5 Uncertainty and the transition
56. The companies we visited raised questions around
the business and regulatory climate that would exist in Scotland
if it became a separate country, and questions have been asked
about the status of both current and future MoD contracts.[96]
When our inquiry began, Professor Sir Hew Strachan commented on
how "politically silent the defence industries have been"
and said he had "expected them to say rather more than they
have, but they have not."[97]
We have found that many companies are still unwilling to comment
in public but will do so in private. The broader business community
in Scotland has started to raise concerns about the uncertainty
that the referendum is generating. CBI Scotland published a list
of issues it would like addressed in the forthcoming Scottish
Government white paper on the referendum, which said:
In addition, what assessment has the Scottish
Government made of the effect of independence on the prospects
of and employment in the defence-related industries which supply
equipment to the UK or other NATO allies?[98]
57. This is additional to the general question of
whether the tax and regulatory regime in Scotland would be more
or less attractive than that offered in the UK. Although each
firm will monitor risk and develop methods to anticipate events
in order to plan for any period of uncertainty, some clarity is
needed for them to be able to make decisions around investing
or relocating.[99] Mr
Godden said
businesses could probably cope with uncertainty
over a one, two or three-year period, but beyond that they will
start investing elsewhere.[100]
58. And while larger corporations like Finmeccanica,
Thales and BAE Systems are better able to manage longer periods
of political uncertainty—they can invest in different countries
and develop several customers—this helps the corporation
but does not necessarily help Scotland if the investment is switched
to another country. Mr Godden also said smaller businesses are
less resilient:
For the smaller companies it is very difficult
because they have shorter term contracts. They have shorter term
horizons. [...] They are the ones that usually suffer from uncertainty.
Although the balance sheets of most of the defence companies have
been okay in this last recession, they are the ones that have
struggled the most because they don't have access to finance the
bridge any uncertainty of timing and contracts, and they typically
will have to diversify.[101]
59. Furthermore, Dr Louth said simply because the
defence industry has developed ways to manage uncertainty did
not mean it would necessarily welcome it.[102]
Of course, the industry has to deal with the uncertainty that
comes along with every electoral cycle and the risk that a change
in government can bring about a change in defence policy.[103]
However, the degree of change that might come about by Scotland
becoming a separate country would be of a different magnitude
than the usual political upheaval, as Professor Taylor said:
A question such as Scottish separation, I would
imagine, would clearly rank as a significant risk to defence companies
that operate in Scotland because the political context in which
they operate would be changing so drastically.
And he noted that: "a yes vote would probably
raise more questions than a no vote".[104]
60. Mr Dunne said that the Ministry of Defence had
concerns around what would happen if Scotland voted to leave the
Union:
which would inevitably introduce a great deal
of uncertainty into the whole procurement process for the MoD
in a residual UK, and about whether Scottish companies would be
able to be given the favourable treatment that they are at the
moment.[105]
61. Several witnesses said that the uncertainty would
halt investment decisions. Dr Louth said that there would be nervousness
around making significant capital investment "with all the
hanging questions associated with a yes vote than otherwise."[106]
Scottish Engineering said:
Concerns have been directly related to this organisation
by members across all sectors as to the uncertainty around the
potential question of forthcoming Independence. Where organisations
are either owned by a foreign parent or, as is the case with many,
operate throughout the UK, there is reluctance to commit to either
basic investment or substantial capital projects, due to the aforementioned
uncertainty.[107]
And Ian Godden said:
The big question on uncertainty is where you
put your investment in technology, people and skills. If there
is long-term uncertainty about a particular market—meaning
more than a few years—then they will tend to invest where
they have some certainty. That means where the policy, the growth
and the contracts are clear.[108]
62. This emphasises the importance of providing information
about the future defence policy, enabling industry to know what
is required of it, and to what extent a separate Scotland would
want to be different from the UK. Mr Godden said:
The most important thing to give certainty is
for the parties in this debate to state their defence policy for
Scotland and then the industrialists can get a bit of certainty
about what is likely to happen.[109]
63. Similarly, it is not possible to know how international
governments and business will react towards Scotland, which would
be important considering the likely need to develop exports.[110]
In addition to concerns around what the defence policy might be,
we also heard concerns about how the transition from the current
situation to a separate Scotland would take place. Professor Taylor
said:
I do not understand but would not underestimate
the difficulties of the transition process. [...] I simply do
not know how the transition process would work. That really opens
up the possibility that, in a way, firms based in Scotland might
cease to be eligible and cease to have access to the technology
that they currently get. I do not know the answer to that.[111]
Active defence industrial policy
and supporting Scottish industry
64. The defence industry tends to be located where
there is a demand from the national Government and appropriate
opportunities for export. The MoD White Paper, National Security
Through Technology, said:
We recognise that many of the large companies
that supply the UK are now transnational in outlook and therefore
have choices about where they invest. We will ensure that the
UK continues to provide a unique environment for industry in the
defence and security sectors.[112]
65. In the event of a yes vote, a separate Scotland
would have a smaller defence budget than the UK, and the future
Scottish Defence Force would be unlikely to buy most of what the
Scottish defence industry currently provides. A separate Scotland
would have to develop an industrial strategy to attract investment
and stop the defence industry drifting to countries with bigger
budgets.[113] Mr Godden
explained:
Without active industrial intervention [...]
a defence industry in a country will naturally decline. It requires
positive industrial policy rather than no policy. With no policy,
it will get sucked into both larger countries and people that
spend more. If the defence industry is to be protected or encouraged,
then an active industrial policy is required.[114]
66. Such a strategy could build on Scotland's strengths,
its skills base and traditional industries, such as engineering.
A separate Scotland could actively support the current defence
industry to diversify into other areas,[115]
and some of the defence technologies produced in Scotland do have
a dual use.[116] Professor
Taylor told us, however, that many defence companies had found
diversification to be difficult for two reasons: firstly, defence
tends to be about manufacturing highly sophisticated products
in small numbers whereas civilian manufacturing is aimed at less
sophisticated products in large numbers; and secondly, defence
businesses' marketing operations are often aimed at one customer,
or very few customers. In the end, many of those who tried to
diversify chose to sell their defence arms to a defence specialist.[117]
Some of the firms we spoke to were not against diversification
and reducing their reliance on the MoD, but they questioned how
quickly, and to what extent, new industries would pick up the
slack to replace the defence contracts.
67. The UK is currently the second biggest exporter
of defence equipment in the world, with access to markets partly
based on the UKs position in the world and its established relationships
with other countries. Professor Chalmers said that it would be
important for Scotland to develop an industrial policy designed
to gain access to such markets as: "It would have to be much
more export-oriented than it is now to survive in anything like
its present form."[118]
This reinforces the importance of having such policies in place
to support the industry as soon as possible if, for some of the
reasons outlined earlier, the Ministry of Defence withdraws its
custom.[119]
68. It is inevitable that
the defence industry in a separate Scotland would be different
from the current one. A future Scottish military would not want
to buy most of what the defence industry in Scotland currently
provides for the UK. There is no guarantee that the UK and others
would place the same level of orders. A separate Scotland would
have to develop an industrial policy that would assist the industry
to adapt to provide for the domestic market, generate products
for export, and diversify into products for civilian use.
Joint procurement
69. One way to compensate for the consequent loss
of MoD spending could be for Scotland to enter into joint-procurement
initiatives with other countries. In this way it might enable
it to afford new equipment, gain economies of scale or equipment
that it otherwise could not afford, and ensure interoperability
with allies. The UK does this with potential partners "whose
defence and security posture is closest to our own or where we
have shared interests."[120]
70. Many large defence procurement schemes are international,[121]
for example Typhoon is shared between the UK, Spain, Italy and
Germany.[122] Each
country entered the programme to secure work for their domestic
industry and also to gain a military asset with the latest technology.
In the case of Typhoon, the UK is responsible for the front of
the aircraft. Suppliers who wanted any of the contracts to be
part of the UK section of the aircraft took part in "competition
with Government agreement".[123]
Scotland would not inherit the UKs share of Typhoon. It would
have to find a joint procurement programme it wanted to be part
of, negotiate how many units of the finished product it would
buy and what contribution it would offer to the construction.
As part of this, a separate Scotland would need to develop how
it wanted to deal with other countries. Ian Godden said:
This debate about what is going to happen between
England and Scotland is not at a big enough level because the
USA, France and Germany have to be brought into this thinking.
My attitude is that, if Scotland can decide what its attitude
to Germany, France and the USA is, as well as England, then we
might have a decent industrial defence perspective about how to
run that.[124]
71. These countries are entering into joint procurement
arrangements whereby their domestic industry would contribute
to the production of an asset they would themselves procure. It
is unsurprising that there is a correlation between countries
which co-operate militarily and whose defence industries co-operate.
Dr Louth used the Anglo-French experience in Libya as an example.[125]
The willingness of other countries to engage in joint procurement
with a separate Scotland would be seen in close relation to how
a new Scottish military might co-operate with those who it is
seeking to do business with.
72. The joint procurement programmes in which
the UK currently takes part include detailed agreement on the
share of work allocated to the UK defence industry. The Ministry
of Defence might expect that share of work to remain within the
UK, if necessary transferring it from Scotland so that it stayed
in the UK. Multi-national companies would want to locate where
they knew, with some certainty, that they could benefit from any
such joint procurement programme.
73. If a separate Scotland wanted to establish
any future joint procurement programmes, then these would be for
Scotland to seek to negotiate. Such programmes are agreed most
commonly between countries which cooperate militarily, and where
military as well as financial benefits can be gained from joint
procurement.
96 Q 1884 Back
97
Q 217. See also Francis Tusa, Defence Analysis, Volume
10, Issue 1, January 2007 Back
98
CBI Scotland, The Scottish Government's Independence White
Paper-issues that business would like it to address, December
2012 Back
99
Qq 1894-1895 Back
100
Q 1882 Back
101
Ibid., Back
102
Q 1881 Back
103
Q 1884 Back
104
Q 1881 Back
105
Q 2019 Back
106
Q 1886 Back
107
Scottish Engineering, HC 139-II, Ev 310 Back
108
Q 1882 Back
109
Q 1996 Back
110
Q 1884 Back
111
Q 1926 Back
112
National Security Through Technology, Cm 8278, February
2012, para 21 Back
113
Qq 1926-1931 Back
114
Q 1996 Back
115
Q 1906 Back
116
Q 236 Back
117
Q 1906 Back
118
Qq 214-215 Back
119
Q 236 Back
120
National Security Through Technology. Cm 8278, February
2012, para 82 Back
121
Q 1900, Q 2038 Back
122
Q 1912 Back
123
Q 1917 Back
124
Q 1996 Back
125
Q 1983 Back
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