FactFiction2 FactCheck: The real cost of cancelling aircraft carriersThe claim

“We were left in a situation where even cancelling the second carrier would actually cost more than to build it.”
David Cameron, 19 October 2010

The background

The National Audit Office (NAO) sparked a furious row with the Ministry of Defence (MoD) today when it published its Carrier Strike report.

The public spending watchdog’s 40-page assessment of Britain’s chaotic aircraft carrier procurement programme was published before the MoD had agreed to the final wording, a breach of the usual ettiquette.

In turn, the NAO said its analysts had been denied access to Cabinet Office papers which they said they needed to see in order to fully understand the situation.

The picture painted by the auditors may be incomplete, but it points to a worrying lack of foresight in the MoD as it continues to bankroll the construction of the biggest warships ever built in Britain.

The analysis

In 2007, the Labour government decided to build two 65,000-ton Queen Elizabeth-class aircraft carriers at an estimated cost of £3.65bn.

At the time, the independent Royal United Services Institute think-tank concluded that was “very good value for money”.

But since then, costs have spiralled dramatically, with the projected outlay now thought to be £6.24bn for just one fully operational carrier, the Queen Elizabeth.

The second ship – the Prince of Wales – will be built, but left in a state of “extended readiness”, meaning that fighter planes won’t be able to launch from or land on its deck.

It gets worse: the NAO now thinks the eventual bill for the programme “will significantly exceed £10 billion”.

And what’s more, the watchdog thinks it will be 2012 before the MoD even fully understands the financial consequences of the decision it made to continue with the carrier programme after last year’s Strategic Defence and Security Review.

Given the massive rise in cost projections, wouldn’t it have been wiser for the Coalition to have cut short a project it had inherited reluctantly from Gordon Brown?

The Government has made repeated claims about the cost of cancelling the order for the second carrier outright.

As Ministers have rightly pointed out, just calling a halt to the construction process would not simply switch off the tap of taxpayers’ money.

The biggest complication is that Labour made a 15-year deal in 2009 with the biggest carrier contractor, BAE Systems, called a Terms of Business Agreement (TOBA), under which the Government guarantees to give the company enough shipbuilding contracts per year to keep the defence giant’s UK operation ticking over.

If the workload falls sufficiently, the Department is liable to make compensation payments of up to £230 million a year to BAE Systems.

The agreement was sold as an attempt to smooth out the peaks and troughs traditionally experienced by Britain’s shipbuilding industry.

In lean years between big Government contracts, there was a danger of mass redundancies and shipyard closures, the industry warned, which could damage the country’s long-term ability to equip itself with ships. (Critics in the Conservative Party were quick to point out that the agreement also guaranteed jobs in Labour’s industrial heartlands on Merseyside, Tyneside and Clydeside.)

Whatever the political rights and wrongs of the TOBA, it means the Government cannot now cancel either of the aircraft carriers without having to pay hundreds of millions in compensation for no return.

However, the NAO has included the effects of the compensation deal in its calculations and says cancelling the order for the Prince of Wales would still produce a net saving.

The auditors’ report concludes: “Compared to the procurement costs of continuing with the existing project and building two carriers, building one carrier would save just £200 million and cancelling both carriers would save £1.2 billion.”

The savings are “relatively low”, the report points out, but they do nevertheless appear to prove Mr Cameron wrong.

However, it’s important to note that the economic impact of cancelling the second carrier extends far beyond that immediate saving.

In explaining the claim he made to Parliament, the Prime Minister referred to a letter sent to him by Ian King, the CEO of BAE Systems, at the time of the spending review.

Mr King warned that the long-term effects of cancelling the second carrier would spell the demise of Britain’s ability to build warships on this scale.

The move would mean the company would have to close three shipyards and lay off 5,000 workers, which would cause thousands more redundancies further down the supply chain.

Even if the Government made up for the cancellation by placing orders for other ships, the company anticipated having to make 2,500 people redundant.

Mr King claimed that the cancellation of the Prince of Wales could spell “the end of the UK’s capability in complex warships”, something that could have incalculable economic, social and strategic costs.

It’s a view backed by the unions. Unite’s national officer for aerospace and shipbuilding, Ian Waddell, told FactCheck: “If you look beyond BAE Systems in shipbuilding, there really isn’t much else.

“The only shipbuilding we’ve got left in this country of note is warship building. In order to build the next generation of ships you have got to have skilled labour in place and the whole aim of this contract and the relationship with the MoD was to smooth out the peaks and troughs that put jobs at risk.

“At the moment we have got world-class capabilities, but we could find ourselves relying on the Koreans or whoever to build our destroyers.”

BAE Systems couldn’t provide independent costings for all the claims made by Mr King in his letter, but they do point out that a study of their shipbuilding operation carried out by the University of Strathclyde’s Fraser of Allander Institute, which found that it supported 15,000 jobs and contributed just under £600 million a year to the UK economy.

The verdict

The NAO’s report paints a far from flattering picture of the MoD, which doesn’t appear to have covered itself in glory under the auspices of this Government or the previous one.

The costs of the carrier programme began to soar out of control under the previous Government, and the MoD has failed to get its hands around the problem under the Coalition, according to the watchdog.

It’s worth remembering that at best, Britain will have to wait until 2020 to get one aircraft carrier capable of launching warplanes, at a cost that is set to exceed £10bn.

That carrier will be at sea for only 150 to 200 days a year, meaning Britain will have to rely on allies like the French and the United States to fill the gap.

And it’s now envisaged that as few as 12 fighters will initially be deployed from the Queen Elizabeth, meaning pilots will fly an average of just 20 sorties a day, far fewer than the 72 originally required by the MoD.

All of that spells a raw deal for the taxpayer, and FactCheck could just about give David Cameron a “fiction” rating, based on the new sums put out by the auditors today on the costs of scrapping the Prince of Wales.

But to say that the Prime Minister missed a trick when he decided not to simply cancel the second carrier is to ignore the massive potential long-term effects on Britain’s shipbuilding industry and the country’s strategic capabilities in the future.

By Patrick Worrall

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Category: Defence, Fact, Fiction, Labour
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