explained that after analysis of the Assessment Phase deliverables, it was concluded that the rival teams respective skills could be considered as complimentary.  Thales had strengths in the design and technical fields, especially the interface between ship, aircraft and flight deck operations and weapons and defence systems, while BAE Systems was considered to possess a better understanding of the complex overall programme in the areas of project management and prime contracting (the MOD's recent and unfortunate experiences with BAE Systems' running of the Astute and Nimrod MRA.4 programmes apparently not affecting this conclusion).  Interestingly (as the projects problems escalated), MOD sources were later to suggest that the CVF IPT Leader, Mr Ali Baghaei, had been a strong advocate of the Alliance approach and had played a key role in the decision, it certainly appears that some preliminary discussions about the possibility had been held with BAE Systems and Thales as early as December 2002. 

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