House of Commons - The Defence Implications of Possible Scottish Independence

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:

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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:

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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:

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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:

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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:

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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:

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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".