§ Lord Hardy of Wath
asked Her Majesty's Government:
What progress has been made with BAE Systems in resolving the outstanding financial issues arising from the Nimrod and Astute programmes. [HL1776]
§ The Parliamentary Under-Secretary of State, Ministry of Defence (Lord Bach)
The Government have reached agreement with BAE Systems on a way ahead for these two strategically important defence projects. 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 our part, the Government have agreed to delay the start of series production until we have seen demonstrated performance from the first three aircraft; and to increase our 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 by 2009, defined as delivery of the sixth series production aircraft. As a result of the delay to 176WA 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 its 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 have agreed to increase our 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 the underestimate of the required effort and the consequent design delays. They also cover costs incurred through restructuring and other revisions to the project and will 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 deal represents a good deal for the taxpayer and will provide outstanding new generation attack submarines for the Royal Navy.
This agreement has been reached following intensive negotiations, carried out in a constructive and co-operative spirit since the autumn. Both the Government and BAE Systems agree that the priority now is to put these difficulties behind us. We have agreed with the company 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 should take several months and the Government will report further to the House when this has been achieved.
Overall, we expect the additional cost to the Government of these two contracts to be around £700 million, although significant additional MoD expenditure will not begin until 2008 and will be spread 177WA 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 addition al 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 are satisfied that both the Nimrod and the Astute project represent value for money. We now look to the company to deliver.