Babcock has suffered losses that nearly doubled, to £190million, on its attempt to build cheap warships in Britain.
Five Type 31 frigates that were supposed to cost £1.25bn are the latest in an ongoing series of Ministry of Defence purchases which have been hopelessly overbudget. Babcock is the one who is paying the price in this case. Its Rosyth shipyard, located across the Firth of Forth, from Edinburgh, has nearly completed the superstructure of HMS Venturer.
Babock accuses its former management of signing a rigid and onerous contract. The contract has been ruined by rising labour costs and inflation, both of which were not anticipated when it was signed, in 2019, before the Covid-19 pandemic.
According to the programme, it is supporting 1,250 jobs in Rosyth as well as another 1,250 within the supply chain.
Babock reported that, at this time last year, it had lost the argument with the MoD over who should pay for inflationary costs. It said it would book a loss of £100 million on the Type 31 Contract.
Babcock published a trading update a week before it was scheduled to report its annual results. It detailed the latest developments on the contract. The company reported that the outturn for the life of the contract had declined by £90million.
The Type 31 contract, which was signed in 2019, is the last legacy contract that the group manages.
The deal was made before David Lockwood became CEO in 2020. Since then, he has been a major force for the company.
The statement continued: “Overall programme costs have increased as a result of maturation of the design, and an increase in forecast labour cost.” The rise in labour costs in the market that is available to Rosyth will be greater than the Consumer Prices Index [rate of inflation], which is the indexation in the Type 31 contract.”
Babcock acknowledged that there were also management issues. “We launched an operational improvement program to challenge all aspects the contract. This included a focus on financial modelling and cost drivers, with external consultants supporting us. The new management team has a greater ability to restructure this programme.
Type 31 is important not only for strengthening the Royal Navy, but also as an exportable, low-cost fregate that benefits Babcock and public finances. Poland and Indonesia are now customers.
The latest Type 31 setback has taken the shine off of a set of otherwise impressive results that will be published by Babcock next week. Babcock operates the Royal Navy Dockyard in Devonport, maintaining and refitting Warships and Submarines for the MoD.
Babcock reported a 33 percent increase in operating profit to £238 millions, with margins increasing from 4 to 5.4% on revenues that were 11 per cent more than the previous year at £4.4 billion. Cash inflows increased by over a half to £160m and net debt fell to £435m.
The company has been able to reduce its annual retirement scheme payments from £65million to £40million by tackling its pension liabilities.
The shares of Babcock had been trading at five year highs but fell 9 1/2p or 1.8 percent to 528p Wednesday. This valued the group at £2.67 billion.
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