Memorandum submitted by King’s College London
This evidence is based on analysis conducted by a research team from the Defence Studies Department and the Policy Institute, both of which are departments within the School of Social Science and Public Policy at King’s College London.
The Policy Institute at King’s links the academic excellence of King’s College London with rapid, relevant policy analysis, to facilitate mutual engagement between academic, business and policy communities. The Defence Studies Department (DSD) is an integral part of the UK Joint Services Command and Staff College (JSCSC), which provides command and staff training at single-service, advanced and higher levels. The Department is a world class centre of excellence that aims to enhance understanding of defence and international issues through teaching, research and the provision of expert policy advice.
The research team is submitting this written evidence to the Defence Select Committee to emphasise the economic and strategic value of the UK defence industry. The research shows that the UK needs to leverage the value of defence better if we are to reap the benefits of our domestic defence industrial base. Based on the evidence available, we make a number of recommendations with regard to the provision of MoD data on the economic benefits of defence expenditure, the MoD ‘value-for-money’ definition, and the Government’s existing procurement philosophy.
• The UK’s defence industry is a key sector in the British economy that provides strategic value to national defence and security.
• The Ministry of Defence (MoD) is required to promote UK growth and report on the effects of its procurement expenditure on the British economy.
• However, MoD reporting on the economic growth implications of its equipment procurement expenditure is patchy and incomplete. This is particularly worrying as there is a growing body of academic evidence that suggests there is economic value to a thriving domestic defence industry, together with the national strategic and security benefits the industry provides. This suggests that the MoD is not able to identify where it might generate economic growth through its equipment procurement choices.
• The available evidence suggests that the MoD’s open procurement philosophy and value-for-money definition are not leveraging MoD within the UK to its full extent.
• We recommend reworking the UK’s defence industrial strategy to incorporate explicit consideration of wider economic benefits to the UK arising from MoD procurement choices. Specifically, we advocate the use of a value for money definition that includes employment, industrial and economic factors; we also suggest that procurement strategies employed in other countries (e.g. France and the United States) will form a fruitful starting point to consider a new strategy for the UK which maximises the benefits of UK Defence expenditure.
The Importance of the Domestic Defence Industry
1. The UK’s domestic defence industry is a leading-edge, high-technology sector that provides key military benefits to the nation’s security by ensuring a secure, assured and agile supply chain. The defence industry provides national defence benefits, most importantly by permitting greater freedom of action than would be the case if the UK were solely reliant on off-shore suppliers. Current MoD policy recognises that there are military capabilities in which the UK must maintain ‘technology advantage’, and associated technological and industrial capabilities that consequently need to be retained onshore. It also acknowledges that defence exports help to achieve national security and defence objectives by providing the UK with influence and leverage over other states which can be deployed in pursuit of foreign and security policy goals.
2. The UK’s defence industry is also a key sector in the British economy. It is a high technology sector that invests in Research and Development (R&D) and contributes to the wider knowledge economy. Moreover, the MoD is the main consumer of UK defence industry output, accounting for approximately 80% of total UK defence revenues, with the remainder of industrial output destined for government-regulated export markets. Without MoD expenditure in the UK, the UK’s domestic defence industry – and the wider knowledge economy that relies on R&D and high-tech and skilled workforce – are in jeopardy.
3. As part of its commitment to reducing national debt and the deficit, the UK government requires the Ministry of Defence (MoD) ‘to promote UK growth’ as one of its six main ‘defence priorities’. The principal mechanism through which the MoD can seek to generate growth and promote economic recovery in the UK is through its expenditure on domestically-produced defence equipment and infrastructure and through support to arms exports.
MoD Reporting on the Economic Benefits of UK Defence Expenditure
4. The MoD is required to report on its contributions to economic growth through investment in defence equipment and the promotion of exports. In its 2014 Improvement Plan, the MoD stated that it contributed to UK growth through its investment in defence infrastructure and equipment, and the promotion of defence exports. The departmental statistics showed that with MoD support, UK defence exports had risen by 62% during 2011/12 to some £8.8 billion.
5. However, MoD reporting on the economic benefits to the UK of defence expenditure is incomplete in three respects. First, in 2009, the MoD decided that estimates for UK employment dependent on MoD expenditure would no longer be published on the grounds that the ‘data do not directly support MoD policy making and operations’. Second, MoD statistical publications no longer differentiate between equipment sourced from the UK or via direct imports. Third, the MoD has not reported on the contribution to the UK economy generated by its £15.2 billion equipment expenditure.
6. The lack of data is concerning and the decision not to quantify the wider domestic growth implications of MoD procurement spend is counter-intuitive. The 2012 National Security Through Technology White Paper states that ‘A healthy defence and security industry … brings wider economic benefits, in terms of providing jobs, maintaining skills, and making a considerable contribution to the Exchequer’.
7. In addition, there is a growing body of academic evidence that expenditure with the domestic defence industry provides national economic, employment, technological and fiscal benefits. Government consumption via public procurement can act as an economic stimulus by creating economic and employment multipliers.
Open Procurement and ‘Value-for-Money’
8. Taken together, the MoD’s existing value-for-money definition and open procurement philosophy suggest that the government may be failing to identify and leverage potential and significant economic benefits provided by the onshore UK defence industrial base.
9. The 2012 National Security Through Technology White Paper states that the MoD currently pursues an ‘open procurement’ philosophy that is intended to obtain value-for-money in MoD decision-making. In essence, this means that the MoD seeks to procure defence equipment through open competition in the domestic and global market.
10. Hand in hand with this goes the MoD’s ‘value-for-money’ definition which underpins all MoD procurement choices. The MoD defines ‘value-for-money’ as achieving ‘the optimal combination of time, cost and effectiveness within available resources’ when selecting between different equipment options available from UK-based and overseas suppliers. Crucially, the ‘MoD does not consider wider employment, industrial or economic factors in its value-for-money assessments’.
Evidence of the Economic Value of the UK’s Defence Industry
11. This sits in contrast to and conflicts with a growing body of evidence synthesised in a report published by the Policy Institute at King’s College London. The report, titled A Benefit, Not a Burden, indicates that the UK defence industry is a source of significant economic value that is overlooked in the current MoD value-for-money definition. The most recent survey of the employment and economic contributions of the UK defence industry published by the ADS Group indicates that it directly employs 162,400 people, and generates a further 114,200 indirect jobs in the defence supply chain. Goods and services purchased by defence industry and supply chain employees support a further 95,800 induced jobs. The ADS survey calculated that the industry’s turnover in 2013 was £22.1 billion and that it returned £8.2 billion in gross value added to the UK economy. In a similar vein, reports by Oxford Economics in 2009 and 2011 assessed whether investment in defence is beneficial (and more so than investment in other industrial sectors) in terms of its contributions to UK gross domestic product and employment. These reports showed that the UK defence industry has a gross output multiplier of 2.3, meaning that a nominal £100 million initial direct investment in the industry would generate £230 million (including the original £100 million investment) in the UK economy. In this, it ranked 12th when measured against a sub-sample of 27 industries.
12. Existing studies also suggest that the UK’s onshore defence industry is a leading-edge, high-technology sector that provides significant tax revenues and microeconomic benefits. According to the ADS Group’s 2014 survey, over half of the employees in UK defence companies are involved in R&D (22 per cent) or engineering and production and assembly (31 per cent); and some 61 per cent of firms collectively employ 4,900 apprentices and trainees in production and assembly (37 per cent of apprentices), design and engineering (39 per cent of apprentices) and R&D (17 per cent of apprentices) roles. These findings suggest that the UK defence industry forms an important national hub generating science, technology and skills within the national workforce. Trevor Taylor and John Louth’s 2012 ‘Destination of the Defence Pound’ study found evidence that the MoD’s ‘open procurement’ regime – which excludes wider employment and industrial factors in its ‘value-for-money assessments’ – risks ignoring potentially significant fiscal benefits of domestic sourcing. The Oxford Economics report, entitled The Impact of BAE Systems on the UK Economy, found that in 2013 BAE Systems created a ‘gross value added’ contribution to UK GDP of £7.9 billion across the economy as a whole (including BAE Systems’ own turnover).
13. In summary, there is a lack of official data and analysis on the contribution that MoD procurement expenditure makes to UK economic growth. We suggest that without this data it is difficult – for the government and independent analysts – to conduct rigorous analysis on the implications of spending decisions on the UK economy and how best to use available resources to achieve the maximum benefit. Our overarching conclusion is that the onshore defence industrial base provides military, national security, economic, technological and strategic value to the UK. Identifying and quantifying where this value lies will be a critical precursor to a considered and evidence-based approach to the UK’s forthcoming review of defence and national security.
14. We recommend that the Government re-instates the requirement for the MoD to gather data on the economic benefits of defence expenditure, placing particular importance on producing estimates for UK employment dependent on MoD expenditure; data that help differentiate between equipment sourced from the UK and equipment sourced via direct imports; and, the contribution to the UK economy generated by the MoD’s £15.2 billion equipment expenditure.
15. We recommend that the MoD revises its ‘value-for-money’ definition in order to identify the full military, strategic, security and wider economic and employments implications of MoD procurement expenditure.
16. We recommend that the Government reviews its existing defence industrial strategy, with a particular view to reworking its procurement philosophy. Other philosophies that take full advantage of the spectrum of value provided by a domestic defence industry have been successfully implemented in France and the US. These should act as the starting point for a renewed strategy that leverages to the maximum the benefits of a domestic defence industry.
 Ministry of Defence, National Security Through Technology: Technology, Equipment, and Support for UK Defence and Security, Cm 8278, London, The Stationary Office, 2012, p. 25.
 Oxford Economics, Economic Case for Investing in the UK Defence Industry: A Report for ADS and the Defence Industries Council, Oxford, Oxford Economics, 2011, p. 7.
 Ministry of Defence, Ministry of Defence Improvement Plan, March 2014, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/298646/20170327-mod-improvement-plan-with-logo-web.pdf (accessed 19 October 2015).
 Ministry of Defence, UK Defence Statistics Compendium 2009, p. 29.
 Ministry of Defence, National Security Through Technology: Technology, Equipment, and Support for UK Defence and Security, Cm 8278, London, The Stationary Office, 2012, p. 47.
 For an extended analysis, see A. Dorman, M. Uttley and B. Wilkinson, ‘A Benefit, Not a Burden’, King’s Policy Institute Paper, (London: King’s College London), 2015 http://www.kcl.ac.uk/sspp/policy-institute/publications/A-benefit-not-a-burden.pdf.
 Ministry of Defence, National Security Through Technology: Technology, Equipment, and Support for UK Defence and Security, Cm 8278, London, The Stationary Office, 2012, p. 12.
 A. Dorman, M. Uttley and B. Wilkinson, ‘A Benefit, Not a Burden’, King’s Policy Institute Paper, (London: King’s College London), 2015.
 Aerospace, Defence, Security, Space (ADS) Group, UK Defence Industry Outlook 2014, Farnborough, https://www.adsgroup.org.uk/pages/81396120,asp (accessed 2 April 2015).
 Oxford Economics, The Economic Case for Investing in the UK Defence Industry, Oxford, Oxford Economics, August 2009; Oxford Economics, Economic Case for Investing in the UK Defence Industry: A Report for ADS and the Defence Industries Council, Oxford, Oxford Economics, 2011.
 T. Taylor and J. Louth, ‘The Destination of the Defence Pound’, RUSI Briefing Paper, London, RUSI, January 2012.
 Oxford Economics, The Impact of BAE Systems on the UK Economy, Oxford, Oxford Economics, 2015.