October 17, 2016 / 5:50 PM / 3 years ago

Exclusive: Proposed German missile defense system cost far above estimates - sources

BERLIN (Reuters) - A proposal by European missiles maker MBDA to develop and build a new air defense system for Germany came in billions of euros higher than the previous estimate of 4 billion euros ($4.5 billion), according to multiple sources familiar with the proposal.

The Medium Extended Air Defense System (MEADS) is pictured during a presentation at European Defense Group MBDA in Schrobenhausen, near Ingolstadt, Germany, June 25, 2015. REUTERS/Michaela Rehle

The German Defence Ministry declined to comment on the report, saying it was still evaluating the proposal submitted late last month by MBDA, jointly owned by Airbus Group (AIR.PA), Britain’s BAE Systems Plc (BAES.L) and Italy’s Leonardo Finmeccanica SpA (LDOF.MI).

The company also declined to comment.

Germany last year chose the Medium Extended Air Defense System (MEADS), made by MBDA and Lockheed Martin Corp (LMT.N), over Raytheon Co’s (RTN.N) Patriot system, but said the companies would have to meet tough performance milestones to retain the contract, one of Germany’s biggest arms projects.

The MEADS system was developed jointly by Germany, Italy and the United States, although the U.S. Army later decided not to buy the system for its own use. Germany is buying MEADS to replace its Patriot air defense system fielded in the 1980s.

German Defence Minister Ursula von der Leyen last month promised to carefully scrutinize the MDBA proposal to avoid the cost overruns and issues that have plagued previous German military procurement programs.

Sources said the MDBA proposal put the cost of finishing development of the MEADS system alone at up to 3 billion euros above the previous estimate of roughly 1 billion euros.

One of the sources said the total cost, including development and procurement, was now seen at 9 to 10 billion euros, more than double the previous estimate of 4 billion euros, raising serious questions about the project’s future.

“With a cost of 9 to 10 billion euros, it’s difficult to know how you can even negotiate,” said the source.

The sources gave no specific reasons for the higher cost.

The ministry was not expected to cancel the project immediately, but would ask MBDA to provide an additional detailed breakdown of the cost of the major items in the proposal, the source said.

Some officials have already raised the possibility of going back to negotiate with Raytheon about a new version of the current Patriot missile defense system, the source added.

A decision on how to proceed was expected by the end of the year.

($1 = 0.8928 euros)

Reporting by Andrea Shalal and Sabine Siebold; editing by Susan Thomas

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