Volkswacht Bodensee - German naval ambitions suffer setback as warship order axed

The multi-billion-euro project to build six new-generation frigates, set to be the biggest in the German navy, was being abandoned in favour of purchasing eight smaller warships, the defence ministry said.

The ministry said in a statement that it had "decided not to pursue the construction of a total of six frigates of the F126 class any further.

"This is a response to the considerable delays in the project, and the foreseeable cost increases."

The move spells a setback for Europe's top economy at a time it has been rapidly building up its long-neglected armed forces to bolster its role in NATO and deter perceived hostility from Russia.

Anti-submarine warfare has become a key focus for European NATO members following alleged Russian submarine movements near vital undersea cables and pipelines in the Baltic Sea and the Atlantic.

Germany ordered four F126 anti-submarine frigates in 2020 from Dutch group Damen Navel, with the price set at 10 billion euros (then $11.2 billion), with the deal later expanded to include two more vessels.

The first was due to be delivered in 2028, with all due to be operational by 2033, according to the defence ministry.

But the procurement project was beset by repeated delays, that pushed back the frigates expected entry into service.

The Financial Times reported there were myriad problems in the complex procurement process.

Damen struggled with defence ministry demands for submissions to be on paper as well as for documentation to be in German, the paper reported in April, citing industry sources.

- Rheinmetall shares dive -

The F126 contract was widely expected to be transferred to German defence giant Rheinmetall, and its CEO Armin Papperger told reporters last year that the firm was in talks to handle the work.

But the government had concluded that handing over the work to NVL, a shipyard acquired by Rheinmetall in March, would be too costly, the defence ministry said.

Carrying on with the troubled project would have led to an estimated bill of over 18 billion euros, including money already spent as well as 15.2 billion euros for NVL to take it on.

It would have also meant the government forgoing a contractual right to sue Damen Navel for damages, the ministry added.

"This runs counter to the ministry of defence's understanding of the responsible management of budgetary funds," it said.

"The amount of these damages is currently being determined as part of the legal review."

News that the F126 order would be scrapped sent Rheinmetall shares down about 17 percent on Wednesday, marking their largest intra-day fall in over a year.

Berlin will instead order eight smaller ships from rival German contractor TKMS, the defence ministry said, adding it would seek approval from parliament's budget committee "as quickly as possible".

Under the plan, the government will pay 6.3 billion euros for four MEKO A-2000 frigates with an option to purchase another four for about 5.3 billion euros.

TKMS shares were up 9.2 percent following the news.

The saga throws a spotlight on the challenges for Germany's massive military build up.

Berlin has earmarked hundreds of billions of euros for rearmament over the coming decade, exempting most defence spending from strict constitutional borrowing limits.

But some have warned that the government needs to speed up complex procurement processes to make sure the money is wisely spent.

J.Marty--VB