Hitting defence targets is not as simple as money

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The warring factions in the UK election have found little space for agreement. But both main parties are pledging to increase defence spending, targeting 2.5 per cent of GDP.

As usual with spending pledges, the how and the when is vaguer. And in this area, stumping up the cash may prove easier than actually spending it.

Dispensing funds falls to the Ministry of Defence, which last fiscal year spent £54.2bn on defence (of which about a quarter goes to personnel).

The UK, like most of the world, wants to do much of this spending at home. By far the bulk of its contracts are with domestic industry giants such as BAE Systems, Babcock and Rolls-Royce. But these companies in turn rely on tens of thousands of global suppliers.

Bar chart of £bn, 2022-23 showing Top Ministry of Defence suppliers

Years of ho-hum demand have left manufacturers scurrying to increase capacity — a tough task for sophisticated production facilities and lengthy supply chains. Germany’s Leopard 2 tank is the work of about 1,500 companies.

Inevitably, many suppliers are highly specialised and have few, if any, competitors. French explosives maker Eurenco rules the roost in propellants for ammunition. David Brown Santasalo, owned by private equity firm Stellex Capital Management, dominates in gearboxes for surface ships and other naval defence. Martin-Baker of the UK is big in ejection seats.

Crossovers with other industries add to the angst. Technology and aerospace are the obvious ones. But there are other vulnerabilities: look at the disrupted supply of batteries used in defence during Covid-19, caused by shortages not of critical elements but cardboard packaging material that had been depleted by online shoppers.

True, government initiatives such as the EU’s Act in Support of Ammunition Production aim to ease shortages. But newcomers face high barriers to entry. Robust balance sheets are necessary for contracts that are often measured in decades rather than months.

Then there are the rules inherent to operating in an industry focused on national security, including cyber encryption and avoiding falling foul of US export restrictions. Even bidding can take a heavy financial toll.

Hitting ambitious targets appears at odds with aims — in Europe as well as the UK — to increase the use of SMEs, which in 2022-23 accounted for 5 per cent of MoD expenditure, or £1.4bn. This is not obviously beneficial to companies nearer the top of the food chain: they prefer rationalised networks of bigger suppliers, which tends to mean better deals than spreading work around. Addressing the defence of the realm is about more than cash.

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