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04 Jan 18. Defence contractors sweat on review findings. The first duty of governmentis to afford protection to its citizens – but if it can do that on the cheap, so much the better. Since taking over as defence secretary from Sir Michael Fallon in November, Gavin Williamson has been engaged in a very public spat with the Chancellor of the Exchequer over the proportion of the state tax take destined for the Ministry of Defence (MoD). No surprises on that score – it’s a perennial debate at the heart of government – but the eventual outcome could have some unnerving effects for investors in the UK aerospace and defence sector.
Unconventional threats and new priorities
The signs are far from encouraging, partly due to the emergence of new security challenges. Recent comments by Mark Sedwill, the UK’s national security adviser, suggest that threats from unconventional warfare, cyber-attack and disinformation campaigns could be prioritised over the planned modernisation of the UK’s conventional forces. The threat posed by these forms of warfare mean that the focus is switching to the intelligence agencies and the police. For policy makers, the threat posed by Vladimir Putin’s Russia – whether real or imagined – still provides the most compelling reason for bolstering the UK’s conventional forces, particularly as there is little appetite for further western intervention in the world’s security hot-spots. But given fiscal constraints, it’s obvious that something has to give.
The National Security Council is due to discuss the findings of a security review led by Mr Sedwill, but he has already warned that the UK’s £56bn annual budget for defence and security is unlikely to be increased following the review’s findings. The UK armed forces will have to wait for a financial settlement until the outcome of the review, known as the National Security Capability Review. However, the prospect of defence cuts, targeted at areas such as the UK’s amphibious landing ships and even Royal Marine numbers, have grown as details of a funding shortfall in the UK’s defence budget have emerged. Some of the military’s larger capital spending commitments were predicated on the ability of the MoD to deliver multi-billion-pound cost savings – but these have proved elusive. (The National Audit Office recently reported that cannibalisation of parts in the MoD – particularly in the Royal Navy – had increased by 49 per cent during the past five years). Add in the fall in sterling since the EU referendum and lower projections of economic growth and it is little wonder that spending plans are now in doubt.
The new defence secretary, a relative novice in ministerial terms, could not be accused of failing to fight his corner. Mindful of budgetary pressures, he has turned his attention to defence industrial policy, as a means of justifying budgets in the years ahead. The MoD and defence contractors obviously have open channels of communication, but the MoD now plans to change the way it engages with businesses as part of the procurement process. The aim is to give UK contractors a better sense of what military requirements are in train, thereby aiding their ability to develop new equipment with an eye on strategic and commercial imperatives.
Ultra sets industry alarm bells ringing
This new co-ordinated response is to be welcomed, not least because it should also help export efforts (on a rolling 10-year basis, the UK remains the second largest global defence exporter, with 9 per cent of the total market). But recent profit warnings from the likes of Ultra Electronics (ULE), where revenues were held in check due to delays to the Royal Navy’s Dreadnought ballistic submarine programme, have undermined conf