Split decision is a matter of politics

13 February 2003
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13 February 2003

The £3 billion Ministry of Defence deal for two aircraft has many calling the partnership between Thales and BAE Systems into question, writes David Arminas

The Ministry of Defence (MoD) has just awarded its largest contract - a £3 billion deal for two aircraft carriers - to BAE Systems and its French arch rival Thales.

But few people seem happy with it, as our news story shows. Analysts, officials and media pundits - not to mention Thales and BAE - have called into question what appears to be a shotgun marriage between the two companies.

Thales, 32 per cent of which is owned by the French government and which employs up to 12,000 people in the UK, has won the design work, estimated to be worth a third of the value of the contract. Its companies include Racal, Shorts Missile Systems and Pilkington Optronics and it is the UK's second biggest defence contractor.

BAE, Britain's biggest defence supplier, which last month announced 1,000 job losses, is the prime contractor. It must work to the Thales design for the two 60,000-tonne vessels. BAE is also likely to get much of the 30-year maintenance work.

The key procurement question is whether the government got it right by splitting the contract. Is it a partnership too far?

Government gets tough

Partnering with suppliers to get schedules and cost overruns under control in military contracts will be looked at closely, given the poor record so far. Thales and BAE need to show they can be trusted partners in delivering on time and to budget.

Already the government is getting tough, saying that the taxpayer will be limited to up to 10 per cent of any cost overruns. This is just as well. BAE is still in dispute with the MoD over delays and cost overruns possibly topping £1 billion on the £5 billion contracts to upgrade the Nimrod Navy reconnaissance aircraft and the Astute submarines. The three submarines, worth £2.5 billion, were due to enter service in June 2005. But the delivery date has been pushed back to the end of 2006. Given BAE's record, some critics argue that it is lucky to get any work on the carrier project at all.

On another level, there is the wider issue for purchasers in all companies, organisations and the public sector. They must decide whether there is room to "buy British" within the mainstream purchasing philosophy of best value based on purely commercial factors.

Purchasers will always face this dilemma. They don't live in isolation from their communities, either local or national. In fact, in response to Prince Charles's call last month for grocery stores to buy locally, 56 per cent of respondents to an SM online poll said that purchasers have a duty to support local and British firms.

Preferential treatment based solely on the basis of nationality is a dubious practice, not least because it is outlawed by European Union legislation. However, a policy to buy based solely on commercial reasons and best value is one thing; implementing it in the real world is another.

So many jobs are at stake with the carrier contract. The positive economic impact of keeping jobs in Britain was not lost on the government, which has a duty to improve the economic health of the nation.

Fortunately the line between a company's national identity is becoming submerged, thanks to globalisation where the location of a head office has little to do with the location of its manufacturing base.

BAE tried to play the "buy British" card in January in its attempt to be the sole contractor for the carrier deal. Yet the same BAE consistently cries foul at apparent US and French government decisions to base procurement on nationality.

Purchasers should conclude from this that the carrier deal is a lesson in real politics. The line between buying only on commercial factors and corporate national identity is often obscure.

Such a high-profile project can make or break many procurement careers. As the months pass, we'll see if purchasers have the "right stuff".

Construction starts in 2006 with the first of the two vessels in service by 2012. The first progress report from the National Audit Office is eagerly awaited.


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