The letter published today by the Treasury – from BAE Systems to David Cameron – is a bombshell that explains in stark outline why ministers pressed ahead with an order for two aircraft carriers despite fiscal constraints.
Alex revealed a month ago that the contract was written in such a way that cancelling one of the ships would still leave taxpayers with a similar bill to proceeding with both.
As he wrote for the FT newspaper:
Mr Cameron had pressed Liam Fox, defence secretary, to recheck costs of the programme after expressing bafflement about one carrier being more expensive than two. The anomaly is caused by a “terms of business agreement” with BAE Systems that requires substitute work to be provided if the second carrier were to be cancelled.
Paul Waugh points out that the cost of both carriers was £5.2bn with the cost of one at £4.8bn, almost as much.
In fact the letter makes it clear that cancelling one of the carriers could have been even more expensive. This is because of “consequential costs”, including “rationalisation”, amounting to £690m because three yards would have to be closed with the loss of 5,000 jobs. Then there would be “additional rationalisation costs”. And finally, a potential termination liability.
The letter suggests that BAE Systems could be compensated in part through some alternative contracts for other kit (“the direct award of more work” might “ameliorate” the position) but this alone would not be enough.
As Andrew Tyrie, Treasury Select Committee chairman, has put it:
“This letter shows what an impossible position the government were put into by this contract. This is an absolutely crazy situation…we also need to know how to prevent this from ever happening again.”