BSA hosts Liam Fox MP speaking on 'Defence and the Economy'

20 March 2008

Speaking to the BSA Defence Committee last week, Liam Fox called for a "healthy UK defence sector supporting UK research, jobs and exports".

Laim Fox MP speaking on 20 March at the BSA said:

"As the Conservative Party prepares to come back into Government it is important that we return to first principles in our thinking of Britain’s national economic and security interests.

Since the Conservatives were last in power the world’s strategic environment has changed greatly. We now live in a truly global economy.

A world where Britain’s economic and security interests are so interlinked into a larger global interdependent network that we have an unavoidable shared set of interests with a multitude of actors in all parts of the globe. We also now have the unavoidable importation of strategic risk.

As recent events have shown, instability in one corner of the globe will quickly affect everyone.

In the current instance the root of instability lies in America’s credit market but it could just as easily lie in an energy security crisis in Japan or China.

This interdependence has major implications on how we think about and organise our national security structures.

When it comes down to the detailed function of national governments, and how to best advance Britain’s economic and security interests in a globalised world, we need to begin by asking simple questions.

What the Ministry of Defence is for, is not a bad start.

When it comes to the issue of procurement the answer is relatively simple. It is there to ensure that our Armed Forces have the best quality equipment to carry out the tasks required by them, achieved at the best possible deal for the taxpayer.

Yet, while the job of the MoD is not to act as a job creation project it is intimately involved with the functioning of the UK defence industry. From employment (directly and indirectly), to exports, and to research and development the Government is a major player.

The Positive impact the UK defence industry has on the British Economy.

So where is the UK today in terms of the global defence market? Britain is one of the world’s leaders in the field. The size and success of Britain’s defence industry brings huge benefits to our economy, workforce and population.

The defence industry in the UK employs more than 600,000 people either directly or indirectly through suppliers. This represents 1 per cent of the total population on the United Kingdom.

Take Derby, where I visited earlier this week, as an example of what the defence industry offers the UK. Rolls-Royce employs more than 11,400 people with a total salary of £0.5 billion. And this is only the direct impact on employment. Through contracts and indirect employment Rolls-Royce supports 125 supplier companies with 15,000 employees.

It just isn’t on the local level that the British defence industry makes a huge impact. On a national level the UK defence industry underpins 5% of our total GDP and makes a significant contribution to our balance of payments. Defence contracts in the United Kingdom alone are worth £16 billion annually and UK defence exports are worth an estimated £5 billion annually.

The defence supply chain in the UK is traditionally more reliant on domestic industry than most other economic sectors thereby returning to the UK economy most of the funds spent by the MoD on UK contracts. The UK's average global market share in the period 2002-2006 was 20%. In 2007, thanks largely to the success of DESO, it was 30 %, second only to the United States

Perhaps most importantly, the reputation of Britain’s defence industry is further enhanced by the fact that we actually use our Armed Forces for their intended purpose. The military equipment we develop and procure for training and combat operations is combat tested.

Consequently, this provides incentives for industry to optimise capability both through the UOR process and normal acquisition. As many in this room know, a ‘combat proven’ tag still carries weight in the global defence equipment market.

In a speech like this it is easy to go on and on citing the benefits the UK defence sector offers to the British economy and the British workforce. Citing stats, numbers, and figures does little justice to the fighting heroism displayed by British forces on the ground in Iraq and Afghanistan.

Right now as we comfortably sit here in the City there is some Royal Marine or Para fighting the Taliban with equipment that many of you in the British defence industry made possible.

Breakthroughs in technology by the UK defence industry give our servicemen and women a true fighting chance on the battlefield. There is no doubt that equipment has been designed, built, and procured from the UK defence industry that has maximised the chances of success of our Armed Forces on the modern day battlefield and also increased the chances of them coming home alive.

So, the positive impact on the UK by the defence industry cannot be understated.

But the benefits afforded to the United Kingdom from the defence industry go beyond the people employed in the defence industry or the billions of pounds pumped into the British economy annually. The benefits extend to all of the general public and in various forms.

For example, many defence innovations, which have resulted from robust research and development, have led to technological developments that encourage innovation, competition, increased employment and economic growth in other sectors of industry.

It is no coincidence that Britain’s successful defence industry also is responsible for approximately one-third of the total spent in Europe on equipment acquisition and research and development. In many cases, the end-product of our research and development spills over into other sectors of industry.

Even if you have no connection whatsoever to the defence industry it is still likely that you have still reaped the benefits. Through defence industry inspired civil solutions we now enjoy flat screen TV and computer screens. Many features of the mobile phone network and early research in the nuclear field have made today’s digital cameras possible. All of these were by products of the defence industry.

The reason for this is very simple. The high value research that the defence industry demands, by its technologically advanced nature, encourages innovation which in turn leads to economic growth across many industrial sectors.

The MoD and the Procurement Process, Defence Research and Development and Criteria for Procurement

Making a decision on whether or not to procure a certain piece of kit cannot be taken lightly. Not only are billions of pounds on the line, along with thousands of UK jobs, we cannot forget that the true recipient of the equipment: the soldier, sailor, airmen or marine on the far off battlefield, will depend on this equipment to stay alive and to keep Britain safe.

This places a great deal of responsibility on the procurement process.

But in an era of pressurised defence budgets in the UK and in Europe policy makers must ensure that they get the most ‘bang for their buck’.

When it comes to the procurement decisions we will look at five criteria—Capability, Affordability, Adaptability, Interoperability and Exportability.

I would like to briefly take these in turn.

Capability: does this piece of equipment enable our Armed Forces to fight effectively on the modern day battlefield?

Affordability: Can we afford not only the initial procurement costs but also the through life costs? The current heavy use of UORs runs the risk of creating future pressures on the core MoD budget and cannot be a long term substitute for a properly thought through procurement programme.

Adaptability: How can we get the greatest flexibility in the equipment we buy while ensuring that as many potential roles as possible are fulfilled?

Interoperability: will this piece of equipment allow the British Armed Forces to take part in Combined and Joint military operations with our allies, specifically in NATO?

Exportability: is this piece of equipment one that will have a high export demand which, may in the long term, create jobs at home and positively affect the British economy?

Before we can embark on these decisions, however, there is one urgent task that must be undertaken (and undertaken with considerable intellectual rigour). That is, to properly define what we mean by sovereign capability. Exactly what do we need to maintain in the design, infrastructure, and build capability for the UK itself?

Only when we answer this are we able to make rational decisions about where competition might better be introduced or what considerations need to be given to a skills base that has considerable problems.
It is a debate we would like to have with industry and the military before the next election.
Clearly we do need to maintain sovereign capability in areas that are vital to our long term defence. Areas such as submarines and avionics may fall into that territory (although the Joint Strike Fighter is a case where we are looking to a partnership with the United States for the shared technology in what will probably be the last manned fighter that we will build and may provide a useful model for the UK’s future procurement strategy). I would not want to prejudge this vital debate but it is clear that many items currently procured cannot be described as sovereign capability. Clearly in some areas it makes sense to buy equipment off the shelf and ensure that it is made speedily available to our forces, rather than investing in what would effectively be re-inventing the wheel.Whilst considering this we must remember that the UK defence equipment market is arguably the most open and most competitive in Europe: 75% of UK contracts are subject to open competition. On average, the UK invokes Article 296 of the EC Treaties, the article which guarantees that EU members can take the necessary measures to ensure that national security interests are protected during the defence procurement process, on only 30-40 occasions/year out of an annual EU total of 20,000 cases.

DESO

One of the first acts of a Conservative led Government will be to reinstate the Defence Export Services Organisation (DESO) which was abolished by Labour in what can only be described as an act of industrial vandalism. Why the Government would abolish an organisation which has been a major and successful player in promoting British interests and defence exports since 1966 is beyond belief. It is a scandal.

Not only did DESO greatly assist the UK defence industry in securing overseas orders it also nurtured relations with key decision and policy makers in overseas Governments. DESO also played a key role in ensuring that Government policy on defence exports was reflected in MoD’s work on acquisition and activities. Abolishing DESO was an insult to an industry that has treated Britain so well over the years.

Before its closure DESO was a successful organisation. Thanks to DESO, Britain's defence exports broke all recent records in 2007. (Britain’s share of the world defence market was about 30 percent in 2007. This far exceeded the 20 percent average of 2002-2006. )

It was DESO that enabled British defence exports to be so successful. Putting it under a slimmed-down operation run by the Department for Business, Enterprise and Regulatory reform is simply the wrong way forward and will prove to be inimical to future defence exports. Defence exports are an important consideration in any national security framework. Responsibility needs to return to the MoD.

Britain and the European Defence Agency

Let me turn finally to the questions of the UK, NATO and the EU. At best the UK must be suspicious of any pan-European defence procurement policy coming from Brussels either in the form of the European Defence Agency or through the supranational EU Commission.

The United Kingdom, unlike most members of the EU, maintains the ability to develop, manufacture, and sell world class products for the global defence market. With limited resources the MoD must prioritise how and where it spends what precious little money it has. I believe that any money given to the European Defence Agency is money better spent at home; on British troops, their families, and their equipment.

Speaking on the UK’s role in the EDA in the EDA’s monthly newsletter General Sir Kevin O’Donoghue, the Chief of Defence Material, Defence Equipment and Support in the Ministry of Defence said that because the UK was supporting two major operations:

“It is inevitable that our top priority will be current operations and the equipment needed to support them….We need to think carefully about priorities when every pound sterling or Euro spent on international institutions is a pound or Euro I cannot spend on equipping and supporting deployed front line forces.”

Now officially in the Lisbon Treaty there are two developments regarding the EDA that must be considered. Firstly, QMV will be applied to votes defining the agency’s statute, seat and operational rules meaning, of course, that Britain will not have its national veto.

Secondly, the Head of Agency, which guides the EDA’s policy, will be the High Representative of the Union for Foreign Affairs and Security Policy who, although it hasn’t been widely reported, will is also be a member of and vice-president in the EU Commission. This will for the first time blur the line on what is supranational and intergovernmental in EU defence policy.

In regards to defence procurement, it is the United Kingdom’s prerogative to define our essential security interests. If we choose to do this through bi-lateral or multilateral agreements of our choosing then so be it but there should be no consolidating, aligning or integration into a European Defence Technological and Industrial Base.

This is a matter for nation-states not supranational institutions. It is not for the Commission to assess the security needs or interests of the United Kingdom. I unequivocally oppose applying QMV decision-making and giving the High Representative such an influential role in the EDA.

The harsh reality is that presently, and into the foreseeable future, it will be American soldiers who British soldiers are fighting and dying alongside in places like Iraq and Afghanistan.

Until European countries make real commitment to increasing capability and until European countries understand that there are both explicit and implicit responsibilities of being a member of NATO, the United Kingdom should maintain its Atlantic focus with defence procurement.

The special relationship makes the UK a viable springboard for exports to the US. And make no mistake, to the British Armed Forces and to the British defence industry the special relationship with the United States isn’t a luxury but a necessity.

The European Defence Agency offers the United Kingdom no tactical, strategic, or technological advantage which NATO, bi-lateral or multilateral agreements, or the UK defence industrial base do not already provide.

We want to see a . We want to see the UK take a greater share of the global defence market. That is the best way to protect jobs and encourage investment in the long term.

I hope that today marks the beginning of a real and constructive dialogue between the defence industry and the Conservative Party."