Government pays for the fall of Pompey BAE workers leave the shipbuilding yards in Portsmouth The Ministry of Defence has come to regret the agreement it signed with BAE Systems in 2009. Under the deal, the government promised to give its biggest defence contractor enough work to keep Britain's shipyards busy for the following 15 years. At the time, there was plenty of work ahead. But that was before the recession hit, export orders failed to emerge, the size of the army and navy was cut, and the Treasury realised that a new fleet of tanker ships for the Royal Navy could be built more cheaply in South Korea than at home. Today the government is paying for its mistake by funding the loss of as many as 1,775 BAE jobs, ordering three offshore patrol vessels to keep work going before its next big order for Type-26 frigates, and taking the political heat for ending shipbuilding at the Portsmouth dockyard, which launched its first known ship in 1497. One industry executive says that, in hindsight, the deal was a "very clever negotiation" by BAE "that meant the government was always going to pick up the tab" for any shortfall in work. In return, BAE had taken over VT Group to become Britain's monopoly ship builder and promised to take as much as £900m in costs out of supplying the UK's navy with its vessels over the 15 years. So far it has delivered £450m. The company has been warning for more than a year that cutting costs further would mean having to close one of the yards once the most labour-intensive work on Britain's two new aircraft carriers drew to a close. BAE was widely expected to keep its two yards along the Clyde and halt ship building in Portsmouth. However, BAE managed to duck much of the fallout from the unpopular decision on Wednesday as attention focused on whether the government had intervened to protect Scottish jobs ahead of next year's independence referendum. BAE believes it could still shift some of the lost jobs to building Britain's new submarines. Paul Lester, who was chief executive of VT Group, before BAE took over its shipbuilding arm, says this latest consolidation will define the future of a scaled-down but still sophisticated UK shipbuilding industry. He noted that 20 years ago Britain built four ships a year, while today it builds fewer than one. "It is a sad day for Portsmouth, but it means there will be one centre of excellence in Glasgow, which has the size and can cope with larger ships than Portsmouth," he said in an interview. In return, Portsmouth has been promised investment and will remain a centre for maintaining and upgrading Britain's naval fleet, employing about 11,000 people. BAE has made some concessions too. Most notably it agreed to accept half the financial responsibility of any future cost overruns, up from a split of about 30/70, with the government having carried the majority of the burden. It is a sad day for Portsmouth, but it means there will be one centre of excellence in Glasgow, which has the size and can cope with larger ships than Portsmouth Paul Lester Britain is not the first nation to push for companies to bear more of the risk on defence projects that almost always turn out more expensive than initially agreed. The US has also become tougher about its terms, having been hit hard by the huge increases in its Joint Strike Fighter programme - a price put at $1.5tn over its lifetime - with Lockheed Martin, of which BAE is a partner For BAE, accepting a higher responsibility is less risky than it appears because the carrier programme is already far advanced. The cost of building the carriers has risen another £800m to £6.2bn, the Financial Times revealed this week. But much of this was caused by the government's indecision about what type of aircraft would land on it. That debate is now over. Francis Tusa, an independent analyst, says the risk of further overruns is small. Meanwhile, BAE has ended up with a more streamlined shipbuilding operation, with much of the restructuring costs borne by taxpayers. Mr Tusa said: "BAE has managed to manoeuvre the government without being seen to have manoeuvred them."