Fight for funding: UK industry calls for increased defence spending

Since stepping up its combat activities in Afghanistan around three years ago, the capabilities of the UK's armed forces - and of its often-troubled procurement process - have been placed under increased public scrutiny.

Questions have been raised over the Ministry of Defence's acquisition of equipment such as additional Eurofighter Typhoons and next-generation aircraft carriers, at a time when shortfalls have been exposed in critical areas such as transport aircraft and armoured vehicles for use in the fight against the Taliban.

Recent news coverage has included fierce debate about whether the British armed forces have enough helicopters available in Afghanistan, and again criticised the disastrous purchase of eight Boeing CH-47 Chinook HC3s for the Royal Air Force.


© Cpl Rupert Frere/Crown Copyright
Recent losses have cut the RAF's Chinook HC2/2A fleet to 38 aircraft

Delivered early this decade but placed into storage due to a problem with certificating their flight software, the first of these operationally valuable aircraft will be available for frontline use only from early next year. Their delayed availability has also been highlighted over recent weeks as the UK has been forced to destroy two damaged Chinook HC2/2As, reducing its fleet of the type to 38 aircraft.

Against this backdrop of operational and funding pressures, a group of the UK's leading defence companies has issued a call for the nation's next government to significantly increase spending on the military, arguing that the sector has been badly neglected at a time of major combat activity.

"We believe that, contrary to the prevailing mood in Westminster, now is the time to consider investing more for our future security, not less," says Mike Turner, chairman of the Defence Industries Council (DIC).

Noting that defence spending has fallen to just 2.3% of gross domestic product from 4.4% around 20 years ago, Turner says some £2 billion ($3.2 billion) more should be spent each year to maintain the UK's position as a global player. The MoD has a budget of £38 billion for the 2009-10 financial year, with around a quarter of this sum available for procurement activities. Its allocation represents 5.6% of total government spending of £671 billion, versus 13% on education, 17.7% on health and 28% on social protection.

A marriage of convenience

Published in December 2005, the UK Defence Industrial Strategy (DIS) was in part responsible for a rise in partnering agreements between the Ministry of Defence and industry.

Through a gradual process, the once highly adversarial relationship between the parties has improved over the last several years, to a point where civilian and military maintainers routinely work side by side in supporting military aircraft.

In a leading example of the changed dynamic, the BAE Systems-led ATTAC project has transformed support for the Royal Air Force's Panavia Tornado GR4 ground-attack aircraft and F3 fighters and will result in savings worth more than £1 billion ($1.6 billion).

"The DIS sought significant change from industry, and industry has responded," says BAE chief executive Ian King, who hails programmes like ATTAC for their ability to develop "trust, transparency and understanding".

And the partnering model itself continues to evolve, with agreements now extending way beyond the "depth" support packages originally covered by such deals. Some 4,000 civilian employees are working in support of British forces in Afghanistan, according to the UK Defence Industries Council.

Other examples of long-term partnering include the Team Complex Weapons initiative between the MoD and a group of companies headed by MBDA. This is working to define future guided weapons requirements for the UK armed forces, and also includes some work to pursue joint projects for use by the French military.

The DIS was launched with a long-term partnering agreement with AgustaWestland on rotorcraft, with the company's Lynx Wildcat product as a cornerstone. The project came perilously close to cancellation last year due to budgetary pressures, but is now secure with a confirmed order for 62 aircraft. Around 850 people are employed on the programme in the UK, and AgustaWestland is marketing the model to potential export customers as the AW159.

"There is a mismatch between the budget for defence equipment and the demands on the UK armed forces," says Turner, who is also chief executive of Babcock. "Unless positive steps are taken, our decline as a nation will be irreversible, and we will find ourselves with no real influence in the world."

The DIC published two new reports into the domestic defence industry on 1 September, respectively assessing the sector's strategic and economic impacts. Its move came one week before the opening of the biennial DSEi exhibition - to be held in London from 8-11 September - and as politicians prepare for the party conference season, the last before a general election to take place by May next year.

Key recommendations include that the next government conduct the first Strategic Defence Review (SDR) in more than a decade, increase spending on procurement and research and development activities, and refresh the Defence Industrial Strategy of December 2005 to give companies a clearer indication of priority areas in which they should invest. Increased efforts should also be taken to boost exports of UK-produced defence equipment, the DIC says.

Defence secretary Bob Ainsworth announced in early July that the Labour party will launch a defence review next year if it retains power, with work already having been launched on a Green Paper. His action followed calls from the opposition Conservative and Liberal Democrat parties to commit to an SDR to address a mounting budget crisis.

The MoD says its top priority will be to ensure that its personnel are properly equipped and supported in Afghanistan, but also wants to learn lessons from the recent conflict in Iraq, pursue technological advances and further reform its acquisition process.

While all three main political parties have committed to staging an SDR, clear details of their respective defence and foreign policy strategies are unclear. "Honesty is what we're looking for at this stage," says Ian Godden, chief executive of the Society of British Aerospace Companies.

But Turner goes further, noting: "The next SDR shouldn't fall into the old traps of setting commitments not backed by investment. It should not be a budget-led exercise prompted by cuts."

The DIC says its initiative stems partly from a realisation that industry was not being active enough in prompting national debate. "The defence industry is concerned that the public no longer associates the country's ability to defend itself with the capability to produce the equipment for our armed forces," it says. "The report aims to reconnect the public with the industry and re-engage them in discussing the wider issue of defence."

Godden says: "We have been too quiet as an industry." He concedes that "defence has been a dirty word".

The UK defence and security industry employs over 300,000 people at more then 900 companies and accounts for roughly 10% of all British manufacturing jobs. Turnover for the sector was worth £35 billion in 2008. And while negative stories tend to grab the headlines, Turner says 75% of UK defence projects are delivered on time and on budget.

The DIC argues that the UK should use an increased commitment to the defence sector as one means of making its way out of the current economic recession, due to what it says is the multiplier effect of such spending. Compiled by Oxford Economics, the other council-backed report claims that for every £100 million committed, a return of £227 million is made through factors such as tax revenues and export business.

Despite significant opposition, the MoD last month signed a production contract for the Tranche 3A phase of the Eurofighter programme, with its move committing to buying 40 of a combined 112 aircraft along with Germany, Italy and Spain. Worth around £3 billion, the UK deal includes 24 aircraft deferred from Tranche 2 production in recognition for the UK having brokered a government-to-government deal with Saudi Arabia in 2007 for 72 Typhoons.

The new order takes total UK purchases for the Eurofighter to 160 of its originally stated 232-aircraft requirement. Deliveries are due from 2013, with Tranche 3A examples to potentially gain active electronically scanned array radars, advanced weapons and conformal fuel tanks. London believes it now has "no obligation" to buy the remainder of the Typhoons from its umbrella contract with the Eurofighter industry consortium, with its procurement emphasis to now shift to Lockheed Martin's F-35 Joint Strike Fighter.

The UK earlier this year ordered its first short take-off and vertical landing F-35Bs to support initial operational test and evaluation activities from early next decade. Current plans are for the F-35B to equip the Royal Navy's two future aircraft carriers, with each 65,000t vessel capable of carrying up to 36.

Rumours surfaced recently to suggest the UK could shift its interest to the US Navy's F-35C carrier variant, but with industrial interests linked strongly to the STOVL variant due to the involvement of companies such as Rolls-Royce, such a change appears unlikely.

With such traditional procurement paths too slow to deliver equipment for the current fight, the MoD has over the last several years become more reliant on signing urgent operational requirement (UOR) deals.


© Sgt Pete Mobbs/Crown Copyright
The UK's Reaper air vehicles were bought using UOR funding

"Afghanistan and Iraq have demonstrated the vital role of the UK defence industrial base in meeting UORs," says Turner. Examples include the General Atomics Predator B/Reaper unmanned air vehicles operated by the RAF's 39 Sqn and Elbit Systems Hermes 450s flown under a service provision deal with Thales UK. Spending on UORs has already topped £2.2 billion for operations in Afghanistan, but kit is routinely acquired without long-term support in mind.

Industry is supportive of an MoD objective to halve the time needed to get future major procurements to contract signature, says Thales UK chief executive Alex Dorrian. "We want to make better, quicker decisions," he says. "We need to look at lowering through-life costs, even if it means more in upfront costs." Such reform "benefits industry, the MoD and the taxpayer," he adds.

Some support has also been given for suggestions that the UK should possibly adopt a procurement model more akin to the US Department of Defense's Quadrennial Defense Review. This would allow more regular assessment and planning of military capability, they add.

While welcoming the DIC's new initiative, some industry watchers have reacted sceptically, pointing out that past reviews - such as previous governments' Options for Change process and the most recent SDR of 1998 - have resulted in cuts, rather than a commitment to increase defence spending.

"This industry creates great wealth, and we think it's worth having a go," says Turner. "At least we'll have tried."

INDUSTRY FLIES THE FLAG IN HUNT FOR NEW EXPORT OPPORTUNITIES

Despite the difficulties caused by its restricted budget for military equipment, the UK's industry is ranked a secure second behind the USA in defence export activity.

International sales of British defence and security equipment typically are valued at around £5 billion ($8.1 billion) a year, and secure around 55,000 jobs, says the UK Defence Industries Council (DIC).

After a massive spike in business in 2007 driven primarily by the sale of 72 Eurofighter Typhoons to Saudi Arabia, the UK Trade & Investment (UKTI) Defence and Security Organisation recorded sales totalling £4.2 billion last year.

This equated to 17% of the global market share, down slightly from a five-year average of 21%. The USA secured 27% of sales in the same study period, Russia 14% and France 9%.

Air sector activities traditionally dominate UK defence exports by value, and have accounted for 75% of sales over the last decade.

A UKTI analysis released in June said "there is no significant drop in global [defence] export orders compared to the same point in previous years". This suggests that the arms industry "is weathering the recession better than many other sectors", it adds.

The UK government's decision to bring the former Defence Export Services Organisation within its wider international business development body has gone some way to increase competitiveness, but the DIC has asked it to do more.

"This is not the unregulated arms trade," says Sir Kevin Tebbitt, chairman of Finmeccanica UK. "This is legitimate, controlled and very clearly organised export activity, which is part and parcel of international state relationships."