For an industry that measures contracts in decades, and a ministry with a reputation for bureaucracy, overspending and delays, the prospect of a rapid increase in defence spending presents a challenge as well as an opportunity.
Sir Keir Starmer’s commitment to spend 2.5% of GDP on defence by 2027 was a pragmatic response to the changing security reality. With Donald Trump back in the White House and retreating from European and NATO commitments, the UK is going to have to take more responsibility for its own security.
The chancellor took an expedient view too, spying an opportunity to tie the industry more closely to her growth agenda. Defence was already included in the industrial strategy being worked up in Whitehall, but if more taxpayer funds are directed to defence contracts it makes sense for as much as possible to be secured by British companies.
Last year the MoD spent £28bn, around half of its budget, on equipment, including almost £3bn on the nuclear deterrent and £5bn on maintenance contracts.
The new spending envelope will increase by almost £14bn in cash terms, £8bn of which will come from GDP growth, meaning only £6bn will be “new” money.
Much of that will be swallowed by the cost of new nuclear submarines, rebuilding stockpiles, commitments to Ukraine and pensions, a public service perennial.
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Most of what’s left will inevitably go to British defence “majors”, including BAE Systems, Rolls-Royce and Babcock, along with overseas multinationals with significant UK operations including Leonardo (Italian) and Thales (French).
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These companies say they are ready to step up, but identify a range of barriers, some in common with other engineering and manufacturing industries. Energy prices, rising employment taxes and workers’ rights reforms are all issues.
Specifically, they also want a clear plan of what the government wants to spend it on, scheduled to be set out in a defence spending review. Defence contracts are long-term and companies need certainty to invest.
For the small and medium-sized businesses the chancellor says she wants to participate, there are challenges of funding and access. In an industry where 5% of companies receive 95% of the money, breaking through is a challenge.
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Everyone wants less red tape in MoD contracting, and there are calls for reform of single source contracting, where deals are struck without competition for reasons including national security or intellectual property, with regulated profit margins of less than 10%.
Perhaps the biggest culture change however concerns the shift to electronic warfare, and the importance of the digital frontline.
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Clive Higgins, CEO of Leonardo UK and vice-president of industry group ADS said defence companies need to behave less like manufacturers and more like big tech, making six-monthly software upgrades as important as 20-year frigate contracts.
“The learning coming out loud and clear from Ukraine is that you’re having to operate more like a software company than an old fashioned engineering.
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“We need computer scientists, software engineers, data engineers, understanding all of that massive information coming through, allowing us to iterate quickly and put a solution in place correctly to defend against new threats coming in.
“We’re competing against the tech sector, with huge budgets and fintech in banking as well. So we need to ensure that we’ve got that capability with us in the UK to deliver.”
