FT:
MoD may delay carrier contract
The Ministry of Defence is examining possible delays to its £4bn contract for two new aircraft carriers as it struggles to meet Treasury demands for swingeing cuts to its budget. The MoD had been expected to agree a manufacturing contract with the industry alliance building the Royal Navy carriers as early as next week, but that now looks likely to slip.
Officials have begun to take informal soundings about the implications of a possible delay to the ships, people close to the talks confirmed last night. Scenarios under discussion range from slipping expenditure on the programme to later years – thereby staggering the cost for the MoD – to delaying the programme by up to 18 months.
The carriers are scheduled to enter service in 2014 and 2016 and had been viewed as one of the few big-ticket items to escape the impending cuts. There is no suggestion that the programme will not go ahead but the talks underline how stretched the MoD’s budget is. The carriers’ hulls are due to be assembled at Rosyth in Scotland in the prime minister’s constituency, so abandoning it would appear politically difficult.
Last July, the Treasury agreed a budget with the MoD, providing 1.5 per cent real increases every year until 2010-11, claiming this to be the best defence settlement in almost 30 years. But higher depreciation and impairment charges on equipment that has been heavily used in Iraq and Afghanistan left the MoD with only 0.9 per cent real increases for day-to-day expenditure and the requirement to make heavy cuts in many areas. Some estimates put the budget shortfall as high as £2bn. With tax revenues already falling short before the credit squeeze took hold, there is little room for additional defence funding over the next three years.
It is understood the discussions are among the reasons for the delay in the signing of a joint venture between BAE Systems, Britain’s largest defence contractor, and VT Group to put their shipyards together. The joint venture was seen as the first step towards the consolidation of Britain’s shipbuilding industry. Although the venture could go ahead without a manufacturing contract for the carriers, the companies are still waiting for a government commitment to a 15-year partnering agreement. The terms of the agreement would offer industry a guarantee to maintain jobs and technical capabilities for 15 years.
People close to the talks stressed discussions were part of the MoD’s wider review of its equipment programme and that no final decision had been made.
The MoD said: “Periodically, as part of the planning process, we consider a wide range of ideas on how we might reallocate funds. Many of these are not taken beyond initial consideration. The [comprehensive spending review] settlement allows the MoD to proceed with two new aircraft carriers . . . We need the [joint venture] to stand up as a legal entity before we sign the contract – that process is under way.”