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By Howard Wheeldon, Senior Strategist at BGC Partners

14 Dec 10. With confidential contractual Terms of Business Agreement (TOBA) detail relating to the 15 year long term agreement between BAE Systems and the Ministry of Defence signed in July 2009 plus further detail of the earlier Carrier Alliance contract also likely to be in the public domain very soon we suspect that the former government of Gordon Brown will come in for further criticism in how it approached defence procurement. However, whilst we make only minimal comment on the specific Carrier Alliance arrangement here and that along with a £36bn defence procurement budget overspend has come in for separate criticism from the Commons Public Accounts Committee today we remain very optimistic that the TOBA deal really will provide very large scale cost saving benefits for both the Ministry of Defence and UK Taxpayer.

In reviewing the TOBA it is important to remember that from the outset the idea was to redefine the MoD and industry relationship so that rather than work as customer/supplier they would in terms of the defence maritime sector in future work together as partners. Committing to drive down costs the other big importance of this revolutionary TOBA is that it laid down sound foundations for a fully committed Key Industrial Capability requirement and that would from that point on deliver future sovereign capability. For BAE Systems this provided long term commitment to defence maritime that it had for so long desired. For the government and MoD the TOBA created very realistic potential to deliver considerable cost saving on maritime procurement and through life support.

Clearly, the two new 65,000 tonne Queen Elizabeth Class carriers (this was a separate deal worth an approximate £5.2bn that was signed in July 2008 between the MoD and the Alliance Partners that includes BAE Systems Surface Ships and Babcock International) will be seen as the first real test of the new TOBA agreement working although it is useful to note that it takes in all existing and future maritime based contracts – including the still ongoing Type 45 Destroyer programme and the proposed Type 26 Frigate due to come into service around 2020.

In our view no matter what flak might fly around the Carrier Alliance contract that was signed off by the Gordon Brown government in July 2008 we take the view that the separate TOBA signed between the MoD and BAE Systems Surface Ships that followed a year later should be seen as a superb revolutionary agreement that will provide huge advantages not only to the signatories but also the UK taxpayer.

We emphasise again that great care should be taken not to confuse the two separate (Alliance and TOBA) agreements – the point being here that full recognition should be given to the huge benefits that we genuinely believe that the TOBA will bring forward to both partners and to the UK taxpayer.

In terms of the Carrier Alliance agreement and as to whether for political reasons the previous government agreed a deal that would be impossible to break without having to pay a far too high exit price we suggest that such questions should much better be asked of the Brown government as opposed to BAE Systems or its Alliance partners. However, in saying this we must observe remarks by the then highly respected Defence Procurement Minister Lord [Paul] Drayson made in the House of Lords in June 2007, a full year before the carrier contract was signed between what was then a joint venture company called BVT and the MoD. Drayson said, “My Lords, we absolutely want the carriers and are prepared to play poker for as long as it takes to get them on the terms that we want”. Determination to secure a good deal for the taxpayer was certainly very apparent back then. However, subsequently it became clear that the Carrier Alliance deal had become a political football for Gordon Brown and

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