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The Defence Implications of Possible Scottish Independence - Defence Committee Contents


5  The implications for the defence industry in Scotland

Background

124. The aerospace, defence, and security sectors are significant contributors to the Scottish and wider UK economies. Each year they contribute billions of pounds in sales, millions of investment in research and development, and many thousands of jobs.

125. According to a Scottish Affairs Select Committee report, in 2008 the defence industry, along with the Ministry of Defence, supported almost 50,000 jobs in Scotland with wages around a third higher than the Scottish national average.[107] A more recent report by that Committee suggests that the defence industry currently supports more than 15,000 jobs throughout Scotland.[108]

126. Professor Malcolm Chalmers, RUSI, told us that figures published by industry groups suggested that Scotland had a share of around 10 percent of defence spending.[109] His colleague, Professor Trevor Taylor, told us that, in common with the UK as a whole, approximately 60 percent of defence products were sold domestically, the principal customer being the MoD.[110]

127. The SNP's policy update states that a "Scottish defence industrial strategy and procurement plan will fill UK capability gaps in Scotland, addressing the lack of new frigates, conventional submarines and maritime patrol aircraft". It also suggests that "joint procurement will be pursued with the rest of the UK and other allies"[111]

An industry perspective

128. We asked defence and security industry representatives to comment on the implications of independence, but for commercial reasons companies declined to do so publicly. Informally, companies in the sector told us that, with negotiations around the process for the referendum largely settled, they would hope to see a greater focus and clarity on the public policy, procurement and regulatory aspects of the independence debate from all parties concerned. Matters such as the anticipated fiscal strategy, taxation structure, commercial regulation and labour law in an independent Scotland are of considerable interest to companies in all sectors, not just defence related.

129. Asked about the likelihood of defence contractors moving their operations out of an independent Scotland to the rUK, Professor Taylor replied:

    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 [...] 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.[112]

European Union procurement law

130. Under the terms of the Treaty on the Functioning of the European Union (TFEU), the UK is required to act fairly, transparently, and openly by competing public procurement requirements at a European Union (EU) level. An exception can be applied under Article 346 TFEU in respect of the "production of or trade in arms, munitions and war material" where a Member State considers it necessary for the protection of the essential interests of its national security. In those circumstances the UK can, like all Member States, derogate from the Treaty to the extent necessary to protect those interests by invoking Article 346.[113]

ARTICLE 346 TFEU

131. In light of the Article 346 TFEU exemption, as currently applied, we were keen to establish whether Scottish suppliers would cease to be eligible to bid for MoD contracts if Scotland was to become independent. We noted that the Scottish Affairs Committee had received evidence that in these circumstances the exemption would not apply.[114]

132. Keith Brown MSP expressed the opinion that "the rest of the UK would procure from Scotland without going through the competitive tendering process that the European Union sets down".[115]

133. The Secretary of State, however, took the opposite view:

    I think that the Scottish defence industry would find itself in the position of being able, and being limited, to bidding for contracts that were open to EU competition—in other words, the contracts that we had decided did not form part of our essential sovereign industrial capability. There are a number of significant UK defence contractors in Scotland who would be affected by this, quite apart from those in the shipbuilding business—Selex, for example, a major provider of radars and electronic systems.[116]

The Secretary of State confirmed that he had sought legal advice on this point from the MoD's internal legal services, who had, in turn, taken advice from external procurement lawyers.[117]

134. The UK Government states that defence suppliers in an independent Scotland would no longer benefit from the application of an exemption from EU procurement law for UK MoD orders. If the Scottish Government has legal advice to the contrary it should consider making it public.

Shipbuilding and maintenance

135. In its report The Referendum on Separation for Scotland: Separation shuts shipyards, the Scottish Affairs Committee concluded that, if Scotland separated from the UK, shipyards on the Clyde were "doomed" as they would not be eligible for UK-restricted orders and would have little prospect of winning export work. A similar fate awaited Rosyth as there would be no Royal Navy refit work and a Scottish navy would be based at Faslane.[118]

136. Rear Admiral Alabaster told us that given the world-class shipbuilding industry, particularly on the Clyde, he thought all the surface ships required by a Scottish navy could be procured from within Scotland. However, he acknowledged that "building two frigates for a Scottish navy from time to time" would not begin to approach the work load generated by construction of Type 26 frigates on the Clyde or the assembly of aircraft carriers at Rosyth".[119]

137. In light of this, we asked Keith Brown MSP whether orders for a Scottish navy would ensure the viability of Scottish shipbuilding. He told us:

    I have never been of the view that the Clyde would rely solely on orders from an independent Scottish Government for their armed forces. The point I have made is that it has world-leading technology there. I have seen some reference in this Committee to the fact that the rest of the UK would have no intention or eagerness to procure from Scottish yards. We talked about the F-35 earlier, and given the massive procurement that the UK undertakes with the United States, I do not agree with the idea that you could not trust an independent Scotland. All the defence equipment at the point of independence, all the defence personnel, all the joint working that goes on and all the history in NATO should lead to a substantial level of trust. I do not see this as a bar to the rest of the UK or other countries wanting to tap into that world-class expertise. For that reason, I think we have a very bright future.[120]

138. Asked why he was confident that the UK Government would award the contract to build the Type 26 Global Combat Ship to Clyde yards, Mr Brown replied that "the Clyde is best for carrying out that contract". He continued:

    We are more than willing to speak to the UK Government and to the contractor to provide the reassurances that they want, if they want reassurances, about being able to place that contract in the full and certain knowledge that it would be delivered in an independent Scotland. I am sure that the UK Government, when they take this decision, will take it based on the need to get the best equipment for their Navy. If that is their decision, we want to try to help them make that decision. I think that the balance of probability lies in favour of awarding that contract to the Clyde, and we will try to make sure that that happens.[121]

SOVEREIGN CAPABILITY

139. The maintenance of a sovereign capability in complex warship building has for many years been a strategic priority for the UK. In fact, as the Secretary of State for Defence reminded us, except during the two world wars, the UK has never bought complex warships built abroad.[122] He explained the current rationale for doing so:

    We have chosen to source our warships in the UK, even though the cost of shipbuilding in the UK is very significantly higher than in countries outside, including other NATO countries. We could buy complex warships built in Spain or Italy at significantly lower cost than we can buy them in the UK, but we choose not to do that because we think it is strategically important to maintain a sovereign capability in this area. Clearly, if Scotland were independent, that capability would no longer be sovereign; it would be subject to the whims of a foreign Government, and we could no longer, in my judgment, justify paying the premium that we do, over and above the base cost of a complex warship, for the sovereign capability to build and maintain it. I should make the point that it is not just about building the ship; it is about having the capability to refit and maintain it over its expected lifetime.[123]

140. In relation to maintenance, the Secretary of State told us that it would be unlikely that the rUK would choose to maintain the Royal Navy surface fleet in an independent Scotland.[124]

141. In the event of independence, shipbuilding in Scotland could not be sustained by domestic orders alone at anything close to current levels. It is our view that the requirements of a Scottish Government for construction and maintenance of warships would barely provide enough work for a single yard. Even the addition of Scottish Government contracts for commercial ships could not compensate for the loss of future UK MoD contracts for ships such as the Type 26 Global Combat Ship. The future of Scottish shipyards would therefore rest upon whether they could diversify the type of ships they produce and reduce their cost base in order to secure orders in open competition with international competitors.

Security clearance

142. A further challenge for defence contractors based in an independent Scotland would be the ability to obtain and retain List X status—the security clearance required to hold UK Government protectively marked information.

143. The UK Government, in its response to the Scottish Affairs Committee Report The Referendum on Separation for Scotland: How would Separation affect jobs in the Scottish defence industry?, stated that there are currently 50 companies that hold List X status in Scotland. It explained the issues which would arise:

    This is required for companies to undertake classified defence work on their premises at Confidential level. An independent Scotland would be required to develop its own national security regulations or continue to apply the Security Policy Framework and to develop the required and appropriate security infrastructures to perform the necessary security activities. Further complications may arise in the context of current MOD procurement and access to material classified for 'UK Eyes Only'. This material cannot be shared with a foreign country or its nationals.[125]

144. In the event of independence, we consider that the defence industry in Scotland would face a difficult future. This impact would be felt most immediately by those companies engaged in shipbuilding, maintenance, and high end technology. The requirements of a Scottish defence force would not generate sufficient domestic demand to compensate for the loss of lucrative contracts from the UK MoD, and additional security and bureaucracy hurdles would be likely to reduce competitiveness with rUK based companies.

145. Although we recognise the commercial risks associated with the potential loss of some highly skilled employees, we believe defence companies in Scotland would be forced to rapidly reassess their business strategies, with the result that relocation of operations to the remainder of the UK would be an unwelcome but necessary decision.

146. From the evidence we have received and our own background knowledge of defence industrial issues raised frequently with us we consider that the Scottish Government will wish to provide industry with more information with regard to the following matters:

  • Defence and Security relationship with the rUK, including the anticipated level of integration and collaboration;
  • Transition arrangements for existing UK contracts during the process of separation;
  • Procurement policy, including co-investment in research and development;
  • Export posture and potential in terms of legislation plus consular and broader government support;
  • Specific expectations of the current "special relationship" with the US over trade, intelligence and technology sharing; and
  • Future relationship with cooperative initiatives such as NATO "Smart Defence" and European Defence Agency "Pooling and Sharing".



107   Scottish Affairs Committee. Employment and Skills for the Defence Industry in Scotland, Sixth Report 2007-08. HC 305 Back

108   Scottish Affairs Committee The Referendum on Separation for Scotland: How would Separation affect jobs in the Scottish defence industry?, Eighth Report 2012-13. HC 957 Back

109   Q 24 Back

110   Qq 208-210 Back

111   SNP. Foreign, Security and Defence policy update, October 2012 Back

112   Q 222 Back

113   Ministry of Defence. National Security Through Technology, Cm 8278, February 2012, paras 73-75 Back

114   Scottish Affairs Committee. Eighth Report of Session 2012-13, The Referendum on Separation for Scotland: How would Separation affect jobs in the Scottish defence industry?, HC 957, para 40 Back

115   Q 370 Back

116   Q 412 Back

117   Q 413 Back

118   Scottish Affairs Committee. Seventh Report of Session 2012-13, The Referendum on Separation for Scotland: Separation Shuts Shipyards, HC 892, summary  Back

119   Qq 150, 152 Back

120   Q 359 Back

121   Q 362 Back

122   Q 407 Back

123   Q 407 Back

124   Q 410 Back

125   Scottish Affairs Committee,First Special Report of Session 2013-14, The Referendum on Separation for Scotland: How would Separation affect jobs in the Scottish defence industry?: Government Response to the Committee's Eighth Report of Session 2012-13, HC 257 Back




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