BAE and MoD split 'widens'

Fears are growing that the relationship between BAE Systems and the Ministry of Defence has soured over slow consolidation in the maritime industry, a priority for the defence procurement minister, Lord Drayson.

"It has got really bad," said one senior source close to the situation. "It's real Mexican stand-off stuff." In the MoD's Defence Industrial Strategy, a procurement plan published in December, consolidation of UK shipbuilders was called for as "a matter of urgency". As the UK's biggest shipbuilder, BAE had been expected to lead the charge. But after a failed bid with VT Group for Babcock International in June, all has been quiet, raising the ire of the MoD.

At last month's Farnborough Air Show, Lord Drayson said: "I am disappointed with maritime [restructuring]. A lot of work has been done, but I would have expected it to have come to a conclusion by now."

An MoD spokesman denied relations had deteriorated. "It is business as usual with BAE," he said. A BAE spokesman said any sense of poor relations between the UK's biggest weapons maker and the Government "couldn't be further from the truth".

But industry sources say pointed public remarks from both sides are evidence of the worsening relationship. BAE is said to be increasingly frustrated with the lack of clarity about future work and defence spending.

In a recent interview with US trade magazine Defense News, BAE chief executive Mike Turner said the MoD was caught in a "funding crisis" and threatened that BAE might leave the UK naval business altogether.

"The only company that's willing to consolidate it all is BAE. We are looking at how we can bring that about to everyone's benefit. But if we don't get the LTPA [long-term partnership agreement, a contract to build and maintain fleets], we could sell it [the naval business]."