Carriers face new delay over rising cost
By Russell Hotten, Industry Editor
Last Updated: 12:51am GMT 01/11/2006
http://www.telegraph.co.uk/money/mai...C-mcn_01112006
Final clearance to build the Royal Navy's new aircraft carriers risks slipping further behind schedule amid continuing disagreements between industry and the Ministry of Defence over rising costs. The two sides meet tomorrow to try again to resolve their financial differences after the consortium building the carriers said the price would be around £300m above MoD expectations.
After years of negotiations the Aircraft Carrier Alliance, which includes BAE Systems, VT Group, Thales and MoD officials, should have submitted final price details for the long-delayed project last Thursday. Recent guidance from the MoD has been that the cost of the two vessels would be about £3.5bn, which itself is up from an initial estimate of between £2.8bn-£3bn.
However, the consortium says the carriers cannot be built for less than £3.8bn, but has agreed to work on a incentive scheme that the MoD hopes could reduce the cost to £3.6bn. The consortium partners would share any cost saving.
One person linked to the alliance expressed exasperation yesterday on learning that last week's deadline for a final price had been missed. "I just can't believe that. I really thought everything had been sorted out," he said.
Another source suggested that the last-minute hitch was due to concerns that the Treasury will not agree to £3.8bn. "I think that after all this time the Defence department would settle for £3.8bn - but they are not the ones paying for it." Economists estimate that £3.8bn is the equivalent to reducing the basic rate of income tax by 1p.
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Once the price is approved, the companies can start preparing to construct the carriers and employ staff. The MoD's latest timetable for that to start was December, with the two carriers expected to enter service in 2012 and 2015.
An MoD official said yesterday: "We are making progress on negotiations and we are optimistic that we can finalise negotiations at a price we can afford and industry can deliver."
Construction of the carriers was hailed as a new way of working for the MoD and industry, and an attempt to avoid the large cost overruns that have dogged other major defence projects.
Lord Drayson, the defence procurement minister, has demanded that industry share more of the risk should the carriers hit problems or run over budget. The defence industry now has to work to fixed prices and pay penalties fees when things go wrong.
About 60pc of the carriers' construction is being pre-allocated to UK yards at Govan and Barrow, owned by BAE Systems, the Ports-mouth shipyard run by VT Group, and the Rosyth facility, run by Babcock, where the final assembly of the vessels will take place. The remaining 40pc of the construction will be open to competition.
The carriers, each weighing 65,000 tons and 280 metres long, will be three times the size of the existing Invincible-class vessels.