The Thing Is: It's nothing personal but its 'name is mud'

BAE Systems
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Tomorrow at around 11am Defence Secretary Geoff Hoon will confirm the worst fears of BAE Systems chairman Sir Richard Evans. In a short statement to Parliament, Mr Hoon is expected to say that a consortium led by the multinational defence group EADS has won a gigantic £13bn contract to supply air-to-air refuelling aircraft to the RAF for 27 years.

It might be the Defence Secretary's last act as he is widely tipped to step down after the Hutton Report is published on Wednesday. If it is, it will be fitting, for Mr Hoon has spent months at loggerheads with BAE Systems, which is leading the rival consortium for the tanker project.

Coming three days after BAE and the Ministry of Defence were hauled over the coals by the National Audit Office for major cost overruns and delays on four defence contracts - as previewed here last week - the decision will be interpreted as a deliberate snub to Britain's biggest defence company. Lord Bach, the defence procurement minister, and MoD officials will be on hand to say the Government's frosty relationship with BAE had no bearing on the decision. Nor did the fact that BAE had teamed up with America's Boeing, which is embroiled in a tanker scandal of its own at home. The bids were judged on value for money and the technical specifications alone, they will claim.

But deep in the corridors of the MoD, people still bear grudges against the group that some officials refer to as Big And Expensive Systems. The disastrous projects to develop the Nimrod attack aircraft, the Typhoon jet, the nuclear-powered Astute submarine and the Brimstone anti-tank missile, which last year cost £3bn in overruns according to the NAO, stir up passions not normally seen in mild-mannered civil servants.

"To say that BAE's name is mud would be a gross understatement," said one senior source close to the MoD. A ministry insider, who asked not be identified, is more guarded: "It would be churlish to suggest that everything in the garden is rosy." A third source close to the bidding process on the tanker project hints that BAE's past performance did indeed have a bearing on ministers' thinking: "The MoD is not in the business of handing out contracts worth billions of pounds to companies that can't deliver. When assessing bids, we examine the companies' previous track record."

The MoD's frosty relationship with BAE has caused friction with other government departments. The Treasury has become increasingly frustrated with the MoD for the seemingly endless flow of bad news that invariably requires the Chancellor to relax the purse strings. The Treasury is keen for the MoD to invite overseas firms to bid for big defence contracts, to ensure the Government gets the best value for money. It was particularly dismayed by the ministry's decision to award a contract to BAE to supply Hawk trainer jets to the RAF, without holding a proper contest. The MoD has also got the Department of Trade & Industry on its back insisting it must dish out contracts that safeguard UK jobs: ie favour BAE.

Despite the long-standing animosity between the MoD and BAE, there are signs of relations improving. While it will come too late to have any bearing on the tanker decision, an arrangement called "smart procurement" is showing signs of reducing delays and cost overruns.

BAE is also selecting a new chairman to replace Sir Richard. National Grid Transco's chairman, Sir John Parker, has emerged as the frontrunner, although Sir Peter Gershon, Office of Government Commerce head and a former GEC executive, is thought to be a close contender. While the MoD is not officially involved in the appointment, both names are said to have met with a positive response in Whitehall.

The first task for the next chairman will be to build bridges with the MoD. If BAE is to fulfil its long-stated intention of US expansion, probably through a merger, it must at least prove it is on speaking terms with the Government.