2 Defence procurement and domestic
industry
Budget
6. In 2012, the total UK defence budget was around
£39 billion,[13]
or about 2.7% of GDP. Although this was planned to fall to about
2.2% of GDP in 2015,[14]
agreed funding for defence over the period 2011-12 to 2014-15
remains over £33 billion per year.[15]
A separate Scotland would not match the defence spending of the
UK in total or in terms of a proportion of GDP. Professor Malcolm
Chalmers, Research Director, UK Defence Policy at RUSI, suggested
that if Scotland spent the NATO average of 1.4% of its GDP on
defence then it would have a budget of between £1.7 billion
and £2.1 billion per annum.[16]
Dr John Louth, Director, Defence, Industries and Society Programme,
RUSI, agreed with this figure and said:
If it is right that an independent Scotland will
come in roughly on NATO average of percentage of GDP, then, as
we have said, the annual budget for an independent Scotland is
about £2.1 billion. That is significantly smaller than Denmark,
Belgium and roughly half of Norway's at the extreme. That is not
that attractive in terms of the league table of defence spending
of independent nation states. Scotland has to be cognisant of
that.[17]
1.4% of GDP in Norway gives an annual defence budget
of near £4 billion, and in Denmark of nearly £3 billion.[18]
7. A model of a possible Scottish military, developed
by Stuart Crawford and Richard Marsh, had an estimated budget
of around £1.8 billion, or about 1.3% of Scotland's GDP.[19]
Most of the estimates we have seen so far suggest Scotland would
have an annual budget of between £1.7 billion and £2.5
billion, considerably less than that of the UK.[20]
The SNP has proposed an annual defence and security budget of
£2.5 billion.[21]
8. The estimates we have seen appear to be for a
steady state budget. The Crawford and Marsh model accommodated
transitional costs—how to get from the current situation
to a self-sufficient functioning new country—by spreading
the cost of any new equipment over a period of time or by expecting
them to be catered for in the division of assets.[22]
Conversely, Professor Chalmers said the transitional costs of
setting up a new state would be high and this, coupled with the
initial competition for resources, would put a lot of pressure
on a new separate Scottish defence budget. At the same time it
may not be possible for Scotland to get what it needs in the division
of assets, because it could not be sure that what it could negotiate
from the UK would match what it would want for its armed forces.[23]
We do not believe that Scotland would necessarily overcome these
transitional costs in the division of assets.
Procurement budget
9. The total amount the UK spends on purchasing equipment,
the procurement budget, is between £16 billion and £18
billion (over 40% of the total budget).[24]
This includes everything the Armed Forces buy, from warships to
night vision goggles. Francis Tusa, editor of Defence Analysis,
said different countries spend varying proportions of their defence
budget on procurement: in Belgium it is as low as 18%, Norway
20%, Sweden 22%, and in Denmark as high as 34%.[25]
Dr Louth said that if Scotland spent between 25% and 40% on procurement,
out of a defence budget of around £2 billion per year, then
the sum available to buy equipment would be at most about £1
billion, a figure that was "not a significant prize for companies
to pursue".[26]
The result would be that the Ministry of Defence equivalent in
a separate Scotland would have a much smaller amount of money
to spend on any equipment it needed, such as warships or night
vision goggles. Similarly, Professor Chalmers said:
If you had a Scottish defence budget of about
£2 billion a year and it spent 40% of that on new equipment
and equipment maintenance, which is quite high, you would be talking
about £800 million a year. A lot of that would be small-scale
suppliers and so on. I think quite a bit would be buying things
from overseas.[27]
10. To put this £800 million to £1 billion
into context, in 2011 the MoD placed a £1 billion contract
for 14 Chinook helicopters, at a cost of £71 million each.[28]
An individual Type 45 Destroyer, the last of which has just finished
being built on the Clyde, costs £1 billion.[29]
A Typhoon jet plane costs about £126 million (and that is
to buy, not to actually fly on a daily basis).[30]
An Orion P-3 marine patrol aircraft costs about £24 million.
The MoD bought 300 Foxhound Light Protected Patrol Vehicles, to
replace Land Rovers in Afghanistan, at a cost of £270 million.
(This also demonstrates the economies of scale—the order
for 300 worked out at cost a per-unit of around £900,000.
A more recent order for 25 vehicles was £30 million, or at
a cost of £1.2 million per vehicle.)[31]
11. Several witnesses told us that the defence industry
tends to be located in countries that spend a greater proportion
of their GDP on defence because they want to have access to the
higher spending markets. When we asked our witnesses about this
relationship, Francis Tusa returned the question: "is the
Belgian defence industry the size of the French defence industry?
No, it is not. Why? Belgians spend very little on defence."[32]
Dr Louth agreed:
It seems to me that there is a very strong correlation
between the size of the nation's defence budget and the size,
scale, capability and capacity of its defence industrial base.[33]
And Francis Tusa said:
You need to look at the examples of companies
like Thales, which is international. They move their facilities
to where the money is. In the case of air defence, they closed
down all of their French facilities and moved them to the UK because
that was where the budget was for their particular niche.
This could happen quite quickly:
It is a lot easier to flex factory demand within
the defence industry than you would think. The idea that that
could take decades before a move is wrong. If you ended up with
an independent Scottish defence force with limited capabilities,
and low-tech capabilities at that, those facilities will be within
Britain within months—end of. It goes where the money is,
pure and simple.[34]
Professor Chalmers broadly agreed, but thought it
might take "a little longer than Francis says", and
he added:
The companies will make commercial judgments
about whether or not to relocate. They will look at existing contracts
and what signals they are being given by their paymasters in Washington,
London or elsewhere. They will also look at their employees and
whether they are prepared to relocate across the border. I do
not think everything will leave on day one, but the trend will
be pretty clear. Why should the UK Government in this scenario
support jobs in Scotland in the defence area unless it is clearly
more cost-effective to buy from those suppliers?[35]
Funding for Research and Technology
12. We were told that the amount a country spends
on research and technology was an important indicator of government
support for the defence industry. Such investment is provided
an incentive to industry and higher education to develop and improve
new equipment. Just as a large procurement budget is an attraction
to the defence industry so is the amount spent on research. Countries
that spend a small proportion of their defence budget on research
and development tend to have a small domestic defence industry.
Vice Admiral Mathews, Chief of Materiel (Fleet), Defence Equipment
and Support, said there was a correlation between the manufacture
of advanced defence equipment and the amount a country spends
on defence research and development.[36]
This is highly relevant because of the high tech nature of much
of the industry in Scotland. Mr Philip Dunne MP, Minister for
Defence Equipment Support and Technology, Ministry of Defence,
said the MoD currently spent about £1.5 billion on research
and development, approximately £400 million of which was
on science and technology,[37]
and:
We do not direct our science and technology budget
outside the UK. I am not going to give an absolute commitment
to that because there are quite a number of examples of collaborative
projects with other nations. We are working with Australia, India
and France on some of our S and T spend, but I am not aware [...]
of any individual projects that are placed with no UK involvement.[38]
13. One of the places we visited, Selex in Edinburgh,
had benefitted from research funding from the MoD. In turn they
have invested in the local university, the research provided post-graduate
research opportunities, high wage employment, and apprenticeships
to school leavers who wanted to work in a high tech industry.
If the UK currently funds such research in Scotland as part of
an international defence programme, then in the event of separation,
we believe the MoD would move that research to stay within the
UK. If the research opportunities moved south, then the workforce
working on these programmes would have to consider whether to
follow.[39]
14. Ian Godden said that when the UK Government previously
reduced its investment in Research and Technology by 23% to £400
million, the international defence companies asked him: "Is
this a place to invest for the future?" Mr Godden added it
was important that a future Scottish Government was aware of the
signal the research budget would send to the industry:
For me, unless somebody has thought through what
the spend is of this new nation in the future in research and
technology and signalling and whether it is growing, shrinking
or whatever it is, and the universities associated with it have
collectively decided, "This is a policy that we are going
to invest in this industry"—that is a political decision.
It is not an industrial decision, but, to me, that is the biggest
signal.[40]
And he said that unless a separate Scottish Government:
"is committed to significant and sustained investment where
companies believe they are going to get expertise out of Scottish
universities, I agree with you. It will not be perceived as the
place to go."[41]
15. Estimates of the size a research budget in a
separate Scotland ranged from £20 million to £30 million,[42]
with which Scotland could choose to fund research where it wanted,
or not. Professor Taylor said that many smaller countries spent
nothing on defence research and over 90% of the research carried
out in Europe was done by the UK, France and Germany.[43]
Implications of a smaller budget
16. It has been argued that Scotland does not receive
its 'fair share' in UK defence spending and that the MoD spends
less in Scotland than the amount sent to the MoD from Scottish
tax payers. This does presume that it is possible to trace where
the MoD spends its money with any accuracy. Professor Ron Smith,
Department of Economics, Birkbeck College, said:
The whole system is so interdependent that it
is very hard to track down regionally. Some of it you can. We
do not know whether the £2.5 billion will be more or less
than is spent in Scotland at the moment; there is real uncertainty
about it.[44]
17. And a considerable amount of MoD spending is
on assets that operate abroad, such as the overseas bases in Germany,
so the same argument could be applied for much of the UK.[45]
18. The contribution from Scottish taxpayers also
contributes to the collective defence of alliances that the UK
is part of, such as NATO. In return the UK benefits from the security
protection offered by NATO. The contribution of Scottish taxpayers
goes towards the security and protection of the whole of the UK,[46]
so it funds the warships that might be called up from a port in
England to keep an eye on Russian warships seeking shelter off
the Scottish coast,[47]
and the Typhoons based in Scotland that police the skies of Northern
Europe as part of the NATO Quick Reaction Alert force.[48]
As a result, it is very difficult, and not particularly helpful,
to try to identify what proportion of each pound spent is dedicated
to the protection of Aberdeen or Aberystwyth.
19. The defence industry in Scotland contributes
to this defence of the whole UK and the level of spending on the
domestic defence industry enhances the self sufficiency of the
UK to defend itself. Philip Dunne MP, Minister for Defence Equipment
Support and Technology, Ministry of Defence, told the Committee:
The security umbrella that is provided through
the whole-UK spend and commitment to defence is very much more
substantial than would be available to an independent Scotland.[49]
20. The Ministry of Defence chooses, for a variety
of reasons, to spend its money within the UK, and Scotland benefits
from this. Professor Taylor, RUSI, told us:
A relatively safe assumption is that almost all
Scottish defence business rests either directly or in a fairly
close relationship with work from the Ministry of Defence.[50]
21. For example, every Royal Navy submarine since
1917 has been fitted with a periscope from Thales or their previous
incarnation as Barr and Stroud. Without MoD contracts, some of
which are very large, a defence supplier in Scotland would be
faced with much smaller individual major contracts and a much
smaller general domestic market. A smaller budget and reduced
spending power would mean reduced economies of scale too: fewer
helmets would be bought so more would have to be paid per helmet
(or boots, water bottle, lorry, helicopter, etc.).
22. The defence industry in the UK, and by definition
Scotland, makes weapons for the UK military to use. It also tests
some of these in Scotland at Cape Wrath and Benbecula. These are
expensive items that would probably be beyond the budget of an
independent Scotland:
In addition, there is work on the F-35, Paveway
bombs and things of this nature, but, for most of the other projects,
they are equipping things one cannot imagine Scotland buying.
I cannot imagine Scotland buying F-35 aircraft, for example.[51]
23. The industry in Scotland also makes a wide variety
of smaller components. Thales provides optical equipment for armoured
vehicles used by the British Army. Chemring makes the charge that
fires the ejector seat for the F-35.[52]
Ian Godden pointed out that Scotland would not automatically lose
all the business it currently gains from being part of the UK.[53]
What the MoD would still be able to buy from Scotland would be
low-tech items which are not considered security sensitive, but
these are the same items that are widely available and generally
sourced from countries with lower production costs.[54]
Francis Tusa said:
"Oh, the EU has said it will be trans-border
procurement." I am sure it will be for bootlaces and bottled
water, but for the key systems there is the political resonance
of security of supply and very simple things like, again, size
of budget.[55]
24. Other witnesses shared this view that some cross-border
procurement would remain. Professor Taylor said:
I would feel fairly confident in saying that
there would not be an increase in orders from London north of
the border. My suggestion is that it would be a diminished number.[56]
25. The population of Scotland is 8.5% of the United
Kingdom. A budget of £2.5 billion would represent 6.5% of
the UK defence budget. A procurement budget of £1 billion
would represent about 6% of the UK defence procurement budget.
This is before costs associated with intelligence and the transition
period are taken into account. A defence industry in a separate
Scotland would have a substantially smaller domestic market.
26. The budget for research in the defence sector
is an important indicator of intent. At the moment, the UK research
budget is £400 million where estimates of a future research
and development budget for Scotland vary between £20 million
and £30 million. The high-tech nature of the defence industry
in Scotland means it would be sensitive to changes in the level
of investment in research. The reduction in research opportunities
would be a factor in determining whether defence industries remained
in Scotland. It would also affect the amount of research funding
for universities in Scotland. We urge the Scottish Government
to provide more information on their commitment to funding defence-related
research after separation.
What this would mean for the Scottish
defence industry
27. The MoD is under domestic pressure to invest
in and support jobs in the UK while at the same time securing
value for money for the UK tax payer.[57]
If the UK needs a Frigate, and it can build one in the UK, then
it does. This keeps jobs and money in the UK economy and the Treasury
gets a fair proportion of it back in tax. Vice Admiral Mathews
told us that if Scotland became a separate country, the MoD would
reassess what was sourced in Scotland, compare it to what the
MoD could produce elsewhere in the UK, and ask the question "Well,
do we want to transfer this business?"[58]
28. Philip Dunne explained what the MoD would take
into account while reassessing current MoD contracts in Scotland:
Clearly, in the event of separation, that will
be a new factor that we will have to take into account. We will
be looking at all MOD contracts at that point that are in existence
and all those that are in the planning phase, and we will decide
what to do about them. In some cases, that might involve withdrawing
the contract, which would have some cost implications for the
MOD that would then be factored into any separation discussions,
and we might conclude for some that it is acceptable for the contract
to continue until termination for those bits that are already
under way, because it may then be inefficient to remove them.
However, it will depend on the capability and the security sensitivity
of each contract.[59]
Mr Dunne made it clear that the cost of any change
to current contracts would be part of the separation negotiations:
As to those contracts that are in progress at
that point, it would be a matter for negotiation with an independent
Scottish Government as to what would happen to those contracts,
the financial implications, who would bear them and where completion
would take place.[60]
29. In such circumstances it is difficult to imagine
that the UK would place any new major contracts in a separate
Scotland.[61] Some contracts
might remain, but many would be withdrawn and it is worth pointing
out that almost all of the firms we visited, such as Vector, Thales,
Selex and BAE Systems have other facilities elsewhere in the UK.
DM Beith is one of the MoD sites we visited in Ayrshire. On the
surface, it is one of 11 munitions stores spread across the UK,
but DM Beith also carries out maintenance and upgrade work on
complex US-UK weapons, including those used by the submarine fleet
operating out of Faslane. If the fleet leaves, then the weapons
leave and the work at Beith goes too. The Minister told us that
this work could be moved south.[62]
30. Similarly, Vector Aerospace carries out maintenance
on parts for Chinook helicopters and Tornado jets. It is unclear
whether a separate Scotland would have such aircraft and on what
scale, and whether that would provide an equivalent amount of
work to replace that lost if the MoD withdrew.[63]
Vector has sites in Hampshire.
31. The MoD has said to us that the contract for
the sensitive work on radar equipment that is currently carried
out at Selex is an example of a contract they would look at and
want to keep within the UK. Thales design and manufacture a range
of electronic and optronics equipment for the MoD and export,
and are very much associated with the latest defence technology.
They contribute to a whole range of MoD assets, such as the Foxhound
patrol vehicles. We believe that such research and work would
move to somewhere in England.
32. In the event of separation, the Ministry of
Defence would reassess its current contracts in Scotland and,
as appropriate, withdraw the work to within the UK. The Ministry
of Defence has said that the cost of severing contracts as a result
of separation would be factored into any separation negotiations.
33. We cannot see a situation where a future UK
Government would sign a new contract for defence work in a separate
Scotland, unless it was one for which there was an international
open competition and Scotland provided better value for a readily
available product.
34. The defence industry that is currently in
Scotland is within the UK and is largely attuned to provide equipment
and supplies required by the UK. As much as 80% of defence sales
in Scotland are directly to the Ministry of Defence. Separation
would remove the single biggest customer, and one with the fourth
largest defence budget in the world.
35. There is a strong correlation between the
size of a country's defence budget and the location of major defence
employers. There are several factors that impact upon industrial
location, but size of the domestic budget is one of the most persuasive.
The defence industries, and particularly the high-tech sector,
tend to locate in countries that have high defence budgets, invest
in research and technology, and buy sophisticated equipment, often
intended for high intensity operations.
13 Ministry of Defence Annual Report and Accounts 2011-2012,
HC 62 Back
14
Malcolm Chalmers, The End of an 'Auld Sang' Defence in an independent
Scotland, RUSI, April 2012 Back
15
Written evidence from the Ministry of Defence to the Defence Committee,
Session 2012-13, Defence implications of possible Scottish
independence, HC 483, para 44 Back
16
Q 158 Back
17
Q 2007 Back
18
Malcolm Chalmers, The End of an 'Auld Sang' Defence in an independent
Scotland, RUSI, April 2012 Back
19
Stuart Crawford and Richard Marsh, A' The Blue Bonnets,
RUSI, October 2012 Back
20
Francis Tusa estimated £2.5 bn or less, Chalmers estimated
£1.7-£2.1 bn. Crawford & Marsh estimated £1.8
bn. Back
21
SNP Foreign, Security and Defence Policy update, October 2012 Back
22
Qq 2370-2378 Back
23
Malcolm Chalmers. The End of an 'Auld Sang' Defence in an independent
Scotland, RUSI, April 2012 Back
24
Ibid. and Q 2046 Back
25
Defence Analysis, Scottish Independence: The Defence Equation
For The Sake of Auld Lang Syne (Revisited) ...? February
2012 Back
26
Q 1907 Back
27
Q 225 Back
28
RAF to get 14 Chinooks, 22 August 2011. www.defencemanagement.com
Back
29
www.royalnavy.mod.uk/The-Fleet/Ships/Destroyers/Type-45-Destroyers
Back
30
Committee of Public Accounts, Thirtieth Report of Session 2010-12,
Management of the Typhoon Project, HC 860, See also Qq
2008-2010 [A single F-16 costs about £100 million.] Back
31
Army orders 25 more Foxhound vehicles, 24 August 2012, www.defencemanagement.com Back
32
Q 214 Back
33
Q 1926 Back
34
Q 214 Back
35
Q 215 Back
36
Q 2064 Back
37
Q 2060 Back
38
Q 2065 Back
39
Qq 233-235 Back
40
Q 1996 Back
41
Q 1938 Back
42
Q 214 and Q 1939 Back
43
Q 1934 Back
44
Q 2175 Back
45
Q 2357 Back
46
Q 2176 Back
47
Seven Russian warships remain near the Moray Firth, 15 December
2011 www.bbc.co.uk/ Back
48
www.raf.mod.uk/rafleuchars/aboutus/whywearehere.cfm Back
49
Q 2046 Back
50
Q 1897 Back
51
Q 215 Back
52
www.chemring.co.uk Back
53
Q 1926 Back
54
Q 242 Back
55
Q 214 Back
56
Q 1901 Back
57
Ministry of Defence, National Security Through Technology:
Technology, Equipment, and Support for UK Defence and Security,
Cm 8278, February 2012 Back
58
Q 2044 Back
59
Q 2026. See also Q 2044 Back
60
Q 2028 Back
61
Q 219 Back
62
Q 2042 Back
63
Qq 704-705 Back
|
