Government backed over award of carrier contract: VSEL bid undercut Swan Hunter by pounds 71m, says National Audit Office

A WAR of words erupted yesterday after the National Audit Office endorsed a government decision to award a huge helicopter carrier contract to a partnership between the Cumbria-based shipbuilder VSEL and Kvaerner Govan rather than the rival Swan Hunter, on Tyneside, which is in receivership.

The NAO said that the contract had been awarded primarily on the grounds that VSEL's pounds 139.5m bid undercut Swan Hunter's final offer by pounds 71m and that the Ministry of Defence had treated both parties 'in a fair and even-handed manner'.

VSEL, while welcomimg the conclusion, attacked as 'most unwarranted' the NAO's decision to publish the detailed figures involved in the bid, which it said were provided in commercial confidence.

Noel Davies, VSEL's chief executive, said: 'We are deeply concerned that the NAO should have concluded that it was necessary or appropriate to disclose tender prices. We did not agree to the disclosure and we shall be making immediate representation to the MoD to establish what changes are to be made to procurement policy to ensure that repetition of this practice does not occur.' He said the ministry, which declined to comment, was also angry.

The report showed that VSEL's lower bid was possible partly because it opted to support the bid price from the company's reserves. The ministry believes the level of support could amount to between pounds 25m and pounds 30m.

The NAO also warned that should Swan Hunter now be closed the ministry might be faced with dealing with a monopoly if it wanted to buy future warships from a British yard. The ministry, it said, failed to quantify the possible future costs arising from such lack of competition.

Dr Roger Vaughan, a director of Swan Hunter, said: 'It appears that VSEL is willing to rely on profits from a future non-competitive market in order to reduce its price.'

Price Waterhouse, receivers to Swan Hunter, argued that the report made it clear that Swan Hunter's design was more advanced at the time of bidding and showed that the yard's bid was 'realistic but unaffordable'.

The NAO believes that both tenderers knew the ministry's budget was about pounds 150m per carrier. But Dr Vaughan said: 'If our bid was deemed realistic, that implies that no one could build the ships except at a loss and that is no way to maintain a healthy defence industry base.'

Ed James, of Price Waterhouse, said that VSEL, primarily a submarine builder, had risked having to use its own reserves to re-enter the surface warship market. Swan Hunter could not tender at a price that would not provide a reasonable return.