Letter from the Minister for Defence Procurement
to the Chairman (19 February 2003)
I am writing to let you know that the Government
has reached agreement with BAE SYSTEMS on a way ahead on the Nimrod
MRA4 and Astute Class attack submarine projects. I made an announcement
to this effect in the House of Lords earlier today.
Clearly, these are strategically important defence
projects, and we have agreed a new structure for the two contracts
which reduces risk, while placing new incentives on the company
to perform. This will, however, involve a rise in the overall
expected cost to completion, and further delays to the in-service
dates of the two projects.
For the Nimrod MRA4 project, which was originally
won by British Aerospace (now BAE SYSTEMS) in open competition
in 1996, the company has announced that it will be making a provision
of £500 million against the project this year in its preliminary
results for 2002. This is in addition to a previous provision
of £300 million made in the company's 2000 results. For its
part, the Government has agreed to delay the start of series production
until we have seen demonstated performance from the first three
aircraft; and to increase its funding of the project by around
£270 million, subject to final negotiations. This covers
our share of restructuring the programme, and will result in the
achievement of an in service date of 2009, defined as delivery
of the sixth series production aircraft. As a result of the delay
to the start of production, we now have the option of considering
an increase in the aircraft's capability to meet the defence requirements
of the 21st century. We have already introduced improvements to
existing Nimrod MR2 aircraft which use some of the technology
planned for the new MRA4 aircraft, thereby both reducing risk
in the new programme and increasing existing capability.
The starting point for the Astute Class attack
submarine project was different. The original contract was based
on a single source supplier, namely GEC-Marconi (which subsequently
merged with British Aerospace to form BAE SYSTEMS) as the only
UK provider of this unique defence capability. We sought to establish
a fair price, given the economic conditions, and agreed joint
assumptions on an open book basis at the time of contract signature
in March 1997 on how the project would be delivered. These related,
in part, to the benefits to be derived from the first comprehensive
application of computer aided design (CAD) techniques to UK submarines.
This will deliver significant advantages in the future, but the
benefits have proved more difficult to realise on a programme
of this complexity than either we or the company had assumed.
We now know that the introduction of CAD requires more time and
effort than either of us had originally anticipated. As a result,
the Government has agreed to increase its funding by around £430
million, subject to final negotiations, as against an increased
contribution by the company of £250 million which it has
announced will be included as a provision in its preliminary results
for 2002. These increases reflect the Government's acceptance
of a share of the responsibility, along with BAE SYSTEMS, for
underestimating the required effort and the consequent design
delays. They also cover costs incurred through restructuring and
other revisions to the project, and should result in the first
of class coming into service by 2008. In the light of what we
now know about the costs and benefits of CAD, we are confident
that the new arrangements represent a good deal for the taxpayer
and will provide outstanding future generation of attack submarines
for the Royal Navy.
The agreement with BAE SYSTEMS has been reached
following intensive negotiations, carried out in a constructive
and co-operative spirit since the autumn of last year. Both the
Government and the Company agree that the priority now is to put
these difficulties behind us. We have also agreed that we will
introduce new methods of project control and reporting on these
and other projects. The exact details of the agreement required
to establish formally the new financial structure and the revised
in service dates still need to be agreed. This will take several
months, and the Government will make a further report to Parliament
when this has been achieved.
We expect the additional cost to the Government
of these two contracts to be around £700 million, though
it will not begin until 2008 and will be spread over the following
years. The scale of the financial consequences now announced by
the company demonstrates that it accepts responsibility for its
share of the serious difficulties that have arisen on these two
immensely complex and demanding programmes. It is, however, appropriate,
for the reasons that I have set out, that the Government should
make these additional contributions to the Nimrod and Astute contracts.
The unique military capabilities represented
by these two programmes are crucial to Britain's future defences,
and there are no alternative systems capable of offering comparable
levels of performance at economic costs in any existing projects
anywhere in the world. The Government is satisfied that both Nimrod
and Astute projects represent value for money. We now look to
the Company to deliver.
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