FRES fail by Labour again....

Again I am going to let the eminent Howard Wheeldon take the lead on this one.

Howard Wheeldon on a supposed press leak from government suggesting a US firm will be chosen over BAE to supply 750 armoured vehicles...

Not content with attempting to give regulatory control of the UK banking industry away to our competitors and potentially killing off thousands of what one high ranking supporter of ‘New Labour’ called ‘unnecessary UK banking industry jobs’, it seems that the government has the same in mind for thousands of UK based defence industry jobs as well! In what appears to have been a deliberate and time sensitive leak to a very well heeled financial newspaper it seems that the government has ‘decided’ that US based General Dynamics with its untried and unproven ASCOD-2 vehicle as opposed to BAE Systems with its already battle proven CV90 was to be awarded the initial block 1 batch of up to 750 armoured vehicles – part of the proposed and already long delayed Future Rapid Effects System (FRES) family of military combat vehicles.

Official confirmation might come as early as this week we are told. However, given the nature of the government beast plus that we are talking here about spending money on defence – something that is abhorrent to Gordon Brown – it may also be a good idea not to take this particular government leak for granted!

Included in the leak was also that the crucially important and urgently needed Warrior armoured personnel carrier upgrade program would again be put back by at least another year, despite BAE Systems having put £50m investment into de-risking the programme and demonstrating the MTIP FRES demonstrator on the back of funding concerns. This particular part of the leak is as appalling as it is believable. So, it might on first sight appear that the government, just ahead of an election and in a constituency widely regarded as an absolute Labour stronghold, is prepared to see thousands of jobs at the former Vickers tank factory at Newcastle-upon-Tyne thrown to the wall. Why is it that I think not? OK, so I am taking a bit of a gamble here and while I readily admit that I could be wrong, I see more into this particular press leak than some others. But on the very basis of best product for the mission and that in the case of BAE Systems there are so many UK based jobs involved, plus events in the US this past week that show protectionism is not only alive and well but positively thriving, there is no reason why BAE Systems should not be awarded the first stage of FRES.

Perhaps though we might dig just a little deeper into what might also lay behind reasons for this rather surprising let alone strange leak:

Try this for one possible scenario: Rather than spin and then subsequently announce what most had been led to believe awarding a contract intention for between 600 and 750 FRES vehicles sometime later this week, my guess is that given the current MoD funding status and budget shortfall and given the unlikely prospect that any part of the long delayed FRES requirement would likely be based on an Afghanistan type UOR (Urgent Operational Requirement) that for the government to agree a contract of this size before the election and, more importantly, before the result of the upcoming Strategic Defence Review would be very unlikely. OK, the government could order now and cancel later – even completely reversing the decision of who it awarded the contract too perhaps. More likely though is that to save its own skin it will slip the potential of an award being made to the most unlikely candidate, let the arguments and angst commence and then blame the cries from the so called loser as reason enough to delay!

And another on the same theme perhaps: It seems to me that with the government knowing that if GD was to be awarded a contract of this size with a product that had not even been seen let alone tested by the MoD (a quite impossible scenario surely?) that BAE Systems would quite rightly scream more than enough of a scenario has been created to delay not only Warrior upgrade but also this first phase of FRES yet again.

And what about this one: It is just possible of course that by dropping the suggestion that GD as opposed to BAE Systems had won to the press (just as the government had done through a similar press and media drop several years ago when it was suggested that Thales as opposed to BAE had won the design contract for the CV aircraft carrier program – something that I was later able to dispel) it just may be that the government could be doing this just to put pressure on BAE Systems to sweeten its deal.

Not surprisingly and quite rightly in my view BAE Systems has risen to the bait throwing its toys out of the pram big time on the basis that:

1.) The government should not be buying a completely unproven product that has never been deployed on operations from a competitor and that maybe two to three years behind the CV90;

2.) Giving part of FRES to GD would potential destroy more UK high end defence industrial capability;

3.) In the wake of the ‘forced’ decision by EADS and its Northrop Grumman partner that it had no choice but to pull out of the US tanker program because of US based protectionism;

4.) Following significant work by BAE Systems to generate cost savings on the program that benefit the taxpayer and given that the CV90 is already a well proven product there is in my view no reason to not award the first phase of FRES (should this really be about to occur) to anyone other than BAE Systems.

If through this leak the UK government is intentionally attempting to buy itself more time whilst at the same time also attempting to appease public concern that it is failing to order equipment that troops urgently need all that I can say is that it is going about it in a stupid and very dangerous manner. At this stage I am left to conclude that we probably will not see any order being given to General Dynamics or BAE Systems later this week for anything other than a handful of vehicles for test purposes. Mind you if I am right then I guess that the government will cover its tracks by making additional promises. We will see!

Howard Wheeldon, Senior strategist, BGC Brokers