I call to order today’s House of Commons Defence Committee evidence session on the impact to the defence industry of the delay to the defence investment plan. It is a pleasure to welcome two of our colleagues from the Public Accounts Committee, namely the PAC Chair, Sir Geoffrey Clifton-Brown, and Chris Kane—a warm welcome to you; this is your first time guesting on the Defence Committee, so we are looking forward to your contributions. I am also very pleased to welcome our esteemed panel of witnesses for today: Samira Braund, the defence director at the ADS Group; Arnab Dutt, a policy champion for procurement and social value at the Federation of Small Businesses; Andrew Kinniburgh, the director general at Make UK Defence; and Fred Sugden, the associate director for defence and national security at techUK. We have an hour before we move on to the second panel, so my request to Members, as well as to panellists, is to please be as concise as possible with your questions, and with your responses, because there is quite a lot of ground to cover. To ably demonstrate that, I will turn to Michelle Scrogham.

Welcome, everybody; it is nice to have you here. We have been repeatedly told “we expect the DIP” and that they are working flat out to deliver it. We were anticipating seeing it last autumn, but clearly that has been pushed down the line a bit further. We are told that defence contracts are still being signed in lieu of seeing that, and that it is not having an impact on defence, so I would be grateful if we could hear directly from you on just what impact the delay to the DIP is having on industry. I will go straight to Samira for that question.

If we go back 12 months, ADS had led a number of the defence industrial strategy workshops. The biggest theme that came out of those workshops was that we need demand signals. Fast forward to where we are today and the industry is still outstanding the demand signal from the MoD. On the 1,200 contracts, we do not know what value those contracts are and we have not had visibility. Obviously, we recognise some really important announcements, such as the new medium helicopter contract that was awarded. However, the real impact that is being seen from the membership base is that where the large defence primes are not getting contracts, they therefore cannot flow contracts down through the system into their supply chain. We have got some large defence primes that are supporting SMEs from a cash-flow problem. We have got SMEs that have had to exit the sector and SMEs that have outstanding payments from the MoD. In essence, the ecosystem that we are in is not in a great place; it is what I would call paralysis. Even though the defence investment plan is something that we have welcomed with 10 years of funding, we have now created even more of a feast-and-famine type environment. That has been a significant concern. Even small-value contracts have to go up to the most senior level for sign-off. That impacts investor confidence. All of the great enabling work that we have been trying to do from an ADS perspective—on access to finance, making sure that defence is an ethical sector for investment, and the work done on the economic growth taskforce—is being putting at risk because investors are saying it is quite difficult to do business with the MoD and the MoD’s perception as a difficult customer is playing out.

I share a lot of what Samira has said. The worry for us is the long-term impact. As you know better than anybody, as soon as you touch the brakes on anything related to defence, the cost rockets up, time shoots out to the right and everything slows down. The biggest worries we have in holding back of the defence investment plan are about investment into the UK. We are in a global race to get money from the big defence companies. They have many options; they can go and invest in Germany, Poland or the US. With us delaying and prevaricating on the defence investment plan, we are basically telling those companies, “Perhaps you should invest someone else.” We are not saying that directly, but that is the indirect impact. That is a real worry for us in terms of long-term investment. The other big thing is that we are in a crisis for young people and others who are not working. The other problem with delaying the DIP is that you are slowing down apprenticeships and the recruitment of graduates. You are slowing the whole process down and, as we lose momentum, in defence it can take quite a long time to get moving again. We are really worried about losing out on investment from big international companies, and indeed worried about smaller ones continuing to invest in the UK. Do they offshore? Do they go to the States, which is circling the UK and offering all sorts of inducements to move abroad? If we keep delaying the DIP, we will make that worse and lose some really clever businesses.

Would you say there are any sectors that are particularly affected more than any others? Fred Sugden: A view from one of our members is that certain critical components, which are now being subject to daily price increases, are being swallowed up by other industries because of the delay. That in turn drives up trading cost into programmes as they are being held up. It also increases the scarcity of those components. You have a vicious cycle, where the delay to defence means that the components that would be needed for certain programmes are being hoovered up elsewhere, therefore driving up the costs and drying up their availability. In addition to that, some equipment suppliers’ quotes are going out of validity. Some of the bits of equipment they need are typically valid for up to one month, and they are then more expensive when it comes to renewals. That means that, when you get to the place where you can move forward with the contract, the prices are all out of sync with where they were prior to the delay. Where it was previously is never captured when it comes to moving forward with the contract.

Do you have details on which particular sectors those examples are from?

Yes. We can provide that in writing afterwards.

Does anybody else want to comment on whether there is a particular sector that is affected more than others?

I can give you one specific example. A company called MTE Heat Treatment, which is a heat treatment and coatings company, has gone bust. On the surface, it has 30 employees and that is a tragedy for those 30 families, but the impact rippling back up through the supply chain is enormous. If I may give you a quick example, I was speaking to a turbine blade manufacturer in the UK who explained what happens as little companies go out of business, which is mainly down to energy costs—this is a whole other subject, but energy costs in the UK are slowly deindustrialising the country, and Make UK are very passionate advocates of that move. The turbine blades are forged in Italy and sent to the UK for machining; they are then sent to the Republic of Ireland for coatings because there is no UK company that does it—it has gone bust; they come back to the UK for further machining; they then get sent to the USA for further heat treatment and coatings at the cost of $6,000 per blade, and then come back to the UK for final machining. The inevitable consequence of that little 30-person company’s going bust is that the company procuring those blades will say, “Actually, it is a bit easier just to do it in the States, because we can get the machining done there, and the British company”—which is fantastic and a world leader in what it does—“is just a bit of an inconvenience.” The effects from these little companies ripple back up through the supply chain and, by the time they reach the top, are tsunami waves of impact on the supply chain.

That covers the fragility in the supply chain extremely well.

We have a member who is working on a digital programme where the funding has been on hold, which has meant that they have had to now put three SMEs at risk. If they do not get funding soon, there will be job losses and other impacts as a result of the funding being put on hold for that particular programme.

Sorry to continue the pain for all of you. That was a pretty powerful example of the impact on big businesses as a result of failing SMEs. What has been the impact of delay on SMEs in particular, at the lower part of the system? Andrew Kinniburgh: Samira explained that very clearly from a prime perspective. There are pockets of defence, as you know very well, that are incredibly busy. The busy bits are very busy, and are looking for new suppliers and trying to drive on. The problem for SMEs is that they are desperately trying to hang on to their people and keep their factories alive. The trouble for them is that they are bleeding cash; there is cash out of the door every day to feed the baby birds, and they are simply on pause. I was talking to one of our members who is an electronic sub-contract manufacturer, and she said to me, “We have x amount of money in cash in the bank. Do I go into administration now, take that money and walk away, or do I carry on paying my 30 employees until that runs out, in the hope that the DIP will get released, and we will win work through that?”

Can you talk to us about lending and liquidity, then, and the support that SMEs are getting from the economy more broadly?

It is an interesting one. I do not know about the rest of the panel, but we are certainly seeing that some of the high street banks are beginning to release the brake—again that analogy. They are beginning to support; they are genuinely stepping up. Yesterday we launched a report with Lloyds Bank that is a guide to getting into the defence industry. There are some good things coming through. They are beginning to improve. We are seeing working capital released. But the big investors need to see the defence investment plan or they are simply not going to put the money in.

Are there other mechanisms that could facilitate or support that?

There are. The British Business Bank is often quoted, but it is an incredibly expensive place to borrow money, so it is not always the panacea. There are options, but without that investment plan it is very difficult for investors to say, “Yes, we’re going to go for it.”

Does the MDM offer any hope? Does anyone know what the MDM offers, in terms of lending?

We have all worked with the MDM through OCCAR and some of the work that we do on NATO around multi-procurement initiatives. It is a different offering to something such as the Defence, Security and Resilience Bank. The challenge is that SMEs do not actually want to give equity away, when we look at the liquidity piece that you highlighted, Calvin.

We shall discuss the MDM later. You are talking about liquidity, where that money can come from, and about lending. There are other solutions, such as DSR; the question was just about whether that was out there. Samira, could we come back to that in a future question?

Yes.

Arnab, does the MoD’s Defence Office for Small Business Growth provide any hope for SMEs? Is it any use at all?

We have not really engaged with the office. It is obviously a recent evolution, so we look forward to working with it. We know that the MoD has a small business action plan. As Samira said, the procurement paralysis with the DIP means that there are delays to us being able to engage with the MoD and support it with its SME action plan. We know that the SME supply chain is important for national security, for national resilience and for sovereign capability. The delay in the DIP, with that uncertainty, impacts many of our members. Anecdotally, defence SME firms in our supply chain cannot plan. They cannot make workforce plans at the moment. They have issues with investment, because if they are not being given the contracts, and they do not have that foresight, it is very difficult for them to go out and get that investment. All those are barriers that occur because of that delay in the DIP.

I think that the Office for Small Business Growth is a worthwhile endeavour. We are broadly supportive of it, as an office. The proof will be in the pudding on whether it delivers meaningful change to SMEs. There is a certain cynicism out in the industry that it is another initiative that does not actually have any teeth behind it to deliver meaningful change in areas such as procurement, acquisition and all those perennial bugbears that smaller companies in particular find challenging when dealing with defence.

We saw one five-year COCONO contract that had been changed to a one-plus-one-plus-four. Can you explain what that type of change would mean for SMEs?

It is a killer, frankly. I have spoken to the Committee before about that touching of the brakes, or thinking that you will save money by splitting it to one-plus-one-plus-four. With that you never get to the nub of the problem—productivity, which is a huge issue in the UK. As we know, since the global financial crisis our productivity has really flatlined while much of the world’s has improved. The problem with going for short-term savings is that in investment, recruitment and all those good things, it drives short-termism. You then are not saying, “I am going to make an incremental change in my productivity. I am going to invest in that five-axis boring machine, or that five-axis precision engineering machine, which will revolutionise what I currently do by hand,” because you simply do not have the longevity or the investment from the authority or the prime to enable you to do that.

Andrew, I want to pick up the point that you just made, which is interesting. Obviously, the MoD understands that for some contracts you need longevity. That is why we have submarine contracts in the way that we do. Don’t you think there is something slightly odd about not extending that logic overall to military funding and procurement?

I do. What we tend to do in the UK is say, “We would like up to 12 warships,” or, “We want up to 12 or 15 AUKUS submarines,” and then as we go through the process of beginning to procure and look at the details of those, that gets nibbled away, and suddenly you are at nine, and then you are at seven, and then you are down to five. I absolutely agree. It would be really nice to see us say, “We are going to buy 12 of these,” and for that to be a firm commitment. Clearly, that is a big hit for the Treasury, but a much longer-term view of everything would be hugely valuable.

Have you done any work benchmarking this against other Ministries of Defence? If you have, how would you score what we are doing? Is it great, not very good, very poor? Where does it sit in that space?

Probably the one I know best is Australia, where they have a 10-year programme, but the problem for the Australians is that they do not have any wiggle room at all; they are fully committed for 10 years. I guess that is the quid pro quo: yes, you have the longevity, but if conditions change—for instance, in the middle east or Ukraine—you perhaps don’t have the wiggle room that you might want, so I suppose there is a trade-off there.

Samira, I take it that you didn’t expect that the DIP would be delayed by 10 months.

No.

So what has the Government done to mitigate the effect of that, if anything?

I don’t think they have put effective mitigation plans in place at all, to be absolutely frank. It is a very difficult time because they are going through defence reform, and there are some really great initiatives, but it is all about execution. Even the Defence Office for Small Business Growth, which is at initial operating capability, is signposting. It is not in execution of delivery.

Do you mean that there isn’t any execution?

At this stage. Defence reform, coupled with the SDR—which we all welcome—and all these other big programmes and initiatives all at once, has caused paralysis. The way that I set my priorities for my members this year was to say that that this is the year for execution—we have done policy for 18 months, and we now need to move into delivery—but we are not in delivery yet. There have been some great motions of success. You have had some positive announceables on the defence growth deals, which is a big plus. They are looking at the defence technology excellence colleges, and that is all great, but then you have to move into the delivery of those. We need to be transitioning much quicker and at pace to make sure we can get contracts flowing through the system. We need to get SMEs paid. It is disgraceful to hear that SMEs have delivered work and are not being paid.      

Do you get the sense that the actual deployments and the work being done now in response to the Gulf have been affected by internal discussions about the DIP or other preoccupations within the MoD?

I am not sighted on the internal conversations. It is tricky, because they will have made some assumptions, and sadly the Gulf conflict has happened and therefore they might have to think about the allocation of those funds to support Gulf partners and British people out in the region. It must make it a challenge. But equally, maybe there is a way that we can look at ringfencing certain pots. We need to move to publication quickly. It may not be a full publication; it might be: “It is a 10-year investment plan, but this is what we need to do in the next X period.” We do need to get some smoke signals coming out.

I have a general question for the panel. What is the impact of the delay in terms of our strategic posture outside industry? Do you think that there has been an effect on allies, capability, training, skills and industrial capacity? Fred Sugden: One of our members has told us that discussions they have had with overseas clients and partners are becoming increasingly difficult, so a credibility gap is developing. The promise of increased expenditure and defence spending in the UK, versus the reality on the ground of the delay, is having a knock-on impact on their discussions with international partners. In turn, that means that it is becoming harder for them to pursue export opportunities and convince those partners to invest in the UK. Returning to some of the points that Andrew made earlier, it is a two-way thing: it is harder to export, but it is also harder to get the investment back into the UK because of the gap between what is being said and what is actually happening on the ground.

Arnab, did you want to say something? You have not spoken yet.

I want to echo what my colleague has just said about the credibility gap. I think the Committee will understand what the perception will be, unfortunately, among our allies and adversaries. The other problem, which is hugely important, is that there is an economic self-harm from this delay, with a permanent loss of specialist skills. Our sovereign manufacturing capabilities are nearly impossible to rebuild once they are lost. Andrew cited an excellent example of the dangers, and across the UK, you can multiply that manyfold. It is an incredible worry for us at the moment. FSB, of course, looks at the whole of the potential supply chain into the MoD, and that includes gardening firms, catering firms and all the other 101 different types of business that support the MoD—not just people who build missiles and tanks—so the longer this continues, the greater the effect on the wider economy. For FSB, any defence investment plan has to include more small businesses directly and indirectly in the supply chain—more than has happened historically—because there is a remedy, and the sooner the DIP can be published, the sooner we can get on with working with the MoD on its action plans for SMEs. This is anecdotal, and as a Committee, you will have to decide on the level of damage, but I think we can understand that it is sub-optimal.

Did you find it odd that the medium-lift helicopter contract was announced outside the DIP, almost as a sidebar?

I cannot speak to that.

We were very relieved to see it actually being released. The dithering that went on around that contract was just incredible. Yes, we were delighted to see it, and delighted for Leonardo and for those 3,000 employees down in Yeovil, because as you know very well, they are not jobs that you can replace easily—if at all, in fact—in that region.

It is the economy—especially around Yeovil, with the colleges. A decision had to be made, because the pricing was moving out of date. It was literally: “You need to make a decision.” For us, we feel that is the right decision, and we really welcomed the announcement. But equally, if we can make those decisions, we can make other decisions.

It is interesting; this could just be a whole session of attacking and criticising the MoD—and that it is not something that we do very often, as you know. But we are probably all on the same page in terms of the concern and criticism about the delay. Obviously, part of it is that the longer it goes on, the more difficult it gets. I suppose you can turn the question around and be devil’s advocate: the Government set out that they are going to increase expenditure. Some of us are hoping that they will say something about the 3% at some point in the coming months. Unless the industry believes that there is going to be a cut in defence expenditure, what are you doing to prepare yourself for when the Government actually decide to tell you what they are doing with each individual part of the expenditure that they want to push forward under the DIP? Surely industry does not believe that expenditure is going to be cut. You must be gearing up in some way to eventually get the decision and deal with that, or are you not?

We absolutely are.

Can you tell us a bit about that? We are not getting that side at the moment; we hear a lot about what the problems are, which no one is denying.

To slightly defend the Government, I think the Ministry of Defence is doing a great deal of work to get its house in order, which will support the DIP, when it does come through—kudos to them for that. With things like the segmented procurement model and SME commercial pathways, there is some good stuff happening. Commercial X is doing some really good stuff, and it has come up with an eight-page contract that is much more along the SpaceX model. There is some good stuff there, and we very much support that. As dedicated defence trade associations, we are probably all finding that we are growing very quickly, and I think a lot of companies are anticipating that growth in demand. We are seeing a lot of companies from the oil and gas and automative sectors, which are the kind of companies that we want in defence, because they are very high-quality, low-cost and high-volume. They will drive costs out of the defence supply chain, and that is not to forget the 10,000 that are already there. There is a lot of work because of new entrants looking to shape up and do things like our Fit for Defence programme, which helps you to prepare, in effect, for being a defence company. A lot of us are doing a lot of work to prepare, but that takes investment itself, so we need this money, and we need to see the DIP come through.

If you think about the industry’s commitment and support that goes into the Defence Industrial Joint Council, that is a significant amount of resource and time, as well as working with the MoD and other Government Departments to make sure that, when we can press the go button, we are in a position to move at pace. If you think about the trade bodies, we will all have offers that will benefit and enhance our membership. From an ADS perspective, we utilise a programme of supply chain solutions so that our SMEs can improve themselves in the supply chain, ensuring that that they become a more resilient supply chain that works with the large defence primes. That is something that we have offered to the Defence Office for Small Business Growth. If you look at big industry, it has a number of SME programmes to make sure that its supply chain is ready to go. You have Lockheed Martin’s SMEUNITE, and Babcock has just launched its SME charter, as well as many others that have their mentorship and improvement programmes. The challenge is that there is so much warming up and making sure that all the enablers are in place. We now need to just understand the funding flows. What we do know is that when the money starts coming, it is not going to be coming at the pace that everyone wants. We know that the flow will probably start in 2027 and then start to build up. The challenge is that—what I am going to say is not a helpful comment—even if we are committing to 3%, the 10-year defence investment plan is based on current projections. Therefore, if we looked at our defence investment plan when we are at 3%, we would also make very different decisions.

I would like to say that the MoD has been very forthcoming in engaging with the FSB, especially in discussions on setting indirect and direct spend with SMEs, and we look forward to hearing that. It is showing a degree of ambition, which is really welcome. However, of course, none of that can be fulfilled until we have the DIP. You are quite right that there are a lot of positive stories and incredibly good engagement, but we are waiting for action.

I would add just one quick point. Through the DRJC, which Samira mentioned, some great work has already been with some of the tech-focused bodies that sit within the council to produce a report on rapid commercial exploitation. There are a series of recommendations in their work—joined up between the MoD and tech companies—that have then been presented to the council. The recommendations are in the process of being looked at by the Department at the moment, as to whether they will be taken forward or not. That is just a practical example of where there is some good work going on at the moment, in advance of the DIP being published, to try to get ahead of the curve.

Following on from that, does the capacity exist within the industry to do this without causing inflation? You touched on defence inflation before, in terms of the cost of minerals and so on. With its current capacity, how can the industry meet demand without seeing defence inflation, while also ensuring that the taxpayer gets good value for their buck?

Through long-term commitment to demand signals, because then you can drive productivity through and drive cost down. Then your inflationary impact will be minimal. You have the cost of raw materials, which is climbing rapidly. Gas and other commodity prices are going up and down—

So you are already setting the scene for when the DIP is produced? We have some certainty—or some clear pathway—that it is already going to cost more than it would have last year, regardless of the other increases in energy costs and so forth, because the capacity is not there as it was. People have gone out of business, sourcing minerals and so forth. Is that right?

There is an investment piece. Some of big industry, and small industry too, will need to invest in manufacturing skills. The longer the delays, the more those costs will increase. We are creating a virtuous circle where we want to bring costs down, but every delay increases cost. We have all articulated that we want to see long-term contracts. We do not want feast and famine. That is not good value for the taxpayer.

Another way that we can keep costs down is by being more inclusive. FSB’s procurement report, “Signed, sealed, delivered”, which came out in December, evidences a lot of issues and challenges within procurement—not specifically MoD, but MoD is covered. That is around the complexity of procurement on the supply chain and how it puts off many capable SMEs from even applying for public sector contracts. That capability is there in our economy. By ameliorating that and working with SMEs to make it easier to onboard and reduce that complexity, you will increase that capability. That will keep costs low.

Will the capacity be there when the DIP is produced, or do you have major capacity problems?

The capacity is there. It may not reside in defence today, but it is certainly there.

Do you have any idea what the number of job losses or lack of opportunities to create jobs has been because of this delay at the moment? You have mentioned examples. Has there been any study or survey about that?

Not that I am aware of.

I chair the PAC and we look at numbers. I am very concerned about the trend that is emerging in the procurement crisis, for two reasons. First, you have given us some very graphic examples this morning of small businesses that are not able to survive, so the capacity will be less. That is likely to drive more production abroad. Secondly, the more we leave this procurement, the more rest of the world—certainly, the western world—will start to procure all the sorts of things that we want to procure. That in itself is going to push inflation up. What can we do in the longer term to make sure that we have the capacity? It is not just the immediate capacity today; it is the capacity we will need tomorrow, in the event that we have a war. NLAWs are a terrific example of this. We have given huge numbers to Ukraine. We need to build that capacity up quickly to build our own restocking. What more can we do to retain skills in this country and increase the capacity we will need in the future?

Within the defence industrial strategy, and I think it is referenced in the strategic defence review too, we have been advocating for “always on” around certain key capabilities. That is starting to trickle through, but not to the level that is needed and not to the breadth of the different capability areas. An always-on capability, at smaller levels, will provide long-term investment because it is a long-term programme. We are securing the skills for the future. We have manufacturing capability that we can surge. We can look at additional shifts—it could be 24 hours depending on the demand. We can also secure the critical minerals and materials that we need, because we have been given that demand signal. There is a piece around energetics, especially with the Gulf conflict, and the critical components that we need to secure additional levels to support our integrated missile defence capability, both domestically and in support of our allies.

To give a brief example, I completely agree with Samira on the always on—the ability to have capabilities sitting there in the background—but it needs to be fed, even if it is just fed on scraps rather than on big strong contracts. We have also talked about shadow factories. For instance, going back to the west midlands, there are big automotive manufacturers that would scale up very rapidly. How do we get those engaged in defence and ready to go if demand is there? The other thing is defence reform. I have a member who just told me about a tender that he is currently bidding for; the requirement was 70 different documents and 6,000 pages. It would take one person a month to read that tender document. Tender responses are about 400 pages long. At the other end of the scale, you have got the gloriously named “human machine teaming framework”, which have gone for a Dragon’s Den approach—they have the top three suppliers doing a beauty contest. They see three of them, and they are funding three companies to go forward, so they are seeing that technology develop—spiral development. You then have three potential suppliers across that whole technology, so you can contrast. I think we need to keep encouraging and supporting MoD in its reform programme to try and get more examples of Dragon’s Dens and fewer examples of 6,000 pages of incredible detail.

Of course, during the second world war we did exactly what you said. Automotive companies switched to aviation production.

Absolutely.

We have been advocating for the need to see a clear path to 3.5%, and we have been debating whether we need to front or backload that, or whether we need an incremental profile increase. In terms of value for money and the capacity of businesses to deal with that increase in spending, do you have any specific preferences? Ms Braund, do you want frontloading in terms of more immediate defence spending, or do you think the industry will not be able to cope with that increase in capacity, and there might therefore be more defence inflation? What are your views?

It is a good question. It is a balance, because we need to get the production runs available and in place. It is about the commitment and seeing that road map laid out to understand when we need to recruit the skills to support those sorts of increases. At ADS, we have already modelled that if you are going up to 3.5%, that is an additional 85,000 jobs. That is a significant increase.

My question is around whether you want frontloading, an incremental profile increase, or backloading.

We need to see some money flowing through the system sooner rather than later. But for me, to ensure that we have the right capability, with the right people and the right skills, it would probably need to be incremental.

The same question to you, Mr Dutt, very briefly.

More tortoise and less hare—I very much agree with Samira on this.

We know you do not pop down to Sainsbury’s and buy yourself an NLAW or whatever it might be. It is about research and development. It is about science and technology—now, absolutely now—with things like the Dragon’s Den contest. Know your supply chain, MoD: know exactly who can do what, where they are and their capacity. Some front-loading is needed in terms of science and technology, R&D and getting ready, and then, as the money starts flowing in, detail. Can I also mention defence exports? Fund them properly, for heaven’s sake. We are still premier league in terms of our defence capability, but if you starve defence exports of money we will miss out on huge amounts of that growth spending around the world.

The only think I would add is that it depends on the type of company you are talking about. If you are talking about software companies or some of the newer players in the sector, they are probably in a place where they can take advantage of front-loaded money more quickly than a larger company that needs to spool up production would perhaps be able to.

Let’s move on to the defence finance and industrial investment strategy. That was due to be published this month. In your opinion, should that be published even before the defence investment plan lands—as and when it lands—or do you think that one should come after the other? Ms Braund? Any specific preference, Mr Kinniburgh?

The two probably need to go hand in hand, don’t they, really? We would prefer to see them together, because otherwise it becomes a theoretical exercise, rather than saying, “This is how much we’ve got, and this is how we’re going to arrange it.” They need to be linked.

It could be published before, because obviously they serve different purposes. The DFIS sets the overall financial principles and rules on how defence manages their investment, their frameworks and their long-term decisions on what comes out of that. But, in reality, they would probably come hand in hand.

I agree. The two need to come out together.

Yes, the two together.

I just wanted to get that confirmation. This month, the Treasury also announced MDM, the multinational defence mechanism. How helpful do you think that will be in supporting defence industry? Are there other measures, such as the Defence Security and Resilience Bank, or other tools that may be more helpful? It would be good to get your views on those fiscal tools.

We are very passionate advocates of the Defence Security and Resilience Bank. To us, it absolutely makes sense. We are aligned with Canada and many other countries in the world. We need to go down that road rather than the MDM road.

Do you think it is an either/or situation? Can we have both?

I think it is an either/or, to be honest. As far as I understand it—we do not have a great deal of detail on this; we have not been consulted on it at all—MDM seems to come with a defence procurement organisation behind it. We need another defence procurement organisation like a hole in the head. We have OCCAR and NATO, and we can buy multinationally. We have plenty of defence procurement mechanisms in the UK; we do not need another one. Please do not go down that road. Get behind the MoD reforms and help it improve its performance, but do not create another one—please; that is the last thing we need. To me, DSRB would be the obvious route to go down.

That is a very clear indication.

Our members would quite like the Government to have another go at getting access to SAFE within the EU. They were really keen on getting access to that. Obviously, unfortunately, that did not work out but, if there is another round of negotiations on access to SAFE, that would be very warmly welcomed by our members.

You will be pleased to hear that, in the Liaison Committee yesterday, the Prime Minister mentioned that they will be pursuing that. Ms Braun, what are your opinions on these fiscal tools?

I do not think either of them is a silver bullet. The MDM is more about multinational procurement opportunities. I am a little bit on the fence about DSRB, if we think about the other initiatives that are in play or could be offered. If we think about the interventions that the DFIS is going to provide, there is a greater opportunity, because we are improving our own investment ecosystem. If we get that right, do we need a DSRB?

The idea of a DSRB is very encouraging. We have not engaged with the MDM at all at FSB, so unfortunately I am not in a position to comment on whether it is a great idea or not.

We have had some of the documents from Defence that we were expecting; we have had the Defence Industrial Strategy, which came out in September—six months ago now. I wanted to give you an opportunity to say whether that has been helpful. Have you seen any progress on that being implemented, notwithstanding the context of this hearing being held while waiting for the DIP? I will come to you, Fred. One of the things that was new in the Defence Industrial Strategy was clarification about the new UK Defence Innovation construct—UKDI—and a number of very positive-sounding strategic aims are laid out in that document. From your membership at techUK, have you seen any progress on that in the last six months?

There has been some good progress on UKDI. We have long argued that consolidation of what is a quite complex innovation ecosystem in UK defence was long overdue. Bringing all the various disparate innovation units under the auspices of UKDI is a good thing and hopefully will deliver results. It comes back to two things: demand signal, and having the right procurement mechanism to flow money out through UKDI. If we can get a demand signal that ties operational requirements in that kind of rapid exploitation space, with a procurement system that is able to deliver on that, that will be the measure of whether it is a success.

A lot of your members will be dual use, and may be very new companies looking to scale up, who have a product that can be used either for defence or for other purposes—or they may have had something for decades that can be used for defence or not. In the past couple of years the zeitgeist in the UK, and probably in the west, has been, “There are going to be great opportunities in defence, because we are re-entering a time of war and we need to modernise our forces and therefore you should think about marketing your product to defence.” Has that changed through the fact that contracts are just not coming forward?

There is a danger that it might, if things carry on as they are. Where we are at the moment, there is still that level of interest from dual-use companies in defence, but I sense that that is time-limited. If things do not move forward in a positive way, we will start to see some of these dual-use technology companies that might have considered moving into the market deciding, “Do you know what? It is just easier to go and work in another industry where we do not have all these hurdles we have to jump.”

When you say it is easier to work in another industry, presumably some of them will think it is easier to work in another country?

Yes, other countries or other industries—both are viable markets for tech companies that are not limited to working in defence as a primary sector.

Has techUK lost any members in the last year or two to other countries?

I do not believe we have—at least, I do not have any evidence that we have.

What about the other organisations? Have any of you lost members in the past year or so on the basis of there not being contracts coming forward from UK defence?

indicated assent.

We absolutely have. It was a nanotechnology business that simply could not get investment in the UK for a start and could not find any contracts. They were talking about nanotechnology built into both structures and electronics as well. They moved to the States. They are now based in Austin, Texas; their chair still lives in the UK, but the rest of the operation is in Austin. We have the US and other countries quite aggressively circling the UK, as I mentioned before, saying, “Oh, we like that. Come and stay with us. We’ll look after you.” It is tricky.

The micro SMEs have really been impacted. Contracts have not flowed; they have had to exit the sector and therefore exit membership. We have had businesses fold. It really is hurting those at the coalface.

Good morning; I am Chris Kane and I am also guesting from the Public Accounts Committee today. What impact are we seeing across industry from the current war in Iran?

I will make a very brief point on my earlier example of critical components and minerals rising. The strait of Hormuz being effectively closed is not helping; critical minerals and parts for components are being driven up as a result of that effective blockage.

If you take the lessons learned from Ukraine and think about the capabilities that we need to support our allies in the region, there are some really great examples of organisations and learnings from Ukraine out into the Gulf. There is a Ukrainian company that is now manufacturing in the UK called U-Force, trying to take the learnings and look at best practice on how we can execute capability immediately. There are opportunities across the industrial base—from big to very small—to support that, and conversations with industry are in the early stages. We had a roundtable last week to understand capacity levels and production ramp-ups over the next 30, 60 or 90 days. Those conversations are very live at the moment.

FSB represents way beyond the defence industrial base. The small firms and microbusinesses are prone to be impacted by the energy price shocks that are occurring, so that has quite a large impact. Anecdotally, we have already seen within our sector a rise in companies going into liquidation because of those shocks. There is a sizeable impact going on in the economy.

Can I give a very specific example from Make UK across manufacturing? Some 30% of all manufacturers in the UK will renegotiate their electricity prices in April this year. That is a quirk of fate; that is what happens—every April, there is a renegotiation. One of our members’ monthly electricity bill will go from £600,000 a month to £2.4 million a month. Energy prices are killing us, and the war in Iran is clearly not helping.

Just on 30%—because it is a great number—we have seen a 30% increase in air freight costs over the last two weeks alone. That is not necessarily just defence; it is multisector, but those logistics costs are causing an impact.

I am very conscious of time, and I want to crack on and ask a couple of other questions, if that is okay. I suspect America is now firing more missiles than it was planning on buying to replace them. How is the industry thinking about the difference between its approach to steadily building a stockpile of munitions in peacetime and the unpredictable nature of replenishment during war? Are the costs of replacing weapons and munitions the same as the costs to plan to build them?

I will come back to the always on production, because we cannot produce weapons or other capabilities if there are not the demand signals—whether that is domestic sales or export sales. That is why it links back to the DIP specifically. What was the second part of your question?

Is the cost to replace a weapon that you have fired the same as the cost to plan to do it?

On the cost to replace a weapon, you will start to see nations looking at alternative solutions around delivering effects, so you are seeing more low-cost attributable capability, such as one-way effectors, some counter-UAS or ground-based air defence assets or electronic warfare, which may be cheaper; if you think about DragonFire, it is £10 a shot. There are different ways to deliver different effects. As part of hybrid warfare—the First Sea Lord talked about a hybrid navy—those sorts of decisions are some of the decisions that will be in the DIP.

You have talked about the ability to surge production, and to go to 24-hour shifts if necessary. How long could you sustain that before it became the norm, or before it broke? Temporarily surging is not the same as moving to a new normal. This question is in relation to how you are coping with the thoughts of being at war as opposed to preparing for it.

I guess it depends on demand from other sectors. If you are in the automotive industry and it is a bit slow, as it is at the moment, and you are flat-out on defence production, and then you get a big order from Jaguar Land Rover as they spool back up their production for electric vehicles, you have a problem. Then you are looking at things like return on investment. On the always on side of things, if we again take the NLAW, for instance, we did not order it for 15 years, and then you have to completely reinvent the supply chain, and also some of the equipment, the people and the skills. If you have kept that ticking over then you can surge but, again, it is tricky to plan ahead. It is difficult to know what is happening. I think depending on the other sectors—oil and gas and automotive—you can hopefully plan and move forward. Organisations like all of ours are there to support in terms of finding alternative suppliers and additional capacity.

A lot of that information is commercially sensitive, so we would not necessarily have sight of that, but if you think about some of the work the MoD is doing with industry on wargaming, surge production is one of those war games specifically. Maybe the Committee can speak to the MoD to get greater detail.

I have some follow-up questions; I think this one is probably for you, Samira. Are ESG and debanking still a problem for defence SMEs?

Yes. From our latest survey, we still see challenges around access to finance. Debanking still goes on. The challenge on the debanking is that a number of companies do not necessarily want to go public on it, because of reputational and credibility challenges with contracts they have with MoD. I know Make UK Defence has also done a survey on this. We still see it as a challenge. I think the ecosystem is improving and that the rhetoric on the awareness and value of defence is starting to get out into the general public. Sad to say that conflicts overseas also demonstrate the importance of defence in order for us to live in a democratic society, and what value that brings. But we are still seeing access to finance challenges and patient capital challenges. Lots of people want debt financing. So there is still work to be done.

In response to the Chair’s question, all panellists discussed MDM and the DSRB, but no one said what other fiscal tools they think should be used. Do you think it should be increased taxation or borrowing? What is your view?

Please may I give you a really nice example?

You can, if you do it quickly, because I think the Chair is keen to move on.

It is £1.8 billion of free money, and I do not say that lightly. There is a programme at the moment called the Patent Box, which costs about £2 billion a year. About £2 million of that goes to SMEs. The rest goes to big business, typically in life sciences, pharmaceuticals, that sort of thing. It is tax relief for development of intellectual property in the UK. If we were to ask the Treasury to refocus that on defence, you could almost instantly release £1.8 billion pounds-worth of money for defence, by reforming Patent Box.

Thank you. It has been very important for your views, as representatives of trade associations, to be put on the record to help us hopefully to put more pressure on the Government to release the defence investment plan forthwith. We will now be moving on to representatives from the trade unions.