Sunday Telegraph:
Government will not cap BAE's £1bn losses
Bae Systems, the UK's leading defence contractor, has failed to persuade the Government to cap its massive potential losses on contracts to build Astute submarines and Nimrod surveillance aircraft.
The stand-off between BAE and the Ministry of Defence will send shock waves through the City because the company had hoped to tell investors with its results on February 20 that losses from the contracts would not exceed £1bn.
"How can we publish our results if we can't say where the red ink will stop on Nimrod and Astute?" asked an executive. "The lack of co-operation from the Government is astounding."
Another said: "This will make it enormously difficult for us to draw up our accounts."
However, a senior Government member said he was horrified that BAE was trying to re-open talks on renegotiating the contracts. "We made our views very clear to the company before Christmas," he said. "There are some things we simply cannot budge on."
BAE's share price collapsed in December when the scale of cost over-runs on the projects was first disclosed. Company executives and Whitehall officials then embarked on a vicious lobbying campaign against each other.
The Government blamed BAE's alleged inefficiencies for the over-runs, while BAE was furious that it was forced to crystallise losses it thought could be offset against possible gains that might flow from the renegotiation of other contracts.
The company has warned contractors working on Astute that negotiations with the Government may not bear fruit until the middle of the year at the earliest, exacerbating programme delays.
The latest row emerges at a difficult time for BAE, which is battling with Thales of France for the prime contractorship of the £3bn contract to build two new aircraft carriers.
An initial decision on the contract is expected to be taken this week at a meeting of the MoD Investment Approvals Board, chaired by the chief scientific adviser, Keith Onions. Ministers hope to announce the deal this month.
A Government member said attempts were being made to broker a compromise deal or "third way" which would give both companies a substantial role.
Last week Geoff Hoon, the defence secretary, caused consternation at BAE by telling US reporters that BAE is "no longer British". Ministers have told The Telegraph that this was code for their refusal to do it special favours.
In its lobbying for the carrier deal, BAE has repeatedly used the argument that Thales is French. However, all work on the contract, whether under the supervision of Thales or BAE, would be carried out in the UK.
Thales argues that it will create and sustain 3,500 jobs in Scotland. For example, assembly of the carriers is likely to take place at Rosyth whoever wins the £3bn deal.
The Government is also close to announcing a shortlist of two for the Watchkeeper contract to develop and build sophisticated unmanned reconnaissance planes for the British Army.
BAE is thought to have lost out on the role of prime contractor on Watchkeeper, with Northrop Grumman of the US and Thales emerging as the probable winners.