The Referendum on Separation for Scotland: How would Separation affect jobs in the Scottish defence industry? - Scottish Affairs Committee Contents


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


 
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Prepared 8 April 2013