5 The implications for the defence
industry in Scotland
Background
124. The aerospace, defence, and security sectors
are significant contributors to the Scottish and wider UK economies.
Each year they contribute billions of pounds in sales, millions
of investment in research and development, and many thousands
of jobs.
125. According to a Scottish Affairs Select Committee
report, in 2008 the defence industry, along with the Ministry
of Defence, supported almost 50,000 jobs in Scotland with wages
around a third higher than the Scottish national average.[107]
A more recent report by that Committee suggests that the defence
industry currently supports more than 15,000 jobs throughout Scotland.[108]
126. Professor Malcolm Chalmers, RUSI, told us that
figures published by industry groups suggested that Scotland had
a share of around 10 percent of defence spending.[109]
His colleague, Professor Trevor Taylor, told us that, in common
with the UK as a whole, approximately 60 percent of defence products
were sold domestically, the principal customer being the MoD.[110]
127. The SNP's policy update states that a "Scottish
defence industrial strategy and procurement plan will fill UK
capability gaps in Scotland, addressing the lack of new frigates,
conventional submarines and maritime patrol aircraft". It
also suggests that "joint procurement will be pursued with
the rest of the UK and other allies"[111]
An industry perspective
128. We asked defence and security industry representatives
to comment on the implications of independence, but for commercial
reasons companies declined to do so publicly. Informally, companies
in the sector told us that, with negotiations around the process
for the referendum largely settled, they would hope to see a greater
focus and clarity on the public policy, procurement and regulatory
aspects of the independence debate from all parties concerned.
Matters such as the anticipated fiscal strategy, taxation structure,
commercial regulation and labour law in an independent Scotland
are of considerable interest to companies in all sectors, not
just defence related.
129. Asked about the likelihood of defence contractors
moving their operations out of an independent Scotland to the
rUK, Professor Taylor replied:
If it is easy to do, I think they would do it
very quickly. If it is expensive and difficult to do, obviously
it is a more challenging question for them. The new Scotland will
not be a major market for defence equipment. Currently, the Scottish
defence industry serves the high-end defence market of a pretty
large player [...] The new Scotland would be a small country with
a small country's defence needs. The domestic market for defence
goods would be radically different from what it is now. Generally
speaking, companies like to produce in a country where there is
a good home market.[112]
European Union procurement law
130. Under the terms of the Treaty on the Functioning
of the European Union (TFEU), the UK is required to act fairly,
transparently, and openly by competing public procurement requirements
at a European Union (EU) level. An exception can be applied under
Article 346 TFEU in respect of the "production of or trade
in arms, munitions
and war material" where a Member State considers it necessary
for the protection of the essential interests of its national
security. In those circumstances the UK can, like all Member States,
derogate from the Treaty to the extent necessary to protect those
interests by invoking Article 346.[113]
ARTICLE 346 TFEU
131. In light of the Article 346 TFEU exemption,
as currently applied, we were keen to establish whether Scottish
suppliers would cease to be eligible to bid for MoD contracts
if Scotland was to become independent. We noted that the Scottish
Affairs Committee had received evidence that in these circumstances
the exemption would not apply.[114]
132. Keith Brown MSP expressed the opinion that "the
rest of the UK would procure from Scotland without going through
the competitive tendering process that the European Union sets
down".[115]
133. The Secretary of State, however, took the opposite
view:
I think that the Scottish defence industry would
find itself in the position of being able, and being limited,
to bidding for contracts that were open to EU competition—in
other words, the contracts that we had decided did not form part
of our essential sovereign industrial capability. There are a
number of significant UK defence contractors in Scotland who would
be affected by this, quite apart from those in the shipbuilding
business—Selex, for example, a major provider of radars
and electronic systems.[116]
The Secretary of State confirmed that he had sought
legal advice on this point from the MoD's internal legal services,
who had, in turn, taken advice from external procurement lawyers.[117]
134. The UK Government states that defence suppliers
in an independent Scotland would no longer benefit from the application
of an exemption from EU procurement law for UK MoD orders. If
the Scottish Government has legal advice to the contrary it should
consider making it public.
Shipbuilding and maintenance
135. In its report The Referendum on Separation
for Scotland: Separation shuts shipyards, the Scottish Affairs
Committee concluded that, if Scotland separated from the UK, shipyards
on the Clyde were "doomed" as they would not be eligible
for UK-restricted orders and would have little prospect of winning
export work. A similar fate awaited Rosyth as there would be no
Royal Navy refit work and a Scottish navy would be based at Faslane.[118]
136. Rear Admiral Alabaster told us that given the
world-class shipbuilding industry, particularly on the Clyde,
he thought all the surface ships required by a Scottish navy could
be procured from within Scotland. However, he acknowledged that
"building two frigates for a Scottish navy from time to time"
would not begin to approach the work load generated by construction
of Type 26 frigates on the Clyde or the assembly of aircraft carriers
at Rosyth".[119]
137. In light of this, we asked Keith Brown MSP whether
orders for a Scottish navy would ensure the viability of Scottish
shipbuilding. He told us:
I have never been of the view that the Clyde
would rely solely on orders from an independent Scottish Government
for their armed forces. The point I have made is that it has world-leading
technology there. I have seen some reference in this Committee
to the fact that the rest of the UK would have no intention or
eagerness to procure from Scottish yards. We talked about the
F-35 earlier, and given the massive procurement that the UK undertakes
with the United States, I do not agree with the idea that you
could not trust an independent Scotland. All the defence equipment
at the point of independence, all the defence personnel, all the
joint working that goes on and all the history in NATO should
lead to a substantial level of trust. I do not see this as a bar
to the rest of the UK or other countries wanting to tap into that
world-class expertise. For that reason, I think we have a very
bright future.[120]
138. Asked why he was confident that the UK Government
would award the contract to build the Type 26 Global Combat Ship
to Clyde yards, Mr Brown replied that "the Clyde is best
for carrying out that contract". He continued:
We are more than willing to speak to the UK Government
and to the contractor to provide the reassurances that they want,
if they want reassurances, about being able to place that contract
in the full and certain knowledge that it would be delivered in
an independent Scotland. I am sure that the UK Government, when
they take this decision, will take it based on the need to get
the best equipment for their Navy. If that is their decision,
we want to try to help them make that decision. I think that the
balance of probability lies in favour of awarding that contract
to the Clyde, and we will try to make sure that that happens.[121]
SOVEREIGN CAPABILITY
139. The maintenance of a sovereign capability in
complex warship building has for many years been a strategic priority
for the UK. In fact, as the Secretary of State for Defence reminded
us, except during the two world wars, the UK has never bought
complex warships built abroad.[122]
He explained the current rationale for doing so:
We have chosen to source our warships in the
UK, even though the cost of shipbuilding in the UK is very significantly
higher than in countries outside, including other NATO countries.
We could buy complex warships built in Spain or Italy at significantly
lower cost than we can buy them in the UK, but we choose not to
do that because we think it is strategically important to maintain
a sovereign capability in this area. Clearly, if Scotland were
independent, that capability would no longer be sovereign; it
would be subject to the whims of a foreign Government, and we
could no longer, in my judgment, justify paying the premium that
we do, over and above the base cost of a complex warship, for
the sovereign capability to build and maintain it. I should make
the point that it is not just about building the ship; it is about
having the capability to refit and maintain it over its expected
lifetime.[123]
140. In relation to maintenance, the Secretary of
State told us that it would be unlikely that the rUK would choose
to maintain the Royal Navy surface fleet in an independent Scotland.[124]
141. In the event of independence, shipbuilding
in Scotland could not be sustained by domestic orders alone at
anything close to current levels. It is our view that the requirements
of a Scottish Government for construction and maintenance of warships
would barely provide enough work for a single yard. Even the addition
of Scottish Government contracts for commercial ships could not
compensate for the loss of future UK MoD contracts for ships such
as the Type 26 Global Combat Ship. The future of Scottish shipyards
would therefore rest upon whether they could diversify the type
of ships they produce and reduce their cost base in order to secure
orders in open competition with international competitors.
Security clearance
142. A further challenge for defence contractors
based in an independent Scotland would be the ability to obtain
and retain List X status—the security clearance required
to hold UK Government protectively marked information.
143. The UK Government, in its response to the Scottish
Affairs Committee Report The Referendum on Separation for Scotland:
How would Separation affect jobs in the Scottish defence industry?,
stated that there are currently 50 companies that hold List X
status in Scotland. It explained the issues which would arise:
This is required for companies to undertake classified
defence work on their premises at Confidential level. An independent
Scotland would be required to develop its own national security
regulations or continue to apply the Security Policy Framework
and to develop the required and appropriate security infrastructures
to perform the necessary security activities. Further complications
may arise in the context of current MOD procurement and access
to material classified for 'UK Eyes Only'. This material cannot
be shared with a foreign country or its nationals.[125]
144. In the event of independence, we consider
that the defence industry in Scotland would face a difficult future.
This impact would be felt most immediately by those companies
engaged in shipbuilding, maintenance, and high end technology.
The requirements of a Scottish defence force would not generate
sufficient domestic demand to compensate for the loss of lucrative
contracts from the UK MoD, and additional security and bureaucracy
hurdles would be likely to reduce competitiveness with rUK based
companies.
145. Although we recognise the commercial risks
associated with the potential loss of some highly skilled employees,
we believe defence companies in Scotland would be forced to rapidly
reassess their business strategies, with the result that relocation
of operations to the remainder of the UK would be an unwelcome
but necessary decision.
146. From the evidence we have received and our
own background knowledge of defence industrial issues raised frequently
with us we consider that the Scottish Government will wish to
provide industry with more information with regard to the following
matters:
- Defence and Security relationship with the
rUK, including the anticipated level of integration and collaboration;
- Transition arrangements for existing UK contracts
during the process of separation;
- Procurement policy, including co-investment
in research and development;
- Export posture and potential in terms of legislation
plus consular and broader government support;
- Specific expectations of the current "special
relationship" with the US over trade, intelligence and technology
sharing; and
- Future relationship with cooperative initiatives
such as NATO "Smart Defence" and European Defence Agency
"Pooling and Sharing".
107 Scottish Affairs Committee. Employment and Skills
for the Defence Industry in Scotland, Sixth Report 2007-08.
HC 305 Back
108
Scottish Affairs Committee The Referendum on Separation for
Scotland: How would Separation affect jobs in the Scottish defence
industry?, Eighth Report 2012-13. HC 957 Back
109
Q 24 Back
110
Qq 208-210 Back
111
SNP. Foreign, Security and Defence policy update, October 2012 Back
112
Q 222 Back
113
Ministry of Defence. National Security Through Technology,
Cm 8278, February 2012, paras 73-75 Back
114
Scottish Affairs Committee. Eighth Report of Session 2012-13,
The Referendum on Separation for Scotland: How would Separation
affect jobs in the Scottish defence industry?, HC 957, para
40 Back
115
Q 370 Back
116
Q 412 Back
117
Q 413 Back
118
Scottish Affairs Committee. Seventh Report of Session 2012-13,
The Referendum on Separation for Scotland: Separation Shuts
Shipyards, HC 892, summary Back
119
Qq 150, 152 Back
120
Q 359 Back
121
Q 362 Back
122
Q 407 Back
123
Q 407 Back
124
Q 410 Back
125
Scottish Affairs Committee,First Special Report of Session 2013-14,
The Referendum on Separation for Scotland: How would Separation
affect jobs in the Scottish defence industry?: Government Response
to the Committee's Eighth Report of Session 2012-13, HC 257 Back
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