UK's warship yards plot twin-track merger strategy

Britain's warship yards are discussing a new plan with the Ministry of Defence to restructure the industry involving the creation of two separate companies to build submarines and surface ships.

The original intention had been to create one all-embracing alliance but it has been decided that this would be too unwieldy. The talks, which have been going on for the past six months, will now focus on forming two companies.

One will be a submarine building alliance made up of BAE Systems' VSEL yard in Barrow-in-Furness, Cumbria, where the Trident fleet was built, Devonport naval dockyard in Plymouth and Rolls-Royce, which provides propulsion systems for submarines.

The other will be a dedicated warship alliance made up of BAE's Clydeside yards, VT Group's Portsmouth yard and Babcock's Rosyth naval dockyard on the Firth of Forth. A fresh round of talks between industry executives and government officials will take place next week.

The companies involved had hoped to reach an outline agreement with the MoD by Christmas. But the sticking point has proved to be their insistence on a guaranteed long-term work programme from the MoD stretching for the next 10 to 15 years in return for agreeing to pool their respective shipbuilding operations.

Ministers are understood to have responded that it would be difficult to give such a commitment when there is no certainty that a future government would honour it. There is also thought to be some concern within the Treasury about whether the creation of a monopoly warship supplier would be good value for the taxpayer. One industry executive said: "There's no way we are going to throw our lot in as part of an alliance unless there is a guaranteed long-term workload. Without that there is no logic in doing it. Unless this issue can be resolved quickly then the idea is a non-starter. Our view is that the alliance is now less likely to happen."

Another industry source said real progress was being made and he was optimistic of a successful outcome. "It's not clear what the final solution or shape of an alliance will be but we are still quite positive," he added.

Meanwhile, there is mounting speculation that the MoD will finally announce the selection next week of a contractor to oversee the construction of two new aircraft carriers for the Navy. The "physical integrator" role on the £3bn project is due to go to Kellogg Brown & Root, a subsidiary of the giant US contractor Halliburton.