Big guns boom in battle for £10bn carrier contract

Gloves come off as BAE fights French group Thales for biggest procurement deal in decades

The French defence contractor Thales yesterday hit back at claims that the UK's industrial know how and naval expertise will be irreparably damaged if it beats BAE Systems to a £10bn order for two new aircraft carriers for the Royal Navy.

The contract, due to be awarded in February, has become the most intensely fought procurement battle for years as claims of dirty tricks, misinformation and double standards are bandied about. Last week the Secretary of State for Trade and Industry, Patricia Hewitt, was drawn into the fray after she was asked a planted question at the annual CBI conference in Manchester.

Both bidders claim they will create 10,000 UK jobs if their bid succeeds and both have pledged to spread the work around several of the country's work-starved naval shipyards.

But BAE, which is well used to draping itself with the Union flag when challenged for lucrative Ministry of Defence work by foreign rivals, argues there is much more at stake.

It claims that if the partially state-owned Thales wins the contest, then the intellectual property rights tied up with the carrier project will slowly leak back to France, undermining the UK's skills base and its long-term export prospects.

BAE also questions whether Thales has the long-term interests of the UK shipbuilding industry at heart, given that it has no UK yards of its own and indeed has recently formed a joint venture with the state-owned French ship builder DCN to export warships and associated equipment.

Yesterday Thales came out fighting in an attempt to rebut the claims being made about its bid, some of them in anonymous and unattributable briefing documents sent to the press. Alex Dorrian, the chief executive of the French group's UK division Thales plc, said: "There are 12,000 families in this country who depend on Thales and frankly our staff get very upset when they see all this nonsense written in the press. A lot of myths have been constructed around our bid. For the record, the two ships will be 100 per cent designed and constructed in this country and all the systems will be sourced to the maximum extent possible from the UK. The intellectual property rights will be retained in the UK and as for DCN, they have got nothing to do with this contract."

The two new vessels are three times the size of the Navy's existing aircraft carriers – the Ark Royal, Illustrious and Invincible – so both BAE and Thales are proposing to build them in a number of "superblocks" at different yards around the country before towing them to a final assembly site.

BAE has already selected its key partners – the superblocks will be built at Vosper Thornycroft on the south coast, Swan Hunter on Tyneside and its own Scotstoun and Govan yards on the Clyde while final assembly will be carried out in Babcocks's Rosyth naval dockyard, which just happens to be in the Chancellor Gordon Brown's constituency.

Thales, on the other hand, has not pre-let any sub-contracts but instead has named eight UK yards which will be invited to compete for the work on the grounds that this will be more cost-effective for the customer.

BAE argues this approach could end up doing more harm than good to UK shipbuilding by pitting yards against one another in a winner-takes-all contest. But Thales argues it will be beneficial not just for the taxpayer but also the shipyards. Peter Thompson, the managing director of Thales Naval who has been in charge of the bid, says that by encouraging yards to work together, it will help "revitalise" UK shipbuilding. He adds that there is no reason why the yards could not go on to build cruise liners in the same way.

The BAE camp has not lost any opportunity to make political capital out of Thales' ownership and the fact that were it the French inviting tenders, then BAE would not even get onto the bidding list.

Harry Knowles, the chief executive of Furness Enterprise and a spokesman for the National Shipbuilding Communities Initiative, put this point to Ms Hewitt last week. He says: "Thales and other French companies are able to dominate their domestic defence markets unfairly. We in Britain run the risk of seriously eroding our own defence capability if major defence orders are given to Thales."

It is not just French chauvinism which has been put under the spotlight. The BAE camp also points to the difficulties being experienced by one of the key subcontractors involved in the Thales bid, the US offshore company Halliburton.

Halliburton, which was led by the US vice-president Dick Cheney from 1995 to 2000, is under investigation for alleged accounting irregularities. In July it reported a $498m (£320m) loss after one-off charges to cover future asbestos claims.

Halliburton not only owns Kellogg Brown and Root, which will run construction and integration of the superblocks, but it also controls the Nigg facility in north-east Scotland, one of the three sites Thales is considering for final assembly.

Mr Dorrian says he is quite happy with the assurances Thales has been given about the financial health of Halliburton. He also argues that Halliburton is best-equipped to manage a project like this because offshore installations are often assembled in a similar way.

This procurement contract is being fought out against a wider backdrop. When Thales bought Racal Electronics for £1.8bn in spring 2000, the MoD promised it would be treated as the UK's "second force" defence contractor. It is still waiting to win its first major order.

In the end it may come down to pork barrel politics. The carrier contract is one of five prime contractorships Thales is bidding for from the MoD. They have a combined value of £12bn to £14bn and, by coincidence, two of them are due to be awarded at about the same time as the carrier contract. The odds are on BAE securing the two aircraft carriers and Thales getting at least one other prime contractorship as a consolation prize. "We are here to stay whatever happens to the carrier contract," Mr Dorrian promises.