Defence: private sector

Defence crisis hits private sector – with wider knock-on effect

The role of the private sector defence industry in the UK and its relationship with the Ministry of Defence has been analysed in the Prospect commissioned report: Challenges in the generation and support of front line forces.

The report by Professor Trevor Taylor, from the Royal United Services Institute, and defence consultant, Brigadier (Retired) Jim Campbell, provides a background analysis to inform the union's contribution to the Defence, Equipment, Support and Technology green paper, announced in December 2010, and the work of the Defence Reform Unit, due to be completed by the summer of 2011.

Prospect says the crisis surrounding MOD now extends to the UK defence industry. The cuts to the defence budget announced as part of the government's Strategic Defence and Security Review are hitting private industry. Thousands of highly skilled jobs have already been lost. MOD's industrial policy is in disarray.

The Prospect campaign aims to highlight the crucial role played by defence professionals both in MOD and the wider defence industry. Without them the success of the armed forces is made that much harder.

Key industry players are working closely with the government to try to shape the ES&T green paper. However there is anecdotal evidence that the government is interested in talking to industry, mainly for reasons other than understanding the industrial input to defence capability.

Evidence given by the CEO of BAE Systems to the House of Commons Defence Select Committee suggested that MOD is approaching the defence industry seeking to explore whether it might re-negotiate or be released from some of its contractual commitments.

Inter-dependence as opposed to dependence

Clearly the UK cannot be self-sufficient in all aspects from design to in-service upgrade and then disposal of its military equipment. But the policy in place is that the UK should be able to sustain and modify its equipment, and any move away from this stance would bring significant risks and major implications for defence industry.

Supply chains and networks

The generation and use of modern and effective armed forces involves contributions from a wide range of capable organisations, dominated by civilian staff, some of whom operate within government and many in the private sector.

To operate effectively, these bodies need personnel with a wide range of individual skills who come together to generate a collective capability. The ability effectively to manage safety, highlighted by Haddon-Cave  is one important ‘collective capability.'

Understanding an organisation's capability is rarely straightforward since, when organisations routinely concentrate on core competences, many rely extensively on their external (and often international) supply chains to complement their own capabilities. These supply chains are complex and difficult to understand, with lower-tier firms sometimes serving several higher-tier organisations.

It may be, for instance, that the cancellation of an order for a fixed-wing combat aircraft causes financial problems for a sub-sub-sub contractor with specialist expertise, which also makes a technically important contribution to the helicopter or complex weapons sector. This is demonstrated clearly in the links and mutual dependence between the military and civil aerospace sectors. Arguably, the UK government has neglected the development of understanding of ever-more complex defence supply chains in an age of globalisation.

Sustain, modify and certify

The modification of equipment, obsolescence management and safety management require a wide variety of skills and a ‘whole-system' knowledge.

There is an enduring issue, well illustrated by Haddon-Cave, over how much of this activity should be conducted in-house and how much by external providers, whether UK-based or international. Industrial capabilities depend on skill bases that are difficult to chart, difficult to understand and, most significantly in the context of SDSR and ES&T Green Paper, very difficult indeed to re-constitute once they have been broken up.

If there is to be some backing away from the objectives of MOD’s defence industrial strategy, these should be mentioned explicitly in the SDSR to inform the ES&T green paper, and the associated risks should be recognised and assessed.

Defence global size and shape

Global military spending in 2009 is estimated at $1,531bn and the US alone makes up 43% of the global total. The UK spend is fourth, behind US, China and France, at 3.8% of global total military expenditure. The UK Aerospace, Defence and Security trade association (ADS), estimates that "our exports sustain about 55,000 jobs and generate a larger research and development base, which generates better equipment for our own armed forces and for our exports."

UK size and shape

There is no single, simple statement of what the defence industry comprises. The options and arguments are clearly expressed in a study by the Centre for Defence Economics of the University of York which, although 15 years old, has continued relevance.

For simplicity this review uses the definition of the Defence Industrial Base (DIB) used by MOD and the Defence Analytical Services Agency (DASA). ADS estimates that the defence industry employs over 300,000 people across all regions of the UK and contributes over £35bn per year to the British economy.

It is number one in Europe and second only to the US globally, with an average of over 20 per cent of the global export market, generating £7.2bn in export revenue in 2009.

Industry also contributes directly to current operations - there are 4,000 UK industry personnel in Afghanistan supporting the armed forces. ADS asserts that the UK defence industry is innovative, is one of the few UK sectors to retain a world-leading position and represents 10% of British manufacturing.

MOD equipment expenditure

In 2008-09, MOD spent £13.387m on equipment, £6.669m on capital expenditure, £4.292m on equipment support and £2.426m on research and development. This represents just under 40% of the overall defence budget and a little over 1% of UK GDP.

Tax and multiplier effects

Any assessment of the role of defence in the economy should make reference to the multiplier effects of defence spending and also to the tax consequences of cutting defence spending.

According to MOD's data, UK defence spending of around £40bn accounts for 510,000 jobs in government and the private sector. That is about £80,000 a job, which at least implies that around 30% of defence expenditure comes straight back to the government in tax revenue. Cutting defence spending will cut tax revenues more than cutting public expenditure in areas where low pay predominates.

Defence employment

According to DASA figures, total defence-related employment in UK is 300,000.

Impact of cuts

These numbers imply that a 10% cut in defence expenditure should not cause significant disruption in the economy. However, that makes no estimate of the multiplier effect of defence spending.

This would be felt particularly in regions and localities such as Barrow, Preston, Blackburn, Bristol, Yeovil and so on. Of the 75,000 jobs directly attributed to MOD equipment expenditure, 22,000 are in the south-east, 19,000 in the south-west and 12,000 in the north-west. The others are spread thinly across the other England regions, Scotland (4,000), Wales and Northern Ireland (1,000).

If the commitment to being able to sustain and modify equipment was scaled back, more of remaining defence work could well go overseas.

Investment in defence by private companies in the UK would become less attractive. An assurance of a shrinking market gives little incentive for such spending, especially when overseas investment is often needed to win defence sales outside the UK.

Impact of uncertainty

The major defence industry companies have a global presence and, as noted, the UK is in competition with other industrial nations for defence industry investment. Government, and MOD in particular, needs to be aware of the influence of national market conditions on investment decisions.

Companies will understandably invest most where the return is greatest and the risk of disruptions or contract shocks lowest. On this basis a swift conclusion to the SDSR/ES&T green paper process is important to reduce uncertainty and encourage continued investment in the UK.