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Defence Committee - Minutes of Evidence HC 198

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Oral Evidence

Taken before the Defence Committee

on Tuesday 18 June 2013

Members present:

Mr James Arbuthnot (Chair)

Mr Julian Brazier

Mr Dai Havard

Mr Adam Holloway

Mrs Madeleine Moon

Sir Bob Russell

Ms Gisela Stuart

Derek Twigg

________________

Examination of Witness

Witness: Professor Trevor Taylor, Royal United Services Institute (RUSI), gave evidence.

Q203 Chair: Professor Taylor, welcome to this Defence Committee hearing into the defence implications of an independent Scotland. These evidence sessions usually go on and on for hours and hours, but you will be relieved to hear that because there is only one witness-you-we may be able to get through the entire set of questions we want to ask you quite expeditiously because you are unlikely to contradict yourself, but time will tell.

Professor Taylor: Thank you for the compliment.

Q204 Chair: Would you like to give a brief introduction of yourself?

Professor Taylor: My name is Trevor Taylor and I work as a professorial fellow at the Royal United Services Institute. Something else in my portfolio is that I still teach at Cranfield university. I am emeritus professor there, where I did defence management. I work for those two institutions and I also do a little work for the Naval Postgraduate School in California. I am a career academic who has worked a lot in defence for more years than I care to remember.

Q205 Chair: Thank you. We are obviously interested in Scotland today. How important is the defence industry to Scotland?

Professor Taylor: That is quite difficult to answer because it is an economic question. If you asked what would happen if the defence industry disappeared overnight, there would obviously be severe disruption. As for the whole issue of how quickly it would take to readjust, recover and do new things, that is a guess really about the nature of the Scottish economy. Obviously, BAE Systems and Babcock with their shipyards are very important employers in the region. It is a long-standing industry. Then there are the high-technology parts of the defence industry in Scotland, which, in terms of the number of jobs, might not weigh so heavily, but they are significant. There are high- technology jobs in radar, electronics and optics with Thales. So there is a number of high-technology jobs there. There is no doubt that the employment side of the defence industry matters a lot to Scottish politicians-employment is always important to politicians, and there is a significant number of jobs there.

Q206 Chair: Is Thales a bigger electronic manufacturer in Scotland than Selex?

Professor Taylor: No, I think Selex is bigger because it has the radar business in Scotland. For the detailed numbers of people who are employed, you would be better to ask the companies themselves. Selex has the airborne radar business for the UK. It used to be the old Ferranti radar business. That is based in Edinburgh.

Q207 Chair: Okay. Are there any other principal products produced in Scotland that you have not already mentioned?

Professor Taylor: I don’t think so. At the margins, there are things such as the Ranges on the Hebrides, which are QinetiQ. There is obviously the nuclear Faslane and Coulport and all the people whom they employ. It is a significant number. It is 10,000-plus people.

Q208 Chair: Are you able to say what proportion of these defence products or services is produced for the Ministry of Defence as opposed to for export?

Professor Taylor: The predominant and most important customer is the Ministry of Defence. As you are probably aware, in the defence business generally, it is very difficult to export products unless they have been bought by your home customer. The most important customer for all of them is the Ministry of Defence, but I do not know the detailed breakdown of exports to the UK market for all the companies. Obviously, with Typhoon, the radar is a radar where there is a UK share for the Typhoon market as a whole-all the collaborative partners and the export customers. The most important customer for these companies is undoubtedly the UK Ministry of Defence.

Q209 Chair: Are you able to hazard a guess about what proportion?

Professor Taylor: I think probably-no.

Q210 Chair: It would be unwise, would it?

Professor Taylor: The companies may know, but even they may not quite know. You can assume that it is the same sort of ratio as in the UK as a whole, so probably 60% is home market and 40% is export.

Chair: That gives us a ballpark figure, which is useful.

Q211Mrs Moon: Would you repeat the figure of how many were actually employed in the defence industries?

Professor Taylor: I think I had a tot up when I gave evidence to the Scottish Affairs Committee. The number, I think, is 12,000, but before I give a definitive answer on that, I would like to check it. It is in that region of about 12,000 people, but of course that does not take account of the multiplier effect, the people whose jobs depend on that. The Government said recently that there were 50 X-listed companies in Scotland.

Q212Mrs Moon: Can you tell us a little bit about the nature of the jobs and how many of them are high-skilled and highly paid jobs? What is the ratio? Are we looking at jobs that would be easy to replicate elsewhere?

Professor Taylor: I am not sure if highly skilled is easy to replicate elsewhere. In shipbuilding, obviously, there are the shipbuilding trades and the tradesmen-the welders and others-that actually build the ships. But BAE Systems, going back to GEC days, the design of ships, the design expertise, is largely based in Scotland-the engineering and architecture jobs. Within the electronics area, particularly the radar business and the Thales business and the Raytheon business, I would have thought a very high proportion of their jobs were high-technology engineering jobs, as a rough figure. Whether they would be easy to replicate or replace with high-technology jobs is a big question about how the economy works, and I do not have the answer to that.

Q213 Chair: You mentioned a concept that has not recently been mentioned in the Defence Committee. You said there were 50 X-listed companies in Scotland; by that you meant what?

Professor Taylor: My understanding of the system is that, in order for a company to receive classified information-and to generate defence products you have got to be able to handle classified information-you have to go through a process by which you assure the security authorities that you can protect that information and that your employees are appropriately cleared. That involves them looking at the site, the physical protection of the site, how you are going to look after documents, what employment process you will have-a security officer, and so on. You can go through that process and become X-listed. That means that you are seen as being able to look after classified information and therefore you become eligible to receive classified information that you need, say, to bid on a contract or to deliver work on a contract.

Q214 Chair: And there are 50 of those in Scotland.

Professor Taylor: That is what the Ministry of Defence revealed the other day, yes.

Q215Sir Bob Russell: May I press this point, because I am not sure, following your answers to the Chairman and Mrs Moon? If there was a yes vote in the referendum, what risks, if any, would there be to the future of the defence sector in Scotland? I do not think your answers gave a definitive position.

Professor Taylor: I was not asked that question.

Chair: You are quite right; you were not.

Professor Taylor: I have been, now. It is not a straightforward question and it is not a straightforward answer.

Q216Sir Bob Russell: I gathered that from the previous answer.

Professor Taylor: It would depend significantly on-what are we calling it?-the rump UK or the London-based? Some of it would depend on the reaction of the entity that is left after the departure of Scotland. There would be a legal dimension to do with European procurement law. There would be a political dimension, depending on whether the new country was seen as an assured and reliable source of supply. There would also be-we should not understate-quite a lot of material to be clarified relating to the regulatory and legal machinery that would be needed. By that, I mean that if you want to receive classified information, you have got to have an export control system, a system for classifying-for clearing-people, to give them secret and top secret clearances. You need a customs organisation that you think can prevent things leaving the country improperly. This is something on which the United States is extremely enthusiastic. In NATO, obviously you need a clearances system.

I am not clear how some of the existing companies could continue to operate in an independent Scotland. Would the Westminster Government allow the people currently in Scotland to keep their UK security clearances? We do not normally give security clearances to foreigners working in foreign countries, so how would we handle it? We do not have an answer to that question. How would the United States view American technology being in a country that did not necessarily have an export controls system or something equivalent in which they have confidence?

I think the regulatory mechanics about how the defence industry works across frontiers, which we are relatively familiar with in established states, would have a lot of problems. I only ask the question, but how would people in the rump of the UK feel about putting work into a newly independent state that was perhaps causing the UK to have to move its strategic deterrent at a cost of-a ballpark figure, Chairman, before you ask me-maybe £20 billion? Would it be regarded as an assured source of supply? I think there would be a major risk to the defence industry.

Sir Bob Russell: I would not describe England, Wales and Northern Ireland as the rump of the UK. Perhaps that is the wrong word.

Professor Taylor: If you can come up with a better one-

Q217Sir Bob Russell: We can have a competition. The straight answer to the question is that if there is a yes in the referendum, there would be risks to the defence sector in Scotland.

Professor Taylor: Massive risk, yes.

Q218 Chair: Does any of that risk arise out of the issue of uncertainty as to how these questions would be answered?

Professor Taylor: Yes, in a word. How much resentment there would be, what the American attitude would be, what the attitude of whoever is in charge in the building across the road-Sir Bob, we really do need a word to refer to it.

Sir Bob Russell: I’m just thinking about it.

Professor Taylor: It would raise a huge number of questions. It would raise a large number of questions for the British Government and for the companies about how they would operate in a newly independent state.

Q219Ms Stuart: If I were to play devil’s advocate for the moment, I would respond, "Well, that is the nature of change." You simply have to arrive at new arrangements that deal with all the elements that you identified to have the relationships. How long would that take, assuming an independent Scotland could come to an agreement about supplies and assurances and so on? What is the kind of time gap where we would extend the air of uncertainty, because at the moment it goes from now to 2014 if we have a yes? How many years down the road are we talking about before you could establish relationships that would bring them back to the path?

Professor Taylor: Obviously, the relationship between the old UK-the London-based country-and Scotland would be an evolving question and an evolving set of relationships that was much bigger than defence and much bigger than the defence industry.

Q220Ms Stuart: I’m talking about the defence industry in an independent Scotland.

Professor Taylor: It is very difficult to put a number on that. One of the big issues, which the Committee may be aware of, is the Type 26. Basically, there are three shipyards in the UK-two in Scotland and one in Portsmouth-that could build a Type 26. As of this moment, there is not enough work for those three yards and Portsmouth looks the most vulnerable to closure; but the Government have not placed a contract for the Type 26 construction. I think that quite soon after the referendum, they will feel that they need to place a contract. I can’t speak for the Government, but it might be that that was a crucial decision for them, and they may decide, in the event of an independent Scotland, that the price would be such that they would not want to place their contracts in Scotland.

There is an interesting legal issue here about European procurement law. Forgive me if I just glance down, but article 346 of the European treaty does not require you to compete your contracts and it does not require you to place a contract in your own country if you choose not to compete it. Is the Committee familiar with 346? It is very brief. Should I-

Chair: Carry on. You’re doing a very good job of explaining it to us.

Professor Taylor: It says that "any Member State may take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material". Technically, you might be able to place a contract in Scotland under 346-perhaps-but if you did not use 346, European procurement law would kick in and you would be obliged to compete it on at least the European and perhaps the world market. The Government’s response to the Scottish Affairs Committee did include the line that "they would then be competing for business in an international market." So I don’t think the Government currently are offering the prospect of any favourable terms as far as defence procurement from Scotland is concerned.

Q221Ms Stuart: I think I was very bad at explaining what I was after. At the outset, you talked about the 50 companies that had access and about customs agreements and assured sources. The Chairman then asked about the period of uncertainty going up to 2014, ahead of the referendum. What I was really after was this. If I was a Scots Nat, I would say to you, "Well, we would do everything that was necessary to be part of those companies, to be part of the customs agreement and to have these assured sources of supply." Even assuming that they could do that, how long would it take them to establish these kinds of things? What is the envelope of uncertainty? Is it years, decades?

Professor Taylor: I think it is years, not decades. May we call it the British system? If they were to say, "We will just take on the London system," that would clearly be the quickest, but that would be London-controlled and therefore you are into the question of what sovereignty would mean or, if you like, independence. There is a good will issue here. How much good will would there be in London towards this move? I don’t know the answer. This would be a considerable inconvenience for defence-for European defence. It’s not just British defence; it’s European security. How much good will would there be, especially if the Scottish Nationalists insist on the removal of Trident? As the Committee is aware, that would be a very, very large cost for the UK to take on, and that would damage good will.

What’s missing from some of this debate is serious consideration of what the reaction of others would be to a yes vote, because how the world looks after a yes vote would not be just a function of what the Scottish people wanted; it would be a function of what people elsewhere wanted. That agenda item ought to stay there. It would be difficult for the companies in many ways. It would be expensive for the British Government, not least with regard to the nuclear side-expensive and politically difficult, as you’re aware, to think of a new location, so this is a high-impact risk for companies and Government.

Q222 Chair: You’ve raised the issue of European Union rules on procurement, and we will come back to the European Union and NATO later. In view of the major risk that you say would exist for companies, what do you think might be the consequence of independence for those companies? Do you think they might move south of the border?

Professor Taylor: I think politicians are famous for not answering hypothetical questions.

Chair: That doesn’t stop us asking them.

Professor Taylor: The answer would depend on the cost and difficulty. If it is easy to do, I think they would do it very quickly. If it is expensive and difficult to do, obviously it is a more challenging question for them. The new Scotland will not be a major market for defence equipment. Currently, the Scottish defence industry serves the high-end defence market of a pretty large player. Obviously it is not as large as the United States, but it is a fairly large player that goes for big, advanced systems-aircraft carriers, combat aircraft, airborne radar, testing ranges and so forth.

The new Scotland would be a small country with a small country’s defence needs. The domestic market for defence goods would be radically different from what it is now. Generally speaking, companies like to produce in a country where there is a good home market. American and continental companies invest here because of the size of the British market. I ask you to picture yourselves in a company boardroom asking, "What would this question look like to us when there is a small defence market in Scotland and we have to get through all these regulatory and other issues when dealing with London?"

Q223 Chair: Okay, so that is the market, but would employee skills continue to be a magnet for Scottish defence companies?

Professor Taylor: You mentioned the word "uncertainty," which is very pertinent here. I haven’t done the research, but I’m not clear how many employees of the major defence employers in Scotland are in fact Scottish and would want to be part of an independent Scotland, and how many of them would readily move south because they do not feel themselves to be Scottish. There may be Scottish people working in those companies who would happily move south because they feel that their job would be more secure and they would have interesting work. There may be people in those companies who are passionate Scottish nationalists who would not want to move. One of the really difficult issues the companies would have to face is the mobility of their work force, which is why I said it is a low risk, high impact thing for them. There is no doubt that the human part of the kind of capabilities that are in Scotland, such as radar and ship design, is not easy to transport unless the workers are very willing.

Q224 Chair: On international collaboration on things such as the joint strike fighter, could Scottish companies continue winning those sorts of contracts? To what extent does it matter that the current United Kingdom is the tier 1 partner of the United States? Would winning those contracts still be possible for Scotland?

Professor Taylor: My quick reaction would be no. There are a lot of technology transfer arrangements. There is a UK-US defence trade treaty. There are all kinds of official and cultural relationships between the United Kingdom and the United States which facilitate the formal arrangements for the control of information. I may be wrong, but I don’t see offhand how an independent Scotland could-within two or three years, at least-get the kind of security clearances that would enable them to work on these projects. How important it would be that Scotland has an anti-nuclear stance-and there is the whole question about whether or not Scotland would be allowed into NATO, or under what terms they would join NATO; all that kind of material. It would be more difficult, anyway; much more difficult. I have had a bit of exposure to American control of information, and I don’t quite see how the Americans are lightly going to pass classified information and controlled goods into an independent Scotland.

Q225 Chair: So, before any such work was carried out in Scotland, the new Scotland would have to enter into a new defence or trade treaty with the United States?

Professor Taylor: They would have to have a security system for the control of that information and that technology in which the United States had confidence.

Q226 Chair: And how long does it take to get such a treaty through the United States?

Professor Taylor: I am not saying that it would necessarily require a treaty, but the United States would certainly have to recognise-investigate and recognise. The United States has had very little to say and I have not seen much in the press about American reactions to this issue, but I think you would be talking about at least a small number of years for those things to be checked out. When I say a small number of years, I mean two, three, four. I don’t want to be part of the conspiracy of optimism, but I would think this might drag out a bit longer than might have been initially expected.

Q227Mr Brazier: I think you actually mentioned QinetiQ in passing then. What does this all mean for QinetiQ and the Defence Science and Technology Laboratory? I ask as someone who holidays near their Kirkcudbright facility. Do you think we would have to move our trials, evaluations and other things south of the border?

Professor Taylor: There are lots of things to be negotiated and discussed. I think the people of that area-some of them-have suggested staying with the UK whatever the vote, haven’t they? Those things are not as sensitive as the nuclear side, so it may be that some kind of agreement could be reached on a fairly remote area-I don’t know. Perhaps we would want to move the facility.

Chair: I will bring in Adam Holloway on the nuclear side now.

Q228Mr Holloway: You have touched on that a couple of times, Professor Taylor. Clearly, they plan to get rid of Faslane and Coulport. What would the costs be, apart from the obvious ones? Aren’t there some enormous costs regarding concrete cradles and things? Can you tell us a bit more about that?

Professor Taylor: I haven’t been to Coulport-it’s too sensitive for me. However, from what I understand about what goes on there, the cost of moving those nuclear installations to a new site would be very extensive. It is the weapons storage and then the submarine docking. There is some evidence on what the docks at Devonport for the Trident submarine cost to build.

Chair: I was in charge. It was horrendous.

Mr Holloway: Is that because they have to be able to withstand an earthquake or something?

Chair: Yes.

Professor Taylor: And accidents of various descriptions. And obviously the weapons storage-

Mr Brazier: What of various descriptions?

Professor Taylor: Accidents of various descriptions-leaks. The safety arrangements-the Chairman could speak better on those than me. I find it difficult; if I were to give you a rough figure, I would say the starting figure would be £20 billion, but that is really just an absolute guess. It would be that order of amount that we would have to find, I think. There are various efforts under way. I don’t think anybody has come up with a satisfactory answer about precisely where you might move the facilities to. I don’t have an answer on that-

Q229Mr Holloway: It is also a huge employer in that area. There are 700 MOD policemen, and it employs thousands and thousands of people.

May I ask another question, not related to the strategic deterrent but to the shape of Scotland’s armed forces and security? They are talking about spending £2.5 billion in the future. What might a Scottish defence force look like?

Professor Taylor: This Committee asks tough questions.

Chair: We are in no doubt that you are up to answering them.

Professor Taylor: With a budget of that size and the economies of scale you get, it is difficult to imagine that they would have anything other than lightly armed ground forces, coastal patrols and perhaps vessels that could do something to protect the oil rigs.

The whole air picture is very difficult because of the cost of combat aircraft and all that goes with it. It is very difficult to see how they would provide for the air defence of the country. In terms of fixed-wing aircraft, for the flight costs of modern aircraft-I don’t know how you do the numbers-you are looking at £20,000 an hour or so at least for combat aircraft flight.

The air domain would be very difficult, as would the communications domain-satellite communications, and that kind of thing. It would be a small country’s coastal, local defence force. Currently, they are part of a big country’s force that still runs a sizeable Air Force and still has an oceangoing Navy, which still has large naval vessels. For a new country, any one of those things would swallow up its money.

The Scottish Affairs Committee asked about submarine construction in Scotland. We had a quick look at that, and one submarine would take their equipment budget for a year or so, if they could build one for anything like a price. A budget of £2.5 billion doesn’t get you much unless you buy all your equipment, and even then it doesn’t get you a very capable force.

Q230Mr Holloway: I’m beginning to wonder how easily they would be able to recruit. Surely guys would much prefer to joint the British Army than a Scottish defence force, given that it has a much wider scope.

Professor Taylor: Certainly, that would be one of the risks for a new Scottish Government, because the career opportunities they could offer in their force would be much more limited than the career opportunities those people could find in the south. That is assuming, of course, that the British Armed Forces would be ready to recruit people from another sovereign state of that nature.

Chair: Madeleine Moon, is there anything you would like to add to this question?

Q231Mrs Moon: I wonder if anyone has tried to stop you speaking. Quite honestly, I am acutely depressed. I’m sure the Scottish nationalists don’t want your evidence broadcast in Scotland, because you paint a bleak picture.

Professor Taylor: The basic elements of the case are quite clear. The defence industry in Scotland serves the UK market, which is a big defence market. Defence trade is special. You do buy things from overseas, but you quite often prefer, for security reasons, to buy things from within your own territory. If your territory changes, then your readiness to buy from that region is going to change with it. I haven’t been able to understand why anyone would think otherwise. The issue is, does Scotland become a foreign country or not? If it became a foreign country, it would be treated as a foreign country.

Q232Mr Brazier: The £20 billion figure that you gave in answer to Mr Holloway’s earlier question was clearly a ballpark figure. However, could you give a very rough split between how much of that is the cost to us of replicating the system somewhere else, and how much of it is likely to be the cost-which we would be within our rights to leave to the Scottish Government-of cleaning up, removing the nuclear material and leaving it in an acceptable state?

Professor Taylor: I couldn’t go there; I really couldn’t. I was just trying to give an order-of-magnitude figure. One of the issues is how the rest of the UK would react to a yes vote. One of the things that would colour the UK’s attitude to a yes vote might be the cost to us of that yes vote. If we wanted to keep the nuclear deterrent, the cost would be substantial. In terms of how substantial, I am thinking around the £20 billion mark. I might be completely wrong, but I doubt it.

Q233Mr Brazier: But even if we cannot put a figure on it-Chair, you are perhaps well placed to comment on this-it would, presumably, be quite a large undertaking for the Scottish Government to decommission whatever is there on the nuclear side, remove it all and do whatever they wanted to do with it.

Chair: Luckily, I am not giving evidence, but Professor Taylor is. Do you want to comment?

Professor Taylor: I couldn’t give a figure for that. What I am thinking of is how much responsibility Moscow took for whatever needed to be done in Ukraine and in other Soviet republics, which is perhaps analogous. I think the answer was that they did not take any responsibility for it. That might be relevant or it might not.

Q234Ms Stuart: Following on from this discussion, "billions" tend to be large figures but we are never entirely clear just how large they really are, so I just want to put it in context. The spending by the Scottish Administration on health in 2013-14 is forecast to be approximately £12 billion; so when we talk about £20 billion, we are actually talking about significantly more.

Professor Taylor: That would be the cost to us of moving.

Ms Stuart: Yes, but it just puts into context the shape of the figures we are talking about.

Professor Taylor: The extra costs of moving Trident would have significant implications for the UK defence budget, whether or not we would have to move to a higher level of defence spending. If we didn’t opt for a higher level of defence spending, the opportunity costs of whatever it cost would still be significant.

Q235 Chair: You paint, as Madeleine Moon says, a bleak picture. Let us suppose that the Scottish people have decided to vote yes to independence. We in the remainder of the UK will then have on our borders a neighbour with whom we will wish, presumably, to have cordial relations. While there might be feelings of resentment, we will wish to make that relationship work. Won’t that be right?

Professor Taylor: I don’t know.

Q236 Chair: Okay. But would it be possible, do you think, for procurement between the two countries-despite the fact that they are different countries-to be carried on on a co-operative basis? With Australia and New Zealand, for example, Australia sometimes buys x helicopters with New Zealand buying three of the same because it is all part of the same package.

Professor Taylor: The long-term nature of the relationship between Scotland and the London-based country is a matter of some uncertainty. I do not know what it would be. What I would say is that, as I have said already, the reaction of the rest of the UK to a yes vote has not really figured. There has been an assumption that people would have the good will you have just referred to, but there is a possibility that that would not be there. That is all I meant.

Clearly, the long-term relationship of the two entities would encompass many things. There is the whole issue of the pound and so on-the economic system. There are many areas of possible co-operation. Defence is particularly problematic because of the different defence policy that the Scottish National party, at least, has advocated for many years, in terms of hostility to nuclear weapons. That makes the defence element different from other agendas.

Your question is a good one. Who could say what the long-term nature of the relationship would be? First, it would change. It would be coloured; there would be an initial reaction, and then longer-term developments. I am not absolutely certain. Currently, on the polls, Scottish independence looks unlikely. That is from the polls so far; that looks like the probability. Perhaps the probability is that if there were a yes vote, there would be a favourable, amenable reaction in London, but it is also possible that there would be a more resentful attitude in London.

Q237 Chair: Particularly, you suggest, if the cost of replacing or removing the nuclear deterrent were as high as it sounds.

Professor Taylor: I think that would be a factor in the equation, yes. It is likely to be. It is a judgment I am offering. We are all aware of a similar range of facts in the matter. It is a matter for the Committee to see whether they share my judgment.

Q238Mrs Moon: May I ask a different question? Professor Taylor, as a Welsh MP, I have to say that referring to "the London-based country" would really alienate the Welsh. I would be careful about using that term. I assume that Northern Ireland would also not be particularly happy about being referred to as "the London-based country".

There would be a huge cost involved in moving the nuclear deterrent from Scotland, and in relocation. But what would be the defence spending implications for the UK in still having to maintain a watchful eye on the north for potential threats, perhaps from the high north, with the opening of the Arctic sea; from planes coming across the Atlantic over Iceland; from submarines and so on? We would still have to watch that northern back door, without having strategic bases north of the border. What would the implications and the cost implications be?

Professor Taylor: Probably, from an air point of view, it would not make that much difference. There are others more expert than me, but aircraft can travel large distances quite quickly. I would not have thought that whether they are based in northern Scotland or northern England would make a huge difference. Maybe some of the issues about the north Atlantic and the Arctic would. It is big-power thinking that Scotland would not be able to afford, due to the nature of the systems. If we wanted to keep that thinking, we would have to bear the cost, but without the 7% or 8% contribution from the Scottish economy that comes to defence from that share of the population.

I am relatively sure that alternative basing arrangements could be made for patrolling to the north. Maybe we would have to ask our Scandinavian neighbours to take on a bit more. I think you are keeping the big-power thinking that the UK has traditionally had and seeing how we would have to deal with it. There are lots of other issues. We would have a smaller defence budget, so what else would we cut generally? We assume that we will lose 8% of the UK population, but would we lose 8% of the defence budget?

Q239Mrs Moon: But if you were thinking in terms of basing, there would then perhaps be no imperative for the UK as a member of NATO to place its bases, if it needed bases to the north, necessarily in Scotland, which might not be a member of NATO. It could instead perhaps ask for help and support from other NATO allies, such as the Netherlands and Norway.

Professor Taylor: There is a bit of the Navy based in the north, I think, but most of it is based in the south, in and around Portsmouth and Devonport. The submarines are the biggest issue. My main focus is with the industrial piece, but I would not have thought that the basing issue would be the big question there. The big question would be the affordability of the forces, given the fact that the residual UK-whatever we are going to call this entity-would presumably lose some of its defence spend or the Government would decide to spend more, as a high share on defence. It would be the funding of those capabilities rather than just the basing issue.

Q240 Chair: May I take you back to an earlier question that was asked by Julian Brazier in relation to QuinetiQ and DSTL? You mentioned in response to what he said the issue of QuinetiQ ranges. Would those be easy or difficult to replace elsewhere?

Professor Taylor: I couldn’t answer that question specifically. They need rather remote areas where there aren’t many people and the UK is not famous for that sort of region. My understanding is that they could be moved, but it is not easy. You would have to ask QuinetiQ, I think.

Chair: I think that QuinetiQ has been eager to do that, to do it all remotely anyway.

I said that we would come back to the issue of the European Union and NATO.

Q241Sir Bob Russell: In one of your earlier answers you raised a question mark about whether the three remaining countries of the former United Kingdom would welcome Scottish soldiers into our ranks. Of course, for 90 years an independent foreign country in the British isles has had many of its citizens joining Her Majesty’s armed forces and they do not even recognise the Queen or the King as Head of State, whereas I believe Scotland would. So would there be a problem with Scottish people continuing to join our armed forces?

Professor Taylor: I only put that as a question. I think it would be a policy question. In all probability you are right. I know that an academic colleague in another institution, who is an expert on these matters, felt that people looking for an army career, wherever they came from in these islands, would look to what today is called the British Army, rather than a smaller force, for a career.

Q242Sir Bob Russell: The SNP’s policy envisages Scotland being a non-nuclear member of NATO, a member of the European Union and the United Nations, keeping the pound and, to boot, seriously reducing Scottish corporation tax. I believe that that is known as a having-your-cake-and-eating-it policy. Taking that into account, what economic and regulatory conditions would be required to maintain and foster an indigenous defence sector, if you were the Scottish Government?

Professor Taylor: Sorry, could you-

Sir Bob Russell: In the context of what the Chair was saying about the European Union, what economic and regulatory conditions would be required to maintain and foster an indigenous defence sector, if you were the Scottish Government?

Professor Taylor: Okay. The key bit is article 346, but also the defence procurement directive. Basically, 346, when it was originally part of the treaty of Rome, was there to keep defence out of public procurement, and out of the EU, or the European Economic Community as it was then. Since then, the borders have got much more blurred and Governments have realised that, in Europe, the protection of national defence industries that work on quite a small scale is both expensive and ineffective. We find it more difficult to have companies that can compete with American firms because they can operate on a much larger scale.

In the past few years, there has been recognition that we ought to have more open procurement in Europe, even for defence equipment. While the precise meaning of a defence directive is a matter for lawyers and perhaps, at the end of the day, a court, basically what is being said now is that you should use 346 only for the most sensitive, almost lethal, major platforms area, and that other defence contracts should be openly procured within the European Union.

Q243Sir Bob Russell: I am not a lawyer, but my limited reading of article 346 of the EU treaty obligations would not allow the remainder of the United Kingdom to give preference for defence contracts to Scottish firms, even if it wished to.

Professor Taylor: I was trying to address that earlier, perhaps not successfully.

Q244Sir Bob Russell: The Scottish Government could not rely on the other three countries currently in the United Kingdom to push defence contracts north of the border, could it? Article 346 would not allow Britain to do that.

Professor Taylor: The normal thing to think of would be that a country has a choice. It can place a contract without competition to a company of its choosing under 346.

Q245Sir Bob Russell: In its own country?

Professor Taylor: Normally in the UK, that would be in its own country. Or it can put the contact into the public domain and have a European procurement. That is unusual for us, because usually if we open it up to the European market, we open it up to the world market. The code for that is that we do not exclude the Americans from bidding for our contracts that are competed for. Whether technically, you could plead 346 and place a contract in a foreign country-my reading of it leaves me to say that I am not absolutely sure. You could well come in for a legal challenge.

Q246Sir Bob Russell: Absolutely.

Professor Taylor: The justification for it is national security and, if you were to say, "Well, my national security says that it is okay to place it in this country, but not another one in the European Union"-

Q247Sir Bob Russell: This is a matter for lawyers. My reading of it would be that no country can place an order in another country by using the defence of article 346. Therefore, an independent Scottish Parliament could not expect the three other remaining countries in the United Kingdom to be generous in putting defence contracts guaranteed north of the border, because we would not be able to guarantee that under article 346.

Professor Taylor: I feel a bit uncertain. I would check with a lawyer. I suspect that the UK has placed contracts without competition with foreign firms, whether they have been urgent operational requirements or some such, when we have not put it in the European Journal but we have bought from a foreign firm. That is just my suspicion. It would be a matter for lawyers and if you were to do it in such a way, which might be quite conspicuous, you might be liable to a legal challenge.

Q248Sir Bob Russell: I am sure that we would be, but anyway, it may be prudent for an independent Scottish Government or one that is thinking of an independent Scottish Government to realise that article 346 would not necessarily be used by the remainder of the United Kingdom to push defence contracts north of the border.

Professor Taylor: It would be very difficult to use 346.

Q249Sir Bob Russell: Following on from that, how important would factors such as European Union membership, NATO membership, the corporation tax rate and currency be to defence companies wishing to operate in an independent Scotland?

Professor Taylor: Currency is perhaps a simpler one to address. If you are operating in the same currency, you do not have foreign exchange rates. They would presumably find it easier to work in another country that did not present an exchange rate risk.

EU and NATO membership would again, I think, in many ways make them more comfortable. Obviously, if they were in the EU, the EU procurement regulations, which we have discussed, would come into play. The EU is clear on-let me read the phrase -"the essential interests of its security". The European Commission has been clear that essential security interests cannot refer to jobs; it is to do with defence considerations, so a Scottish Government that wished to place defence contracts to sustain or rebuild employment in Scotland would have trouble with the European Commission if they were a member of the EU.

Q250Sir Bob Russell: Linked to that and your previous answers, could an independent Scotland continue to attract a derogation for UK Government contracts, or would they have to compete at EU level if contracts were openly tendered?

Professor Taylor: I think they would have to compete at EU level.

Q251Sir Bob Russell: The last question: putting yourself in the shoes of a defence contractor, what impact would EU procurement rules have on defence contractors in an independent Scotland?

Professor Taylor: If you could get all the security and other machinery in place overnight, they might feel that, as a member of the EU, and with capable industry, they would have access to a wider European market, rather than just Scotland. So they might well feel that it was beneficial. Whether the European market will, in fact, get that open, especially for this kind of major systems-these are sensitive things that are in Scotland-I have my doubts. You do not have much trouble in calling 346 from a London or UK point of view with regard to shipbuilding. In fact, the Government response to the Scottish Affairs Committee has listed the things that they see as covered by 346, and many of the things are in Scotland. There might be some firms that would get wider access, but they enjoy that access to the European market, even as part of the United Kingdom.

Q252Sir Bob Russell: But they have a better opportunity to penetrate the EU market, do they not, as part of the United Kingdom, as opposed to being located in an independent Scotland?

Professor Taylor: Given all the transition-of-membership arrangements, and so on, I would have thought yes. Having access to the UK market gives them greater bulk anyway.

Sir Bob Russell: Thank you.

Q253 Chair: Have you formed a view-it may not be for you to form-on whether Scotland would be part of the EU, would have to apply to the EU, or would get automatic membership?

Professor Taylor: I have formed an inexpert view that it would have to apply for membership. It is seceding from the UK.

Q254 Chair: Have you formed an expert or inexpert view as to whether such an application would have to be subject to a referendum within the remainder of the United Kingdom?

Professor Taylor: I have not formed a view on that. It is a very interesting question.

Q255 Chair: If you were to consider that, which way do you think a vote might go? Now that is a really hypothetical question.

Professor Taylor: Clearly, that would be high politics. It would come down to the stance of the Government of the day as to whether they felt that the British people would expect a voice on that. If you take a doctrinaire position that any further modifications of treaties on the European Union should be subject to a referendum, you have just given the answer. I do not have huge faith-I think we elect politicians to take our decisions, especially on matters with significant technical content, but if you take a position that any change to European treaties should mean a referendum, this would be a significant change to a European treaty.

Chair: Are there any further questions? We are just about to have a vote in the House.

Q256Mr Holloway: It sounds trite, but I know people will be interested. What do you think would happen to regiments such as the Scots Guards and the Royal Scots Dragoon Guards after independence?

Professor Taylor: The SNP has said that it would take the Scottish regiments into Scotland. There would be a division.

Q257Mr Holloway: Take the Scots Guards, for example. Their allegiance is not to Parliament but to the Crown.

Professor Taylor: Yes, and that is a really good question. On a moment of lightness, I once ran a course in Sri Lanka and we had students from the Pakistani and Indian militaries. We found that we had different battalions of the Bengal Lancers chatting about what had happened to their regiment since the two countries divided. I do not know the quick answer to how the Army would be split up. Many of the Scottish regiments have a significant number of British officers.

Q258Mr Holloway: Exactly. Where do the Paras get their NCOs from?

Professor Taylor: Yes. Some of the Army experts feel that the British Army could probably continue to recruit from Scotland if it so chose, and that it would be a more attractive career option than the Scottish armed forces for somebody who wants to be a soldier. That seems to make some sense to me.

Chair: Professor Taylor, thank you very much indeed. That was very interesting and not as long as you might have been expecting.



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