The cancellation of the option to purchase a third Hamilton-class WHEC from the US Coast Guard was announced by the Department of National Defense (DND) last week. Although this was not new since there was already an earlier announcement, the reason this time is different from the first.
Background:
Initially the DND decided to forego the purchase of another Hamilton-class vessel after it decided to instead use the ship purchase budget for capability upgrade for the 2 ships already in Philippine Navy (PN) service. These are the BRP Gregorio del Pilar (PF-15) and BRP Ramon Alcaraz (PF-16), both were stripped of their surface and air search radars, close in weapons systems, electronic surveillance measures (ESM) systems, tactical air navigation (TACAN) system, and other essential equipment before handing-over to the PN. The PN then installed new systems including additional light guns, a new commercial off-the-shelf (COTS) navigation and search radar, a new command and control suit with link with the Coast Watch System, VSAT and new satellite communications equipment and an Electronic Surveillance Measures (ESM) system. But the ships are still short on combat and surveillance capabilities, and the PN is contemplating of installing surveillance and combat systems that will increase the ship's war-fighting capabilities. But nothing much was done on this plan.
Surprisingly the DND shifted back to the original plan of getting a 3rd Hamilton-class ship from the US, without mention of anything about the upgrade plan for the two ships already with the PN. This plan was also against earlier DND and PN statements on policy against buying "second-hand"ships, which according to them sealed the Maestrale-class frigate purchase plan's fate.
But again the new announcement to cancel the purchase of a 3rd WHEC is now directed on diverting the ship purchase budget to support the existing Php 18 billion budget for the PN's project for 2 brand new frigates.
Comparable Projects:
Previously MaxDefense brought out the issue of budgeting for the new frigates since there are doubts on what the PN can get based on comparable foreign warship project costs. For those unfamiliar with earlier MaxDefense blogs, please see these earlier posts for reference:
An In-Depth Look at the Philippine Navy Frigate Program of 2013
http://maxdefense.blogspot.com/2013/05/an-in-depth-look-at-philippine-navy.html
and
Proposed Designs Offered for the Philippine Navy Frigate Program 2013
http://maxdefense.blogspot.com/2013/05/proposed-designs-offered-for-philippine.html
Looking back on those previous assessments, it already shows that the PN budget is way lower than those of comparable regional frigate projects. MaxDefense provided some examples, but let us take another stab on the costing of the exemplified ships with the closest cost as the PN budget, as an update from last time:
Damen Schelde Shipbuilding's SIGMA-class
Based on earlier MaxDefense blogs, the Indonesian PKR Project based on Damen Schelde's SIGMA 10514 platform has the closest allocated budget as the PN at $220 million. But there are some information indicating that the Indonesian PKR SIGMA 10514 cost may only cover the hull, and the ship's mechanical and integral electronics systems plus technology transfer, and actual cost may reach closer to $280 million if including weapons and sensors. Also, the contract between Damen Schelde and Royal Moroccan Navy for 3 SIGMA ships (2 SIGMA 9813 version and 1 SIGMA 10513 version) was said to have cost $816 million as of 2008, or around $272 million per ship average although the 10513 version is expected to be more expensive than the shorter 9813 version due to the addition of an additional segment. Take note that the Indonesian PKR is slightly larger than those for Morocco.
Latest offer of Damen Schelde to Vietnam for 2 corvettes based on SIGMA 9814 was quoted by IHS Janes to probably reach $668 million, or $334 million per ship average, with one probably to be built in Vietnam and the entire contract may include technology transfer clauses.
(Note: The Damen Schelde SIGMA class is classified by a unique numbering system. The first 2 or 3 numbers signifies the length and the last 2 numbers signifying the beam, all in meters. Example: Indonesia's PKR based on 10514 means it is 105m length and 14m beam. Morocco's 10513 is 1m narrower than Indonesia's PKR.)
Hyundai Heavy Industry's Incheon-class:
Earlier information indicated that the price for the initial Incheon-class frigate for the Republic of Korea Navy (RoKN) costed $106.5 million for the hull made by Hyundai and a total cost of $232 million for the entire ship. It is still unclear if this includes Integrated Logistics Support (ILS) packages that is required by the DND/PN, and if Hyundai may opt for selected pricing premium for foreign clients like the Philippine Navy. It is expected that the amount does not include any form of technology transfer, although it is believed that the PN and DND are after this incentive.
MaxDefense now expects the Philippine-offer price of the RoKN-standard Incheon-class frigate to be nearer to $250-$280 million. But the PN may always opt to remove certain items that may not be required, like RoKN-specific systems, and the land attack cruise missile Hyunmoo-3 option. The PN may also opt to replace some more-expensive systems with cheaper ones, like the installation of an OTO Melara 76mm Super Rapid gun instead of the larger and more expensive BAE 127mm Mk. 45 Mod. 4 gun.
So is there a funding shortage?
MaxDefense believes that the PN and DND may have found out that the budget they allocated for the 2 new frigates is not enough to get what they specified the ships to be capable of doing. MaxDefense sources say that the budget is already very tight as it is, and has not much allowance for the PN for additional systems that they may have overlooked. It is worth noting that the DND and PN already added Php 6 billion to the original Php 12 billion allocated for the 2 used Maestrale-class frigates without increasing the Php 75 billion allocated by the government for the Revised AFP Modernization Law for the first 5 years.
Not only is the budget small, but it is also getting smaller everyday with the value of the Philippine Pesos falling against the US Dollar. The Php 18 billion budget for the frigate program was crafted early this year and was based on an exchange rate of $1 = Php42 ($214 million = Php 9 billion). Presently the exchange rate is around $1 = Php44.5 ($202 million = Php 9 billion), with the Peso down by more than 6% from its value a few months ago, and is still expected to fall in the next few months. It is expected that foreign shipbuilders and system providers will ask payment in US Dollars, and the PN has already lost $12 million per ship due to the declining value of the Peso.
Opinions and Options:
There are many ways to skin a cat, so they say. And MaxDefense sees three options for the Philippine government to solve this concern:
1. Increase budget allocation for the purchase of new frigate, to meet the budget as specified by the PN's frigate requirements.
This is actually the best solution, but the hardest to attain. The Philippine government may use Executive-sourced funding (so-called "Presidential Pork Barrel") like Fund 151 or Malampaya Special Account, which has been done before to fund AFP-related projects like the purchase of Hamilton-class cutters. There is even a growing consensus on both the government and private sector to use the Priority Development Assistance Fund (PDAF, aka "Pork Barrel") to boost modernization of the entire AFP, so if that happens this might be another source of funding.
In some way, the cancellation of the 3rd Hamilton-class ship was another way to increase funding, this time by realignment of defense project priorities. MaxDefense does not see this as a good option, as we support the purchase of more Hamilton-class ships that are made available for the PN.
2. Avail of soft-loans offered by specific countries like South Korea to fund the ship's purchase.
There were reportedly standing offers for the Philippine government to avail soft loans, the most well-known is the offer from South Korea to avail their goods. Although a downside is the limitations to using that to buy the specific country's products, these countries have likely a strong defense industry and wide product range that the PN or the entire AFP can choose from. The only problem with this is President Aquino's previous statement from SONA 2013 of not availing loans that will become a problem of the next administration.
3. Remove or reduce expensive line items within the frigate program for separate budgeting, but building the ship to be fitted for but not with these items.
This is a common practice for military systems either to save on costs, or if a new technology still under development is expected to be placed on a certain platform. On our case it's the obviously the former. The PN may opt to build the frigate hull according to their expected capability, plus all the important items that will enable the ship to be minimally capable. Some major line items that can be separated are the surface-to-air missile systems, half of the expected anti-ship missile numbers, torpedo systems, anti-ship missile hard kill systems, and one of two possible sonar systems.
These can already reduce the cost of the ship by around 30%-50%, and can be purchased separately should funding be available. The PN is familiar with this concept and is actually a policy for their purchase of Offshore Patrol Vessels (OPV), which has the option to be heavily armed in case of crisis or emergencies.
A fourth option is possible, that is for the PN to decrease the specified requirements of the new frigate, either by decreasing its size, reducing the capability, or both, effectively making the ship more of a corvette or OPV rather than a frigate. But MaxDefense does not recommend this option at all as it does not make sense to do such option if the PN believes that they really need a frigate and not a smaller or less capable vessel.
Background:
Initially the DND decided to forego the purchase of another Hamilton-class vessel after it decided to instead use the ship purchase budget for capability upgrade for the 2 ships already in Philippine Navy (PN) service. These are the BRP Gregorio del Pilar (PF-15) and BRP Ramon Alcaraz (PF-16), both were stripped of their surface and air search radars, close in weapons systems, electronic surveillance measures (ESM) systems, tactical air navigation (TACAN) system, and other essential equipment before handing-over to the PN. The PN then installed new systems including additional light guns, a new commercial off-the-shelf (COTS) navigation and search radar, a new command and control suit with link with the Coast Watch System, VSAT and new satellite communications equipment and an Electronic Surveillance Measures (ESM) system. But the ships are still short on combat and surveillance capabilities, and the PN is contemplating of installing surveillance and combat systems that will increase the ship's war-fighting capabilities. But nothing much was done on this plan.
 |
| MaxDefense expected the USCGC Rush (WHEC-723) as possibly the 3rd PN WHEC. Photo taken from USCG website. |
Surprisingly the DND shifted back to the original plan of getting a 3rd Hamilton-class ship from the US, without mention of anything about the upgrade plan for the two ships already with the PN. This plan was also against earlier DND and PN statements on policy against buying "second-hand"ships, which according to them sealed the Maestrale-class frigate purchase plan's fate.
But again the new announcement to cancel the purchase of a 3rd WHEC is now directed on diverting the ship purchase budget to support the existing Php 18 billion budget for the PN's project for 2 brand new frigates.
Comparable Projects:
Previously MaxDefense brought out the issue of budgeting for the new frigates since there are doubts on what the PN can get based on comparable foreign warship project costs. For those unfamiliar with earlier MaxDefense blogs, please see these earlier posts for reference:
An In-Depth Look at the Philippine Navy Frigate Program of 2013
http://maxdefense.blogspot.com/2013/05/an-in-depth-look-at-philippine-navy.html
and
Proposed Designs Offered for the Philippine Navy Frigate Program 2013
http://maxdefense.blogspot.com/2013/05/proposed-designs-offered-for-philippine.html
Looking back on those previous assessments, it already shows that the PN budget is way lower than those of comparable regional frigate projects. MaxDefense provided some examples, but let us take another stab on the costing of the exemplified ships with the closest cost as the PN budget, as an update from last time:
Damen Schelde Shipbuilding's SIGMA-class
Based on earlier MaxDefense blogs, the Indonesian PKR Project based on Damen Schelde's SIGMA 10514 platform has the closest allocated budget as the PN at $220 million. But there are some information indicating that the Indonesian PKR SIGMA 10514 cost may only cover the hull, and the ship's mechanical and integral electronics systems plus technology transfer, and actual cost may reach closer to $280 million if including weapons and sensors. Also, the contract between Damen Schelde and Royal Moroccan Navy for 3 SIGMA ships (2 SIGMA 9813 version and 1 SIGMA 10513 version) was said to have cost $816 million as of 2008, or around $272 million per ship average although the 10513 version is expected to be more expensive than the shorter 9813 version due to the addition of an additional segment. Take note that the Indonesian PKR is slightly larger than those for Morocco.
 |
| Projected SIGMA 10514 frigate for Indonesia's PKR project. |
(Note: The Damen Schelde SIGMA class is classified by a unique numbering system. The first 2 or 3 numbers signifies the length and the last 2 numbers signifying the beam, all in meters. Example: Indonesia's PKR based on 10514 means it is 105m length and 14m beam. Morocco's 10513 is 1m narrower than Indonesia's PKR.)
Hyundai Heavy Industry's Incheon-class:
Earlier information indicated that the price for the initial Incheon-class frigate for the Republic of Korea Navy (RoKN) costed $106.5 million for the hull made by Hyundai and a total cost of $232 million for the entire ship. It is still unclear if this includes Integrated Logistics Support (ILS) packages that is required by the DND/PN, and if Hyundai may opt for selected pricing premium for foreign clients like the Philippine Navy. It is expected that the amount does not include any form of technology transfer, although it is believed that the PN and DND are after this incentive.
 |
| Korea's Incheon-class frigate. |
MaxDefense now expects the Philippine-offer price of the RoKN-standard Incheon-class frigate to be nearer to $250-$280 million. But the PN may always opt to remove certain items that may not be required, like RoKN-specific systems, and the land attack cruise missile Hyunmoo-3 option. The PN may also opt to replace some more-expensive systems with cheaper ones, like the installation of an OTO Melara 76mm Super Rapid gun instead of the larger and more expensive BAE 127mm Mk. 45 Mod. 4 gun.
So is there a funding shortage?
MaxDefense believes that the PN and DND may have found out that the budget they allocated for the 2 new frigates is not enough to get what they specified the ships to be capable of doing. MaxDefense sources say that the budget is already very tight as it is, and has not much allowance for the PN for additional systems that they may have overlooked. It is worth noting that the DND and PN already added Php 6 billion to the original Php 12 billion allocated for the 2 used Maestrale-class frigates without increasing the Php 75 billion allocated by the government for the Revised AFP Modernization Law for the first 5 years.
Not only is the budget small, but it is also getting smaller everyday with the value of the Philippine Pesos falling against the US Dollar. The Php 18 billion budget for the frigate program was crafted early this year and was based on an exchange rate of $1 = Php42 ($214 million = Php 9 billion). Presently the exchange rate is around $1 = Php44.5 ($202 million = Php 9 billion), with the Peso down by more than 6% from its value a few months ago, and is still expected to fall in the next few months. It is expected that foreign shipbuilders and system providers will ask payment in US Dollars, and the PN has already lost $12 million per ship due to the declining value of the Peso.
 |
| Take note the exchange rate posted by MaxDefense on May 2, 2013 is at $1=Php41.19, while on September 6, 2013 is at $1=Php44.49, a sharp 7.5% fall of peso value already. Photos taken from MaxDefense blog (top) and Bloomberg website (below). |
Opinions and Options:
There are many ways to skin a cat, so they say. And MaxDefense sees three options for the Philippine government to solve this concern:
1. Increase budget allocation for the purchase of new frigate, to meet the budget as specified by the PN's frigate requirements.
This is actually the best solution, but the hardest to attain. The Philippine government may use Executive-sourced funding (so-called "Presidential Pork Barrel") like Fund 151 or Malampaya Special Account, which has been done before to fund AFP-related projects like the purchase of Hamilton-class cutters. There is even a growing consensus on both the government and private sector to use the Priority Development Assistance Fund (PDAF, aka "Pork Barrel") to boost modernization of the entire AFP, so if that happens this might be another source of funding.
 |
| An infographic from ABS-CBN shows what Php 10 billion from Legislative PDAF can do for the AFP (photo shows only for PN). Such amount could have given the PN enough room for improvements on the new frigate requirement. Photo taken from ABS-CBN News website. |
In some way, the cancellation of the 3rd Hamilton-class ship was another way to increase funding, this time by realignment of defense project priorities. MaxDefense does not see this as a good option, as we support the purchase of more Hamilton-class ships that are made available for the PN.
2. Avail of soft-loans offered by specific countries like South Korea to fund the ship's purchase.
There were reportedly standing offers for the Philippine government to avail soft loans, the most well-known is the offer from South Korea to avail their goods. Although a downside is the limitations to using that to buy the specific country's products, these countries have likely a strong defense industry and wide product range that the PN or the entire AFP can choose from. The only problem with this is President Aquino's previous statement from SONA 2013 of not availing loans that will become a problem of the next administration.
3. Remove or reduce expensive line items within the frigate program for separate budgeting, but building the ship to be fitted for but not with these items.
This is a common practice for military systems either to save on costs, or if a new technology still under development is expected to be placed on a certain platform. On our case it's the obviously the former. The PN may opt to build the frigate hull according to their expected capability, plus all the important items that will enable the ship to be minimally capable. Some major line items that can be separated are the surface-to-air missile systems, half of the expected anti-ship missile numbers, torpedo systems, anti-ship missile hard kill systems, and one of two possible sonar systems.
These can already reduce the cost of the ship by around 30%-50%, and can be purchased separately should funding be available. The PN is familiar with this concept and is actually a policy for their purchase of Offshore Patrol Vessels (OPV), which has the option to be heavily armed in case of crisis or emergencies.
 |
| The Gregorio del Pilar-class frigates are actually examples of "fitted for but not with" ships. They have the capability to accept additional weapons and sensors when needed. Photo taken from Philippine Embassy in Washington DC website. |
A fourth option is possible, that is for the PN to decrease the specified requirements of the new frigate, either by decreasing its size, reducing the capability, or both, effectively making the ship more of a corvette or OPV rather than a frigate. But MaxDefense does not recommend this option at all as it does not make sense to do such option if the PN believes that they really need a frigate and not a smaller or less capable vessel.
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