Serco hit by loss of nuclear submarine contract

Serco’s share price fell 12 per cent on Monday after it lost a contract to develop warheads for Britain’s nuclear submarines.

The Ministry of Defence (MoD) is renationalising the Atomic Weapons Establishment, which manages Britain’s nuclear stockpile from two sites that include the Aldermaston factory in Berkshire.

Serco and US company Jacobs Engineering each own a 24.5 per cent stake in AWE, while Lockheed Martin owns 51 per cent.

The consortium was handed a 25-year contract in 2000 to develop Britain’s nuclear warheads, which are carried on the Royal Navy’s four Vanguard-class submarines. Last year, AWE Management paid £82m in dividends to its shareholders, despite continuing controversy over cost overruns associated with projects to upgrade the facilities.

The decision to renationalise will be another blow for Serco, which has faced criticism for its role in managing several coronavirus testing centres and call centres.

Its shares fell 12 per cent to 113.3p on Monday, although the company said the contract would contribute £17m of underlying trading profits in 2020 and it did not expect any change to consensus forecasts for 2021.

Joe Brent, analyst at Liberum, retained a buy position on the company. “There may be some concerns about further outsourcing in UK defence but we see this as a special situation,” he said.

A critical report by the National Audit Office (NAO) this year found that the MoD had paid millions of pounds in additional management fees to AWE.

It pointed out that although the MoD was paying for the infrastructure, it neither operated the sites, nor had a regulatory role — giving it “less opportunity to secure value for money”.

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The NAO said the MoD and its prime contractors lacked commercial expertise and that the MoD had failed to learn from mistakes over the past 30 years for three key projects to upgrade the nuclear defence network, parts of which were built in the 1950s.

The contracts were so poorly written that the department rather than the contractors footed the bill for the financial and time overruns, reducing incentives to minimise costs, the NAO said.

The MoD said AWE would become an “arms-length body wholly owned by the MoD”.

“The new business model will see AWE plc continue to draw on private sector specialist support to strengthen capability as well as playing a key role in managing capital projects and contracts,” it said.

A new board will be appointed, replacing chairman Ian Tyler, the former Balfour Beatty chief. Until May, the company was run by former Network Rail chief executive Iain Coucher.

Serco said it was “proud to have been involved with AWE for the last 20 years, and will work with the other shareholders and the Ministry of Defence to ensure a smooth transition to the new arrangements”.

Two years ago, AWE was fined £1m for failing to ensure the safety of its staff following a prosecution brought by the Office for Nuclear Regulation.

AWE said on Monday that it would continue to manage and operate the enterprise until June 2021. 

“We are proud of our achievements and the significant progress we have made developing this unique, scientific and engineering national asset and executing a number of ‘first of a kind’ projects in a complex and highly regulated environment,” it said.

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