Government to foot £700m of BAE costs overrun bill

The Government has bowed to demands from BAE Systems to help bail it out of two massive contracts that have seriously over-run, in a deal that will see the taxpayer stump up £700m.

And, in a major change to contracting arrangements, the Ministry of Defence will pick up 100 per cent of any extra costs over and above the new figures agreed and announced yesterday for the Nimrod surveillance plane and Astute nuclear submarine programmes. The Government has also accepted a later delivery date on both projects.

As part of the deal, which appears to share the pain between public and private sectors, BAE will have to take a £750m charge in its 2002 results, which will be reported today. This covers what the company says is its share of the cost over-runs on the £5bn contracts, which were awarded several years ago. But BAE's risks are capped at the additional £750m. BAE had previously taken a £300m provision on Nimrod

Mike Turner, BAE's chief executive, said: "Back in the 1990s, we made mistakes in competing for these contracts.... In retrospect, it is clear that we accepted too much risk, which has now crystallised."

Analysts said the deal would probably be enough to save the jobs of Mr Turner and Sir Richard Evans, the company's chairman. BAE shares closed up 10 per cent at 128p.

There have been a series of stories suggesting that both investors and the MoD were demanding that heads roll in the BAE boardroom. Only a few weeks ago, signals from the MoD suggested it would not stump up for any of the over-runs with the two contracts, which have proved more complex than expected and while specifications from the ministry also changed.

Nick Fothergill, analyst at Banc of America, said: "If government wants the flexibility to move goalposts, then companies must also be given flexibility."

Mr Turner said the agreement was a "win-win" situation for the company and the Government. He said BAE had examined all its other contracts and there was nothing else which could hit the company in the same way as the Nimrod and Astute liabilities. BAE was forced to warn about the problems with these giant orders in December, admitting that it could not then quantify the risk, wiping some £1.5bn off its stock market value within hours.

"You should not fix prices on contracts too early. That's the mistake we made....We would now only fix the price when the design is stable," Mr Turner said. He gave an assurance that the company would "never again" be faced with this problem and said that relations with the MoD have now improved.

Mr Turner said the issue of who should run BAE was a "matter for shareholders" but he added that no investors had told him to step down.