Britain feels the heat of US defence blitz

As President Obama looks to attack spending, Mark Leftly reports on the programmes that could be torn from the grasp of UK workers

Fighting two wars and facing a $1.75 trillion deficit by next year, Barack Obama was bound to take the knife to big spending projects shortly into his presidency. And defence looks to be one of the big losers, even though President Obama has pledged to match the previous administration's costings for Iraq and Afghanistan until late 2010.

Obama has noted that spending on government contracts doubled to $500bn (around £350bn) during the George W Bush years, and is looking to reform the process of awarding tenders in a bid to save $40bn a year.

But the White House needed a symbol of that waste – something to show the electorate how spending had spiralled out of control. And Obama appears to have chosen Marine One, the armoured helicopters that transport the President.

Much of the existing fleet of 19 is a quarter of a century old, but the contract for a new wave of the choppers had nearly doubled in price from $6.1bn to $11.2bn. At a news summit late last month, Obama joked: "The helicopter I have now seems perfectly adequate to me. Of course, I've never had a helicopter before."

Last year's presidential rival, Senator John McCain, said of the contract: "I don't think that there's any more graphic demonstration of how good ideas have cost taxpayers an enormous amount of money."

The US spends $500bn on defence every year, making it by far the world's most important market for arms dealers, military engineers and manufacturers. Defence exports account for £5bn of the British economy, and Obama's willingness to make do with his current aircraft is just one contract delay that could prove harmful to UK contractors.

There are three deals under threat that could affect British defence workers: Marine One; a $40bn air refuelling scheme; and, to a lesser extent, the F-35 joint strike fighter, a multinational craft that involves the UK.

It is difficult to assess the full importance of these programmes on the British economy, though the air refuelling contract alone should generate £3bn and entail the participation of 13,000 UK workers.

Derek Marshall, director of defence at trade body the Society of British Aerospace Companies, says: "There are UK companies involved in these US contracts. They will be concerned, particularly at suggestions that there could be wholesale cancellations. For the UK defence industry, the US is a different order of importance, bar Saudi Arabia and Typhoon [a combat aircraft produced by Eurofighter]."

Starting with Marine One, the British-Italian group Augusta Westland and US giant Lockheed Martin won the contract to provide the helicopters back in 2005. Prime Ministers Tony Blair and Silvio Berlusconi are known to have lobbied President Bush on the consortium's behalf.

Several of the aircraft have already been built, as the programme is di-vided into two phases. However, most of the 64ft-long helicopters will be part of the second tranche.

Design and requirement changes have increased the cost of the overall programme by more than 50 per cent, meaning it is in breach of the Nunn-McCurdy statute introduced to contain cost growth in American defence procurement, triggering a thorough review.

A spokesman for Lockheed Martin says the company remains confident that the programme will go ahead, with operational capability by 2011: "Consistent with President Obama's call for a thorough review, Lockheed Martin is supporting the ongoing Nunn-McCurdy review that will comprehensively examine budget, schedule and developments.

"We have made significant progress on the programme's first phase, delivering seven aircraft and completing other key milestones designed to give the President significantly better command, control and communication capabilities than exist today."

However, a Washington defence lobbyist warns: "I think the programme is at risk. When a president says he's happy with his old helicopters, you pretty much can't argue with it. If I were a betting man, I would put money against these coming out for years."

The source adds that although much of the current fleet was built in the 1970s, the craft have not been involved in combat and are almost inevitably "the best-maintained helicopters in the world".

Any suspension of the programme would clearly hurt the interests of Westland Helicopters workers in Yeovil. And it could add to the UK's research and development budget.

Marine One is a modification of craft built for British forces. As with any technology, these need to be upgraded fairly regularly, and the work going into the US designs would be easily transferable to future UK craft. "Instead these advancements might have to be paid for by the UK taxpayer," warns one defence contractor. "The US presidential helicopter was effectively paying for those upgrades, which was good because these are big, complex, expensive pieces of kit."

And this comes at a time when the UK National Defence Association has reported that the country needs to spend £15bn more on the sector each year if it is to continue with its current foreign policy.

The air refuelling programme is a more complicated problem, and has a whiff of protectionism surrounding the contract process. Aerospace giants Northrop-Grumman and EADS were awarded the contract early last year, with many of the parts to be manufactured by the latter's British subsidiary, Airbus.

However, American rival Boeing challenged the decision, arguing that the selection procedure contained fundamental errors. President Bush's Defense Secretary, Robert Gates, has been retained by the succeeding administration, and it was hoped that this would mean a speedy retendering process.

There is a natural hiatus in defence spending in the build-up to an election, as well as in the transition period while a new administration beds in. A defence expert says that should this delay extend beyond mid-summer, it will then seem like "a deliberate act by the administration" to delay another major contract.

As it stands, Secretary Gates must decide how the competition might be remodelled. The process could be tweaked or completely rerun. This means that the contract might not be relet for between 18 months and four years. Either way, should Boeing be selected – and there was a "Buy America" clause in the administration's recent stimulus package – the British economy could miss out.

An EADS spokesman says: "EADS is committed to participating in the renewed competition whenever the US administration decides it will take place."

Finally, the fate of the F-35 programme is not yet known. Although primarily backed by the US, the F-35 is developed in co-ordination with a slew of other countries including the UK. Secretary Gates favours the craft, arguing the cost is half that of the $144m-a-plane F-22, a similar aircraft.

However, the F-22 is likely to be granted a bigger role in future production than originally planned, as Lockheed Martin seems to be arguing successfully that 25,000 US jobs are dependent on its production.

"There's nothing official yet on what will happen to these craft," says a Washington insider. "But it's easier to save money on the really big programmes like these. Nobody's talking about cancelling F-35 orders, but the programme could be pushed back."

And a delay in the world's biggest defence market will always have repercussions this side of the pond.

Britain looks to its defences

The facts and figures of military spending

The aerospace industry employs 113,000 people in the UK and is worth more than £20bn.

The sector spends nearly £3bn in research and development each year, second only to the pharmaceutical industry.

The UK buys more defence equipment than any country, bar the US and China.

Defence exports account for £5bn of the UK economy.

In 2003-05, £3bn was spent on the acquisition of UK-based defence-aerospace companies.

The Government spends 5 per cent of its budget on defence, although it has been as high as 10 per cent.

The share of GDP spent on forces and equipment is 2.5 per cent.

Source: Society of British Aerospace Companies