3 Operational advantage and security
of supply
36. There is often a close relationship between governments
and the defence industry. This relationship is not just determined
by price. There is an element of history as to why certain industries
are based where, and this in turn may affect the availability
of traditional skills and capabilities. But the development of
new technology in an international industry is very important.
Countries want to access equipment that provides a technological
advantage over enemies, and they want to ensure unconstrained
access to that equipment. The UK is no different. While the MoD
has said that "Wherever possible, we will seek to fulfil
the UK's defence and security requirements through open competition
in the domestic and global market",[64]
it also recognises that defence procurement is different because
of the desire to maintain an operational advantage over adversaries,
and the need to maintain freedom of action. As Peter Luff MP,
then Minister for defence equipment, support and technology, told
us:
We believe in our ability to maintain an operational
advantage and a competitive edge over our enemy. We want to do
it ourselves and we want to guarantee that we can actually maintain
that action and not depend on foreign countries to maintain that
action.[65]
And that means making sure the capability is nationally
produced.
Operational advantage
37. Operational advantage means possessing something
that increases success in combat and reduces the risk of danger
to UK personnel and equipment. The UK Defence white paper said:
A key issue is our ability to assure the operation
of critical sub-systems, which will often include the design and
operation of complex electronic hardware and the associated controlling
software. This may require us to request assurances relating to
processes and components used in the manufacture of such sub-systems,
as well as their subsequent operation and support through-life.
Without these assurances we would be unable to judge the level
of operational risk or take appropriate action to mitigate certain
threats. Similarly, the ability to understand a system as a whole
and to be able to modify or upgrade it through systems integration
can be essential to the performance of the system and to our ability
to react to the changing and evolving threat environment.[66]
38. The UK has: "a sophisticated demand for
high-value products that have to stand up to active service"[67]
In addition to containing reliable systems and components, the
MoD wants to be able to receive upgrades as necessary over the
lifetime of the product and, importantly, ensure security of supply
when its Armed Forces are on operations. While minor or common
components can be sourced internationally at market price, purposely-designed
ones tend to be sourced along national grounds.[68]
39. The need for assured security of supply was explained
by Professor Taylor who told us that: "unexpected military
operations are becoming the order of the day", that operations
of any scale involve mobilisation of any industry on which a country
relies, and:
Therefore, an assurance of an agile and supportive
supplier who was ready to go the extra mile for you has become
a feature of defence in a way that it wasn't during the cold war.
[...] I do not know if it is a big variable or a large variable—it
depends on the cost—but people are going to look at assurance
of supply and that should be, as I say, part of the equation.[69]
He gave the example of Operation ELLAMY in Libya,
when several British companies went out of their way to ensure
the UK Armed Forces had what they needed. Any UK Government would
want similar assurances of "flexible, timely, agile and sometimes
off-contract support from any of its suppliers."[70]
Article 346
40. Under Article 346 of the Treaty on the Functioning
of the European Union, individual states can, if they wish to
limit procurement to domestic suppliers, derogate from the Treaty
requirements to procure through open EU wide competition in the
interests of national security.[71]
There is no application process; the MoD satisfies itself that
the requirements of Article 346 are met and carries on. It would
be for another state to challenge the decision. Les Mosco, Director
Commercial, Defence, Equipment and Support, said he could not
recall an instance where the MoD had asserted an exemption under
Article 346 and it had been challenged.[72]
At the moment, Scotland benefits from this because it is in the
UK. If Scotland left the UK, then invoking Article 346 would exclude
Scotland.[73] Mr Luff
explained:
Where we wish to maintain our operational freedom
of action we would apply the article 346 exemption, yes. That
would mean we could not buy from Scotland. We could not buy from
an independent or separate Scotland.[74]
41. If the UK wants to open the order out beyond
the UK, then it must put it out to open competition and, as Mr
Luff told us, "we would be obliged to compete the contract
internationally. We could not favour Scotland, England or Northern
Ireland."[75]
42. This has been shown in Scottish shipbuilding.
In our previous Report, entitled Separation Shuts Shipyards,
we highlighted how the Royal Navy has consistently retained the
capability to design, build and maintain its warships within the
UK for reasons of national security. To do so, it consistently
excluded the construction of complex warships from open competition
using Article 346. If Scotland was a separate country, then the
Royal Navy would then not place orders in Scottish shipyards because
that would be outside the UK.[76]
43. For reasons to do with operational advantage
and maintaining security of supply, the UK will seek to place
defence contracts within the UK. Such operational advantage is
often related to high-tech equipment developed through expensive
research. The UK protects such assets by closely guarding the
design and production process. The UK also wants to guarantee
that, when needed, it can secure the equipment it needs. To do
so, it commonly chooses to place certain contracts within the
UK. This would exclude a separate Scotland, unless an agreement
between the two countries could be negotiated.
44. EU law requires major procurement contracts
to be offered for open competition. Individual states can use
various exemptions to place contracts with domestic suppliers.
One such exemption, Article 346, allows countries to exempt defence
procurement on the grounds of national security, and has consistently
been used by the MoD where it wishes to keep defence programmes
within the United Kingdom.
45. If the Ministry of Defence did not protect
defence contracts domestically, then any such offer would be subject
to rules on open competition and Scottish firms would have to
enter international competition without favour.
64 National Security Through Technology. Cm
8278, February 2012 Back
65
Qq 380-381 Back
66
National Security Through Technology. Cm 8278, February
2012, para 61 Back
67
Ibid., Back
68
Qq 1917-1923 Back
69
Qq 1979-1980 Back
70
Q 1979, Q 1924. See also RUSI, The Defence Industrial Base-A
Critical Component of Military Capability, June 2012 Back
71
National Security Through Technology, Cm 8278, February
2012, para 73-74 Back
72
Q 2041 Back
73
We explained how this would affect the shipbuilding industry in
Scotland in HC (2012-13) 892 Back
74
Qq 380-381 Back
75
Qq 380-381 Back
76
HC (2012-13) 892 Back
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