Franco-Italian Frigate Program Hit by Italian Funding Row
(Source: defense-aerospace.com; published Oct. 11, 2005)

Updated on Oct. 18, 2005
PARIS --- A complex financing package hastily put together by the Italian government appears to have solved Italy’s funding shortfall, and could allow final approval of the joint FREMM multi-mission frigate program, according to Italian press reports. (see original story below).

Signature of the French-Italian Memorandum of Understanding (MoU), and award of the first contract, is now anticipated in November, according to the Rome daily Il Giornale, once the financing package is approved by the Italian cabinet.

The Italian government has not made any comment on the reports, and none is expected before a cabinet decision.

The package calls for long-term bank loans of 2.1 billion euros guaranteed by the Industry Ministry, and payable in three annual installments in 2006, 2007 and 2008. Italy will thus obtain 1.5 billion euros to pay for the first phase of the FREMM contract, covering the first two ships for the Italian navy (750 million euros), 400 million euros for Italy’s share of non-recurring development costs and 300 million euros for initial logistic support.

In parallel, France will pay 3.5 billion euros for its first eight ships and for its share of non-recurring costs. Additional batches of ships are expected to follow at intervals up to 2015.

France plans to order 17 frigates to Italy’s ten; the entire program will cost about 11 billion euros, including the ships’ equipment and weapons.
(end of update)


ORIGINAL STORY:

PARIS --- The Franco-Italian FREMM frigate program, one of Europe’s largest joint defense projects, risks cancellation over the Italian government’s failure to include the necessary funding in its draft 2006 budget.

The Memorandum of Understanding launching the program was due to be signed in Paris on Oct. 4, during a bilateral summit meeting between the two governments, and had been announced as a done deal by the French government. However, in a last-minute reversal, Italian Defense Minister Antonio Martino declined to sign it because of what he called “a minor technical issue.”

In fact, it later developed that the problem is a major one: not enough funds have been earmarked for the program in Italy’s draft budget for 2006, which cannot be modified at this late stage as it was approved by Cabinet on Sept. 29, and is now due to be submitted to Parliament.

Italian Industry Minister Claudio Scajola acknowledged to trade union representatives Oct. 8 that the problem was more serious than initially stated, adding that Italy must find the necessary funding despite current budgetary difficulties.

He told reporters shortly afterwards that the frigate program had been discussed during the Oct. 7 cabinet meeting in Rome. “It’s a complex issue, because we need these [financial] resources. I’m moderately optimistic that a solution will soon be found,” he said.

The financial shortfall, according to Italian press reports, amounts to about 400 million euros for 2006. Italy’s share of the program is estimated at about 4 billion euros over ten years. Current plans call for Italy’s Industry ministry to fund the program until 2008, and for the defense ministry to take over from 2009.

The problem is that the joint contract, due to be signed at the same time as the inter-government MoU, covers construction of the first eight frigates for France, but only part of Italy’s lead ship. Italian production orders are to follow between 2008 and 2015, but the current lack of Italian funding is holding up the French side of the program as well.

Italian officials are scrambling to find a legal way to appropriate the additional funds without re-opening the domestic budget debate. One possible solution is for the government to tack the necessary funds onto a supplementary budget that it plans for later this year.

France was dismayed by Italy’s last-minute reversal, and has signaled it might proceed alone unless the bilateral agreement is signed within days or at most a few weeks.

Italian sources say that a meeting between Martino and his French counterpart, Michele Alliot-Marie, has been tentatively scheduled for October 13.

The French are especially incensed as the program is already running a year late due to Italian administrative difficulties, and because of Italy’s insistence on powering the ships with LM2500 Enhanced gas turbines produced by Italy's Avio Group (formerly Fiat Avio) under license from General Electric. France wanted instead to use the competing MT30 turbines offered by Rolls-Royce of the United Kingdom, which are more modern and offer better performance, but finally relented because of their higher cost (as much as 30% more, according to some Italian sources).

Further complicating the issue is the fact that Avio’s factory in Brindisi, in southern Italy, where the turbines are due to be manufactured, is hovering on the brink of closure because of insufficient work-load. Unless the frigate program moves forward, and an order is awarded for the turbines, the factory could be forced to close.

Furthermore, Italian trade unions fear that, unless the agreement is signed and quickly followed by initial contracts, the Muggiano and Riva Trigoso shipyards of Fincantieri, the state-controlled shipyards group, could face massive lay-offs.

Bruno Manganaro, a representative of the FIOM CGIL trade union, said that unless the additional funds are found “a work-load shortfall of up to 600,000 man-hours” could hit the two shipyards in 2007.

The FREMM program calls for a total of 27 frigates (17 for France and 10 for Italy) at a total cost of about 11 billion euros including their equipment, weapons and initial support. The lead ships are now due to be commissioned in 2011 (France) and 2012 (Italy), four to five years later than initially planned when the preliminary agreement between the two countries was signed in 2003 and confirmed in October 2004.

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