UK faces bill to cancel Eurofighter order

[tigershark]

UK faces bill to cancel Eurofighter order
By Alex Barker and Jeremy Lemer in London and Gerrit Wiesmann in Frankfurt

Published: May 10 2009 23:30 | Last updated: May 11 2009 00:01

Cancellation of the UK’s latest order of Eurofighter Typhoon jets could cost the country more than £2bn in penalties and would break contingent deals on maintenance and upgrades, leaving Britain facing yet higher bills, according to senior Whitehall sources.

The warning about paying “money for nothing” comes as ministers battle over the future of the programme, which the Treasury wants to abandon on grounds of cost.

Gordon Brown, prime minister, is coming under increasing pressure from the leaders of Germany, Italy and Spain – the UK’s partners on the programme – to stop holding up the aircraft’s third production run by making an overdue €1.6bn (£1.45bn) payment.

But critics – both in and out of the Ministry of Defence – see the third tranche of aircraft as un­affordable and surplus to defence requirements.

Senior figures from the Treasury and MoD will meet on Monday to examine the cost implications of pulling out.

Assumptions on cancellation costs are disputed by the Treasury, which believes significant savings are possible over the aircraft’s lifetime.

Supporters of Eurofighter say cancellation will annul cost-effective maintenance and upgrade deals, agreed in principle with BAE Systems, the defence group, which are contingent on the third tranche going ahead.

Stopping the order could force the MoD to renegotiate arrangements to upgrade existing models on relatively unfavourable terms. The MoD and BAE declined to comment.

Partner nations expect to be compensated for additional costs should Britain pull out. A memorandum of understanding places a ceiling of about £2bn on fines and compensation. But officials fear that may no longer hold if Britain cancels, opening the door to higher costs.

Furthermore, the UK is likely to face claims from industry, which are expected to run into hundreds of millions of pounds. Officials have yet to put an exact figure on liabilities. Mr Brown will also need to balance the political implications of job losses.

The programme is estimated to sustain more than 40,000 UK jobs, including workers at BAE and hundreds of smaller suppliers. Under the terms of the contract, the UK is obliged to buy 88 aircraft from the third run.

Production plans have already been scaled back after a German proposal to split the run into two separate tranches to avoid having to pay everything in one go.

In another concession to the UK, the country is being allowed to count export orders to Saudi Arabia and possibly Oman towards its total.

However, even taking into account those orders, the government still faces a bill of about €1.6bn for the 16 aircraft it would have to buy.

Germany wants Britain to give the go-ahead for the third production run before the end of June, so it can authorise payments before the German elections in September.

Source
http://www.ft.com/cms/s/0/bc9319a4-3d9d-11de-a85e-00144feabdc0.html?nclick_check=1