Conclusions and recommendations
Implications of a smaller budget
1. 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. (Paragraph 25)
2. 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.
(Paragraph 26)
What this would mean for the Scottish defence
industry
3. 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. (Paragraph 32)
4. 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.
(Paragraph 33)
5. 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. (Paragraph 34)
6. 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. (Paragraph 35)
Operational Advantage and Security of Supply
7. 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. (Paragraph 43)
Article 346
8. 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. (Paragraph
44)
9. 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. (Paragraph 45)
Security vetting in the defence industry
10. The
regulation of any defence industry seeking to operate beyond its
national borders is complex and requires extensive protracted
negotiation. A separate Scotland could not rely on existing arrangements
continuing with the UK Government, or provided through the UK
Government with other countries. (Paragraph 52)
Regulation and the US
11. The
UK currently enjoys a highly privileged defence relationship with
the US. Scotland could certainly not presume to inherit this relationship.
First, it would have to set up a regulatory regime for its defence
industry, including the ability to security vet personnel, and
have it in operation on the first day after the UK regulations
stopped. Secondly, the United States would be nervous of a new
state and would want to understand the defence policy of a separate
Scotland before being persuaded that it could do business with
companies in Scotland. These relationships can take time to build.
(Paragraph 55)
Active defence industrial policy and supporting
Scottish industry
12. 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. (Paragraph 68)
Joint procurement
13. 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.
(Paragraph 72)
14. 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. (Paragraph 73)
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