UK Government Auditors Question Aircraft Carriers Decision

The U.K.'s National Audit Office, the body that scrutinizes government spending to ensure it is achieving best value for taxpayers, Thursday reopened the debate over the U.K.'s future naval power by voicing deep concern that recent changes to the country's new aircraft carrier program risked being poor value for money.

The NAO report comes as the U.K. government continues to juggle the need to cut spending on defense amid a wider drive to cut the country's budget deficit, and the need to ensure its military capability meets future requirements. The replacement of the Royal Navy's aircraft carrier fleet, set to cost billions of pounds, has been at the center of the debate and turned into a political battle between the previous and current U.K. governments.

The previous Labour government decided to replace three carriers with two larger ships from 2012 and replace the fleet of Harrier jump-jet aircraft with a vertical landing version of the Joint Strike Fighter for the new carriers. However, with estimated costs for the project rising sharply, the current government last year decided to decommission one of the U.K.'s existing carriers and scrap the Harrier fleet earlier than planned, meaning that the U.K. won't be able to fly aircraft from carriers until 2019. It also decided that at least one of the new carriers would be redesigned so that it can deploy normal fighter aircraft that do not need a vertical lift capability, delaying the completion of the project. It had considered scrapping one of the new carriers altogether, but decided this would be more costly than building it.

The decision on the carriers was part of a wider Strategic Defence and Security Review that aimed to cut the U.K.'s GBP37 billion defense budget by between 10% and 20%.

The NAO Thursday said the review is unaffordable unless there's a real term increase in defense funding in the later half of this decade, and that the carrier project is at risk from further changes.

"We are worried that the continuing difficulties the Department is facing in balancing its budget leaves Carrier Strike vulnerable to further changes," the NAO said in a report released without the agreement of the government.

Michael Whitehouse, chief operating officer at the NAO, said: "The 2010 Strategic Defence and Security Review has radically changed the Carrier Strike concept. It generated GBP3.4 billion of savings but introduced significant levels of operational, technical, cost and schedule uncertainty."

"It will take two years for the Department to reach a mature understanding of the consequences of the decision. These consequences include a decade without an operational carrier and the risks after such a time associated with reconstituting the capability," he added.

The NAO said the government will only understand whether the review was successful after the two years have passed, by which time the investment in the Carrier Strike will have "significantly exceeded GBP10 billion."

When the previous government gave the go-ahead to build two new carriers in 2007, the estimated cost was GBP3.65 billion. The NAO said Thursday that's now risen to GBP6.24 billion for building one carrier and converting the JSF.

U.K. Defense Secretary said he was disappointed that the NAO hadn't produced an agreed report, and stressed that the move to change the carrier project had delivered savings at the same time as ensuring the future military capability of the Royal Navy. He said the U.K.'s current involvement in NATO operations in Libya illustrated how the country could maintain military flight operations before the new carriers are operational by using land bases.

"We inherited a massive Defence deficit which included a carrier project that was already GBP1.6 billion over budget. The Strategic Defence and Security Review put this programme back on track and delivered GBP3.4 billion of overall savings to Carrier Strike," he said in a statement.

Ursula Brennan, the Ministry of Defence's Permanent Under Secretary said she was concerned the NAO took the "unusual" step of publishing this report "without agreeing the final text with me, as Accounting Officer, as required by their own guidance."

The new carriers are being built by BAE Systems PLC (BA.LN), Thales SA (HO.FR) and Babcock International Group PLC (BAB.LN). Lockheed Martin Corp. (LMT) of the U.S. builds the Joint Strike Fighter, although British firms including BAE Systems and Rolls-Royce Holdings PLC (RR.LN) are also involved.

- By Kaveri Niththyananthan, Dow Jones Newswires; 4420 7842 9299; kaveri.niththyananthan@dowjones.com

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