MoD paid £100 million premium on new patrol ships

It is understood that the Ministry of Defence paid an extra £100 million for new Offshore Patrol vessels in order to satisfy a requirement to pay BAE a minimum of £230 million per year.

A house of Commons Briefing Paper explains the agreement:

“In 2009 the Government signed a 15 year Terms of Business Agreement (TOBA) with BAE Systems and Babcock. The TOBA guaranteed BAE Systems a minimum level of surface ship build and support activity of £230 million a year.

This was judged as the minimum level of work possible to sustain a credible warship-building industry in the UK and thus avoid the delays encountered during the Astute class submarine build caused in part by the loss of skilled staff following the gap between Astute and the Vanguard class submarine build.

If cancelled the MoD would be liable for industry closure costs and compensation to BAE Systems.”

Regarding the cost of the new Offshore Patrol vessels:

“The provisional cost of the new vessels was given as £348 million but because the TOBA required a £230 million a year spend with BAE, the Defence Secretary estimated the additional cost to the MoD of the ships, over and above the payments the MoD would have had to have made to BAE, is less than £100 million.”

The paper adds:

“Philip Hammond, then Defence Secretary, admitted “we are effectively ordering the OPVs to soak up money we would have been paying in any case to have these yards stand idle.”

Lord Astor of Hever said the Government provisionally agreed a firm price of £348 million with BAE Systems for the supply of three OPVs, inclusive of initial spares and support. He said this sum is “entirely contained within provision set aside to meet the Ministry of Defence’s obligation for redundancy and rationalisation costs.”73 Mr Hammond estimated the additional cost to the MoD of the ships, over and above the payments the MOD would have had to have made to BAE, is less than £100 million.”

The first of the five new vessels, HMS Forth, is expected to be handed over to the Royal Navy in 2017.

The Offshore Patrol Vessels have been ordered to fill a gap in orders after the second carrier and before the Type 26 frigates begin construction.

The Strategic Defence & Security Review states:

“We will buy two further new Offshore Patrol Vessels, increasing the Royal Navy’s ability to defend UK interests at home and abroad.”

The vessels will be used by the Royal Navy to undertake various tasks including border protection roles, including anti-smuggling, anti-piracy, fisheries patrols, and immigration law enforcement.