Meteor approval gives boost to BAE

BAE Systems, the beleaguered defence group, will receive a boost today when Britain and five other European countries sign up to a £1bn deal for missiles to arm the Eurofighter.

There had been fears that deep cuts in the German defence budget could force the cancellation of the Meteor programme. But Germany has now agreed to back the programme although it will buy fewer missiles than originally planned.

Meteor is being developed by the European consortium MBDA in which BAE has a 35 per cent stake. Work on the programme is expected to support up to 2,500 jobs in the UK and 5,000 across Europe as a whole.

The programme is being backed by Britain, France, Germany, Italy, Spain and Sweden. But export orders could bring in a further £5bn worth of exports, according to industry estimates.

The meteor contract was awarded to MBDA two years ago after a fierce battle between MBDA and the US defence giant Raytheon, who had strong backing in its bid from President Bill Clinton.

The signing of the Meteor deal comes as BAE continues negotiations with the Ministry of Defence on cost overruns on two other big procurement programmes – the Nimrod surveillance aircraft and the nuclear-powered Astute submarine – which are about £800m over-budget.

It emerged over the weekend that the MoD brought in the accountants PriceWaterhouseCoopers to check BAE's figures after the company first approached the Government to warn about cost-overruns on the two programmes. The PwC review is understood to have taken four days.

The investment bank UBS was subsequently appointed by the Government to advise on its negotiations with BAE. An outline of the compromise deal BAE is hoping to secure from ministers to share the cost overruns on the two projects could emerge in the next fortnight.

The dispute between the company and the MoD has cast a shadow over BAE's bid for a £10bn aircraft carrier contract, due to be awarded in January. BAE is still the favourite to beat the French group Thales to the contract although Thales is expected to pick up at least one other prime contractor programme due to be let shortly.

One of these is the Watchkeeper programme to develop an unmanned battlefield reconnaissance aircraft although the timing on this contract may slip because of a late hitch in the specification of the plane.