Oral evidence: One-off session on implications of the Defence Investment Plan for UK industry, HC 722

Oral evidence, 20 October 2026.

Witnesses

Kevin Craven, Julian David, Arnab Dutt and Stephen Phipson.

Chair

I call to order today’s House of Commons Defence Committee evidence session on the defence investment plan and, in particular, its implications for UK industry. It is a great pleasure to welcome back some of the good and the great from industry to give evidence, starting off with Kevin Craven, chief executive at ADS. We also have with us Julian David, chief executive at techUK. Welcome back also to Arnab Dutt, policy champion for procurement and social value at the Federation of Small Businesses, and to Stephen Phipson, the CEO of MakeUK. Welcome and, without further ado, let me pass on to my colleague Lincoln Jopp, so that we can get the questions and answers under way.

Lincoln Jopp

Thank you all very much indeed for coming in today and giving us your time; I know that you are very busy people. We had the strategic defence review and then the defence investment plan. When I worked in the main building at the Ministry of Defence, they used to say that plans without resources are hallucinations. We are keen to know whether the MOD is doing stuff or whether it is still hallucinating. What I would love to hear are some concrete examples of where that cascade of the priorities in the strategic defence review is reflected in the defence investment plan and has turned itself into either orders or changes in behaviour. If I were to characterise the two main priorities of the SDR, they were NATO first but not NATO only, so a shift very much to the Euro-Atlantic geographical focus. That comes with NATO and a recalcitrant US. Are there any orders to fill gaps that have been identified if the US does not play so fulsomely? The second is a shift away from deterrence to war-fighting readiness. If any of you could give us some sense of where you have seen real, concrete changes in processes, behaviours or order book stuff, I would be very interested to know. Shall we go down the line, because I think you will all have insights into this?

Kevin Craven

First, we should say that we welcome the strategic direction of the defence investment plan. There has been a pivot towards integrated systems, autonomy, AI and a number of things that reflect the lessons that we have learned in Ukraine. However, it is also clear that the DIP was reasonably granular around the first four years of what, in old money, was the defence equipment plan, but thereafter less so. Even in those first four years, it was not clear whether around a third of the £298 billion announced is unfunded or not articulated in the right way. Broadly, that clarity around the near term is welcomed, if not complete. The lack of clarity over the 10-year plan makes it very difficult for industry to start thinking about longer-term investment and infrastructure, and, in particular, ramping up industrial capacity. We are very concerned that the lack of a pathway towards a higher level of spending, be that 3%—or 3.5%, as NATO has stipulated—makes it even harder for industry to then scale up our capacity and production lines. In terms of orders, what is probably interesting to note is that the equipment spend to the year ending March 2026 was £5 billion less than in the previous year, which is an indication of the MOD looking to remain within its budget or live within its means. We are hearing all of this language. The lived experience on the ground is that it is still hard to get orders. Against that, we can also look at the procurement announcements that have been made since the publication of the DIP, and there are quite a lot of those, such as the Royal Oaks plan for the mobile docks at the Clyde, et cetera. I would particularly point to the rapid procurement processes, with £1.4 billion around defence AI and some of the other elements that go towards SMEs. We are seeing behaviours shift, and the shape of the machine shift towards more modern warfare fighting, but, in terms of longer-term commitments over a 10-year period that enable certainty, investment plans, readiness and deterrence, we are not seeing those in sufficient detail yet.

Julian David

I would echo the fact that the SDR was very welcome, and the direction of travel was very good. Now that we have seen the DIP, that also has a plan that is welcome. From a tech point of view, defence-oriented tech members expected, therefore, that there would be a big uptick in the focus on tech and that orders would flow, particularly to SMEs. We have not found that to be the case. Last time we were here, we reported on our survey of members, and 73% said that the market has declined since the report; that was in May. Funding delays and reductions have hit 87% of respondents, and 93% of them are now reassessing investment or recruitment of people to focus in this sector. The problem, particularly from an SME point of view, is that they live off the cash flow. If there is no cash flow or no predictable path to cash, they are going to either try to find markets elsewhere or cut back and wait and see. We have checked again with them since that survey, and I have to say that they have not really seen a lot of progress. I would highlight the fact that, in terms of delivery, the MOD is still not properly staffed in order to deal with procurement, particularly of new things and from smaller companies. Sometimes that is disguised, in that one commercial team’s headcount is 70%, with a gap of 30%, but 40% of the team is filled by contractors who cannot fulfil the whole process of sign-off authority. This is a real challenge that has been reported by members in that way. I would echo Kevin’s point about clarity in terms of how much is actual spend, whether it is committed, and when it is going to come. Again, we see that the spread of it depends on a few things, even if that spread is even. We are still waiting for the Budget to say whether or not it will be. I hope that the fact that the previous Defence Secretary is now the Chancellor will help with that. There is a dependency on capital cuts elsewhere, which may or may not happen, and there is still a gap. We all want efficiencies and a shift to new types of faster procurement, but that is a problem. One of the other things that I need to highlight is the change in security clearances, which is having a real effect because of the change in the way that it is done on the sponsoring.

Lincoln Jopp

Do you mean a detrimental effect?

Julian David

Yes, absolutely. It is affecting small businesses, but it is also affecting large businesses. I am sure that colleagues can talk about that as well, with people losing 1,600 clearances, and SMEs having to reapply because their sponsor route has gone. This is a cross-Government issue, but clearly very important in defence. You mentioned the international context and the shift from transatlantic to an Atlantic and cross-channel. If you think about tech and dual-use, which is really close to defence tech, the European Cloud and AI Development Act, which builds on the safe exclusion to say that non-EU companies cannot supply dual-use cloud or AI technology in the EU, that affects the exporting capability of our industry. That is a big blow to the economy, but also affects the capacity and the resilience of the industry that is based here, and will encourage it to look elsewhere as well.

Lincoln Jopp

Were the figures that you were quoting from your survey a result of asking a question about their relations with the MOD? We go around, particularly in the High North, where we have just been focusing, and we have countries out there spending like drunken sailors on shore leave. Are they spending that with your members, notwithstanding what you just said about the AI bit at the end?

Julian David

Yes, that is happening, but, equally, we have international members that came here to invest, and they are not seeing the resulting pathway to growth and business, and so they are also saying, “Maybe I made the wrong decision to come and expand in the UK, and perhaps I should retrench and go elsewhere”. We are not in favour of a “buy British” approach, because that just reinforces all the challenges that our industry, which is very international, would have, but we are very much in favour of looking at capability in the UK, and encouraging new capability to flourish here, with support for exports, which are essential.

Arnab Dutt

It is good to have the opportunity to talk about the wider environment of SMEs, and not just those that are already in defence pipelines. Speaking directly, the publication of the defence investment plan was a really welcome step towards transparency, but it is very high-level. The long-term equipment plans do not really provide viable commercial signals to small businesses outside of the defence perimeter. We are really concerned about how the MOD looks beyond that horizon and ahead at the environment. We would echo my two colleagues here, Julian and Kevin, and are concerned about capacity and capability building. The fixed pipeline documents fail to drive SME engagement effectively. I will give you a few figures from our own research. Only 13% of small businesses use pipeline documentation to find public opportunities, compared to 28% who use active procurement platforms. That means that the vast majority are not even looking, so there is a question about pre-engagement and engagement with the external SME supply chain. Three-fifths—62%—of small businesses are looking for public sector contracts but report that finding suitable opportunities is incredibly difficult. Demonstrating that a passive publication of equipment will do anything to improve that situation is rather fanciful, in our opinion. Contracts stemming from the DIP will continue to flow exclusively to SMEs already in those supply chains, and to the prime contractors. So far, I have to say, as an organisation, we have had minimal consultation on the DIP with the MOD, which has been really disappointing, because it does not give us the opportunity to help the MOD and give it advice and support. That has been our main bugbear with this process since the publication of the DIP.

Lincoln Jopp

When you last came here, the MOD was talking about the launch of its SME hub. Is that real or is that just another case of all hat and no cattle?

Arnab Dutt

It may have happened, but we certainly do not know much about it, because the engagement has been incredibly sparse. We have had no cadence. We have been given no notification. All of those things were promised by the MOD, as well as the fact that we would be able to engage in a timely manner. That has not happened.

Chair

We will be coming back in detail on all this towards the end of the meeting and will have a specific section on the Defence Office for Small Business Growth, so just hold your thoughts there.

Arnab Dutt

Another awful piece of research is that 19% of companies that have already engaged with the MOD said that they will not be doing so again because of the systemic barriers and the level of hard work and engagement. Among that 19%, there could be some brilliant businesses, so that is another issue.

Lincoln Jopp

It is, I am afraid, a story that is only too common. Stephen, what is your perspective?

Stephen Phipson

The answer is that it is patchy. We see a slightly different perspective on that. The DIP is welcome in many respects, particularly around the autonomy brief and what is happening in terms of bringing SMEs into the innovation part of it. We see a number of actions that are happening, and different behaviours coming from MOD at the moment. I would cite things such as the energetics programme, the low-cost one-way effectors, and what we are doing with drones, where we have brought not only defence suppliers, but also, because we have a very wide brief in MakeUK around the whole of manufacturing, non-traditional defence suppliers into those sorts of development activities with the MOD. That is a change of behaviour and is something worth noting, to give them some credit, but it is a very small part of what is outlined in the DIP. The point that we get from many companies is that you cannot invest on press releases. We need detail and funding, and we need to make that work. In a number of those projects where they have focused, we definitely have seen a change in behaviour, which is bringing lots of new SMEs into the supply chain. The point that I would make is that a lot of SMEs are doing very well on the export market. To your point about everyone spending like drunken sailors, we are seeing a lot of that. A lot of them are doing really well with lots of innovative technologies, going out and exporting to European defence authorities, and seeing it as very slow from the UK perspective. The other point is that we have had a lot of manufacturing companies that are not normally defence companies wanting to enter the market. We have a big service helping them to make that transition. It is very difficult. There is a lot of enthusiasm, but there is no direct funding, orders or requirements. We have the enthusiasm to do it in terms of supplying and fulfilling the DIP, but we need to see some certainty to get it delivered. I would just push back a little bit and say that there are some pockets where the MOD has changed behaviour.

Lincoln Jopp

One thing that I do not think will be covered later, to the Chair’s point, is that the MOD, as we know, puts massive barriers to entry in terms of SMEs doing business. Have we seen any change in the behaviours of the primes towards their SMEs, to the good or the bad? Our model needs totally reworking. Having 18 primes does not work for me. Have we seen any tangible change—it will not be by all primes; it might be by one or two primes—in the way in which they are investing in their relationship with those SMEs that are crucial to their business?

Kevin Craven

Broadly, you have seen some incremental improvements. Some of the primes are stepping up in terms of improved payment terms, direct account management for smaller primes, and easier routes to entry.

Lincoln Jopp

Feel free to name the ones that are doing well.

Kevin Craven

I would probably call out Lockheed Martin as one that has had a prompt payment code for a long time. There are others, such as BAE and Babcock, which are building better routes for SMEs as we speak, but, in fairness, it is patchy. Some of that relates back to the lack of longer-term certainty from the MOD in terms of 10-year programmes, and they are unable to pass that certainty on to the supply chain. The capacity of both the primes and the MOD to respond to those small businesses remains low, in my view.

Julian David

It is not that primes do not want to work with SMEs, and I am sure that Stephen and Arnab can give examples of that, but the procurement environment and the way that things are happening does push towards going through the prime rather than getting directly to the SMEs. Of course, that potentially excludes a lot of innovation. SME spend by May 2028 is £7.5 billion, of which only £2 billion is direct and £5.5 billion is going to be indirect, and the procedure to check on this is tracking rather than committing and delivering. We have said many times that what are needed here are targets and KPIs for the people doing the procurement, and measuring progress against those, as opposed to waiting until the end of 2028 and then asking whether it happened.

Lincoln Jopp

Institutions get the behaviour that they reward.

Julian David

Yes.

Lincoln Jopp

That is why I was keen for Lockheed Martin and others to get a mention.

Julian David

The other thing that I would just point out is that the MOD has chosen to use a different definition of SME than is generally understood.

Lincoln Jopp

It is below 200 employees, is it not?

Julian David

Yes, but that is different from the Procurement Act and fair payment code. SMEs that are used to reporting in that way now have to report in another way, which does not seem to make any sense.

Emma Lewell

Good morning, all. We are coming up to about a year since the national armaments director was appointed. He assured me and this Committee that things would improve and that procurement would get better within the first year. Do you feel that it has?

Julian David

The plan and the intentions are good. We submitted to the Defence Industrial Joint Council a 30-point series of things that we thought would make a big difference here. The national armaments director agreed to adopt pretty much all of them. What I would come back to, though, is that, if we do not have granularity behind the DIP in terms of what they are going to do and when are they going to do it at a granular level of procurement, and if we do not track performance, we are probably not going to see that. The second thing is the difficulty of addressing the gaps in capability within MOD procurement, which seems to be very challenging.

Emma Lewell

Have you heard rumours about the DIP implementation plan? Have you seen it? Do you know what it is? We do not.

Julian David

We have heard the rumours.

Emma Lewell

Are you confident that it is going to come forward? Does it exist?

Julian David

I think it is October.

Kevin Craven

We are engaging with each of the frontline commands in terms of a programme of consultation about unpacking the DIP and the implementation thereof. To be fair to the frontline commands, they too have some of the lack of certainty that is required around that implementation plan and the pace at which it is going to go. The NAD group, which is the total aggregation of departments that now report into Rupert Pearce, is some 25,000 people. In parallel with the announcement of the DIP and implementation of the SDR, defence reform is going on. The challenge of transforming the Department while implementing a gigantic strategic shift is causing large amounts of pain within that Department, so there is still some way to go in terms of the implementation being granular, transparent and obvious to industry.

Stephen Phipson

The problem is that it is all too slow. We are constantly being told in the media that we are under threat and that 2030 is a key date. The way that things are going at the moment, if there is another delay in the spending review in terms of finding the money for the DIP, factories are not built overnight. People have to make investment plans and we have to build capability. Some of the changes in behaviour have been good, but they are minimal. They are mainly on the new capability. If we see what is happening on autonomy—we mentioned things such as cheap one-way effectors—that is good. That is a different way of doing things with non-traditional defence suppliers, but it is tiny compared to what we need to do. The overriding sense is one of speed, pace, delivery and moving forwards quickly. That would be one message to take from this.

Emma Lewell

Since the publication of the DIP, have you seen any significant contracts being awarded?

Stephen Phipson

We have seen a few.

Julian David

Yes, and some of them are, as Stephen said, in the new areas. techUK is very keen to support that and we have had engagement and hosted members with MOD officials, but we are talking about relatively small amounts of money and relatively small programmes.

Emma Lewell

When contracts are awarded, are they too concentrated in the south-east and south-west? The Government want good growth in every postcode, and want defence to be an engine for growth in every region, but it seems to all get concentrated in the same regions, time and time again. That is my view, but you might disagree.

Stephen Phipson

We have national coverage and thousands of companies all around the UK. We do see clusters of technology. At the moment, the north-east is doing very well with technology. For example, cyber in defence is very strong in the north-east. It depends on where the existing pockets of capability are, but I would not say that there is a particular concentration in that respect. We are seeing some good effects. We are also seeing some very interesting new stuff happening in defence with the automotive sector around the west midlands, where there is a lot of interest in using its capability, but it is early days yet. In terms of large contracts, we have not seen that.

Kevin Craven

The figures on spend per head per region that the MOD used to publish, but has either slowed down or not published, remain broadly the same. The south-west and south-east are still significant areas, and regions such as Northern Ireland and Scotland less so.

Julian David

If you have the traditional spending relationships, you will risk reinforcing that. The tech industry has a bias to certain parts of the country. There is a lot in London and the south-east, but also in Cambridge, Manchester, Newcastle and Scotland. It is entirely possible to spread it, but, if the relationships stay with the current players, that will leave the concentrations where they are.

Chair

Let us now go on to the level of detail within and the funding of the 2026 defence investment plan.

Ian Roome

We have come a long way. The SDR was published in June 2025. The DIP was going to come that autumn, and we waited and waited, and we waited even bloomin’ longer, did we not, until June 2026? Kevin, as you alluded to earlier, for industry, how does the DIP compare to the equipment plans, and does it provide enough detail and confidence to you, or would you have preferred something similar to keeping the equipment plan?

Kevin Craven

There are things in the DIP that are welcome. The focus on the industrial context and capacity is useful and helpful in terms of building the resilience that we need. The focus of the DIP is very much on the first four-year period to 2029, whereas the defence equipment plan used to focus on a granular acquisition pipeline over 10 years. We can see that the rough shape of the DIP is around 50% to 55% of the total spend over the 10-year period, so some spend has been brought forward to improve the readiness of what we are doing, but there is not enough granularity to provide certainty to industry. Intent is not the same as a commitment that is suitable for investors in defence.

Stephen Phipson

I have been doing this for a long time, to say the least, and, as Kevin said, there is not sufficient detail. It is nothing like an equipment plan. This is not investable as it stands at the moment. It gives you a thematic direction of travel in many areas, a lot of which is welcome and is great news, and attracts a lot of new companies into the market, but the questions are then around where the contracts, the programme and the procurement are. We do not have that yet, and that is the problem.

Julian David

A good thing about the DIP is the point that Kevin made, which is that it is a more comprehensive view of what is needed, which came from the SDR, as you say, and that is very welcome. We would like to see that extended to a shift towards software-defined procurement. Stand-alone equipment purchases really do not work very well in the modern defence environment. We would also like to see, within the plan now, the granularity and specificity, and also responsibility. Awareness of the DIP delivery plan is low. The national armaments director has confirmed that they are converting it into a more granular plan, coming in October, I believe, but does that then have the programme-level funding, the dates and the route to market? Coming back to my point, if you read through the SME action plan, it is a cautionary tale; it says “we” throughout, with no owners or KPIs, and just the one target date. We all have to wait until after 2028 to find out whether it has worked.

Arnab Dutt

To send demand signals out to the broader supply chain, we need far more information and, following on from that, a plan around regional and country-wide engagement. That will probably be the process that begins to open up opportunities for SMEs as they get ready. If they see that coming down the line, that is the real demand signal, but that is not there.

Julian David

I would also like to point out that this costs the country money, because delay in an inflationary context and, particularly in tech, an availability crisis of certain components means that what you are going to do costs more when you get around to doing it.

Ian Roome

The MOD director general for commercial and industry says that he has had a really positive response from industry to the DIP and the demand signal that it sets out. Is that the feedback that you are getting from your members?

Julian David

Has there been a really positive response to the DIP? It is a good plan, but what we now need to see is the detail and the commitments.

Kevin Craven

It is a strategic plan. It is not a detailed, granular plan as we were used to with the acquisition pipeline that was represented by the 10-year equipment plan.

Ian Roome

Would you say that it has left more questions than answers?

Kevin Craven

The short answer is no. There is a clear shift in strategic direction. We have talked about autonomy and other changes in terms of that particular—I would call out frontier AI and other things—but the lack of certainty over that 10-year period is a real problem. Headlines do not make for good investment.

Ian Roome

How damaging would it be if the next spending review failed to provide a firm, funded pathway towards 3% of GDP on defence? Would industry still invest on the strength of the current DIP?

Stephen Phipson

The answer is that it will not. It is only going to invest when there is certainty on what the programme looks like, and we have seen this for decades in defence. It has to be around a certain programme. The thematics that we have are all good and welcome. To your earlier point, industry welcomes the new technologies and innovation, but, until we see certainty, no one is going to invest a penny. We need to see where those contracts are going to come from. We will play with all the innovation that is happening with the MOD, which is good, but we need to start building factories and capability.

Julian David

The fact that we have had certain deadlines that have either not been met or, when they have arrived, have been met at a very summary level is a learned behaviour. If you contrast that with other geographies that are spending, you do have the open question of, “Why invest here?”

Arnab Dutt

I would echo what Julian said. We have some brilliant firms, especially in some of our tech clusters, and they are finding opportunities abroad, and particularly in the Baltics and northern Europe, where those countries are getting on with it because they see the threat as imminent. If their capacity is taken up, even though they would love to be working here, we are going to lose out. By not addressing this, getting that granularity and funding it properly, the risk to us in terms of capability over the next few years is potentially very dangerous, in my opinion.

Ian Roome

Have any of your members left the UK and gone abroad?

Kevin Craven

Yes.

Ian Roome

If you had to put a percentage on it, what would that be?

Kevin Craven

It is low numbers, but there are companies that are leaving. The US and Europe represent more attractive defence markets at the moment.

Ian Roome

I will leave my questioning with the same question to each of you. If you could sort out one thing from the MOD today regarding this particular area of the DIP, what would you say that it needs to do urgently, in terms of what your members require?

Kevin Craven

I am going to say two things. The first is rapid procurement. We have a number of rapid procurement routes that work, and Commercial X has done some good work in this space. The second is resourcing the Defence Office for Small Business Growth. There are four people in that office versus the 29 that are suggested as being appropriate.

Julian David

I would echo that the contracting backlog really does need to be sorted out. Otherwise, how can we contract new stuff as well? In order to encourage investment, we have to have a delivery plan that is multi-year, granular and signals the implementation of the SDR.

Arnab Dutt

Granularity is really important, but I want to echo what Kevin said. We have fantastic exemplars of super practice and speedy procurement where barriers have been removed, and Commercial X is one of them. It has been running since 2022. If the MOD was able to use that as an exemplar across the wider field of MOD procurement, that would be a great start. It is not like reinventing the wheel. We are doing it really well. That project is incredibly successful in giving SMEs contracts, so use the exemplar.

Stephen Phipson

There are two things from my perspective. One is to echo the points about funding certainty, which is going to drive investment in terms of people being clear about when things are required and what they are going to cost. There is a wider point that I would like to make about manufacturing in this country, which is something that we have been talking to the Chancellor about. In fact, Julian and I were with the Chancellor this morning on this very subject. We are now losing a lot of companies because it is uncompetitive to manufacture goods here. That is because of energy costs in the UK. This year, we have had an enormous flight of businesses out of the UK. In particular, larger companies are finding it hard to allocate capital to UK capability because the maths works better if you do it in France and Germany than it does in the UK. It is very difficult to isolate that just to the MOD, but there is a wider issue about the competitiveness of manufacturing in this country, which, to be fair, the Chancellor recognised this morning as a key issue for growth.

Julian David

The number of companies saying, “We are not going to be here anymore. We are going to be somewhere else” is low, but they are shifting emphasis and investment money. Going back to the sovereignty point, if we get into, “Buy British”, “Buy European” or “Buy US”, that is going to mean that, given the relative spends of those markets, there will be more emphasis on companies shifting their entire locus to one of those geographic entities.

Chair

Let us move on to the funding profile. It has been set out in the defence investment plan, but it sees the majority of that investment appear after 2030, so backloading. That is something that we, as a Committee, raised with the Secretary of State and the permanent secretary during our session just last week. Is there sufficient capacity within the UK defence industry to bring any of that planned investment forward, if required?

Kevin Craven

We have great underlying capacity in the UK and, as has already been mentioned, in other interested sectors, such as automotive, as we are seeing in other international competitors such as Germany, but you cannot switch on industrial capacity and production lines overnight. You need a strong demand signal over a long number of years to be able to do so, so a ramp-up towards the back end of a period is not helpful. It creates a future bottleneck where firms will compete for the necessary skills, monies and other industrial requirements at the same time, so it is not a helpful profile in any way.

Chair

Basically, what you are saying is that there is sufficient capacity to bring some of that investment forward—or are you not saying that?

Kevin Craven

With advance warning, there is sufficient capability to build the capacity that we need, but to build a brand new production line from scratch will take between two and four years, depending on what we are talking about. At the moment, we are not seeing sufficient certainty to enable that investment to take place.

Chair

Mr David, from techUK’s perspective, do we have capacity?

Julian David

The UK has a really large and capable tech industry in terms of indigenous as well as people from other countries who have invested here, and so, in one sense, there is no capacity issue. It could respond. The challenge has been that they need to have a plan that is set, and to know what they are going to invest in, particularly in terms of smaller companies. As Kevin has said, if you do not have sight of when that capacity is potentially going to be productive, that is quite hard to do. We could do an awful lot more on some of the newer technology areas. The other thing to watch out for is the bottlenecks that are going to happen and are already happening to components, such as memory and processors, and there will be other bottlenecks. Having a plan where people can procure ahead of time is incredibly helpful to them.

Chair

Mr Dutt, from the perspective of SMEs, is there capacity?

Arnab Dutt

We believe that there is. Adopting the dual capacity that they have done in northern Europe and the Baltic states is a really good exemplar of how you can do it, but you need time, access to finance and the right type of investment. What we worry about is the problem that we already have in the economy, which is the ability to source skilled labour. That is where the bottlenecks are going to occur. It is something that we really have to address, especially if we want to act quickly, because it is already a real problem for many small manufacturing, engineering and tech companies.

Chair

Mr Phipson, what is MakeUK’s perspective?

Stephen Phipson

We do not lack capacity at all. We certainly have it there. We have thousands of SMEs that are exporting defence technology at the moment to other nations. I can tell you from first-hand experience that they would much rather be doing that with their own MOD. We have some large sectors under pressure at the moment as well, such as automotive, where we have 600,000 people employed and we have capacity. Every single one of those is a member of MakeUK, and all of them would love to be doing much more in defence to fill some of that capacity. It is there; it is a matter of bringing it together, sending clear demand signals about where the investment is needed and funding it properly.

Chair

The message from industry is clear: “Rather than backloading, let us have a clear demand signal right here and now, and let us get on with producing”. Let me come to the second part of my question, which is around the additional £15 billion that has been provided to defence. Is that sufficient? Does it concern you that it is reliant on efficiency savings? We had this out in the Public Accounts Committee as well when I guested there. Are you concerned that that money may or may not materialise, given that it is based on efficiency savings and that it is going to have to be found in this month’s Budget?

Kevin Craven

We are concerned. The MOD has a long history of baking in efficiency savings to its plans and then not necessarily being able to deliver them. The commitment to deliver those is not the same thing as doing so. One of the interesting things about the DIP was that the central contingencies held by the MOD were increased from 1.2% to 2% over the spending period, which is perhaps indicative of some of their own cynicism around the ability to deliver those efficiencies and savings. Again, the complexity of delivering defence reform at the same time as implementing a huge shift in capability towards new warfare areas is a very complex thing to do, and the MOD is going to find it hard to deliver on those savings.

Chair

Basically, we have seen this movie before, and it does not quite end as well as some would wish. Does anybody else want to come in on this particular point?

Julian David

We are waiting to see. We think that nearly £5 billion is dependent on the Budget, and there was some potential confusion about whether the Budget is going to do that or whether they will wait for the spending review. In our view, that would be a very big mistake and would compound the delays that we have already highlighted. I echo the point about efficiency savings in terms of whether they will arrive and whether that means that it is new money. It depends on where the savings are made from. If they cut some other parts of capital, is that really saving or is that just shifting money around? We still do not see clarity on it being funded.

Chair

When Lord Robertson appeared before us, he said that in his opinion only around £11 billion out of the £15 billion was new money. There is considerable concern, but let us see what the Chancellor is going to enlighten us with. Mr Phipson, did you want to come in on that?

Stephen Phipson

The other point that I would make is around the previous spending review in terms of the difference between CDEL and RDEL and what is happening there. The CDEL number increased by 75% in the 10 years, but RDEL by only 0.7%. Of course, that means cutting things such as training and all the other support services, which is very concerning if you look at that mix. I do not know if the Committee has had a chance to look at that in some detail, but it is something else that we wanted to point you in the direction of.

Chair

We have discussed that as well in terms of RDEL versus CDEL. Mr Dutt, did you want to come in before I move on?

Arnab Dutt

We love the ambition, but the proof of the pudding will be in the eating, and everyone has said more or less the same thing, so let us see what happens.

Chair

We are all singing from the same hymn sheet, which is brilliant.

Emma Lewell

In your dealings with Government and different Departments, what do you currently think the status of the relationship is between the MOD and the Treasury?

Stephen Phipson

It should be a lot better now that we have the ex-Defence Secretary as the Chancellor.

Julian David

It should be.

Emma Lewell

It should be, but is it?

Julian David

We definitely got the impression from the Chancellor this morning that he understands the need for a transition in defence spending, which was encouraging for the tech industry to hear.

Stephen Phipson

I guess we will see in the Budget.

Julian David

We are going to find out.

Kevin Craven

Nobody would welcome a shift on certainty in defence spending towards the CSR, and then question marks about whether the CSR or the defence spending element of that is delivered in spring or autumn next year. If that rumour is correct, that is very unwelcome.

Emma Lewell

Did you make that point this morning?

Kevin Craven

I was not in that meeting, but I am certain that colleagues did.

Julian David

We have made that point directly to the Chancellor. We did not get any answer.

Kevin Craven

The relationship has improved, given the Chancellor’s direct knowledge of the problems that defence has faced. The ability for him to then fund the resources necessary to fix those problems is the question, rather than just the relationship, which has been unhelpful in the past.

Chair

The Defence Committee has, very forthrightly and for a considerable amount of time now, put out a statement to say that we need to reach 3% of GDP spend on defence by the end of this Parliament. I have forthrightly made that point on the Floor of the House recently, as well as before. Unfortunately, we are in a situation where we are now having to wait until next year’s spending review, which we are led to believe may come in the autumn of next year, to get that clear pathway to 3%. From your perspective, is that too late for industry to respond to the demand signal?

Stephen Phipson

It is absolutely too late. Again, we are all working to this idea that we have a severe threat in front of us by 2030. The investment cycles in building capability are quite lengthy. If we decide now, it is, as we said before, two to four years, or perhaps even five, depending on the capability, to get that up and running and put it into FOC, so I would say that you need to start now. We need to see that now. We need to bring that forward. That would, effectively, be another two-year delay in the process.

Julian David

It really is having a material and deleterious effect. You get learned behaviour from delays. If you delay yet again what has been publicly stated by the Government, including the Prime Minister, as an absolute national priority, it sends a message.

Chair

I agree. Mr Craven and Mr Dutt, are you of a similar opinion?

Kevin Craven

First, there are probably three sets of stakeholders affected by the lack of certainty around this. We have talked a lot about industry, but there are also the defence planners inside the MOD who need that certainty. The third group are our international allies, and we could mention NATO in particular. What I would mention, and what should probably be of most importance to the Chancellor, is that our figures indicate that, if we went to 3%, there would be 50,000 additional jobs in the UK. If we went to 3.5% by 2035, that would be a further 85,000 jobs. This is in an industry that currently has around 190,000 jobs in the UK, and adds roughly £16 billion of value adds to the UK economy. One of the challenges that we have is that most of the attractive markets in defence are not here in the UK. Our export figures are about £11 billion out of a total of £36 billion to £37 billion of revenue, so less than 30%. We could double that. In terms of some of the SMEs that we have talked about this morning, 65% to 70% of their revenues are from exports. There is a market outside the UK that people are turning to because of the lack of certainty here.

Arnab Dutt

The market is also incredibly competitive. If our high-skilled SMEs are getting that level of business from abroad, that is where they are going to build out their capability and long-term contracts, which means that the opportunity, when that money is released, is less. It is just going to be more difficult. The opportunity cost of not getting to that target quickly is 50,000 jobs, which is a huge amount. It is something that is part of the Government’s target and is really important for our own SMEs in this country in terms of skills, employment and growth. The sooner it happens, the better. Again, I am echoing what everyone is saying here. It is not rocket science.

Chair

That is something that has been forthrightly put forward as a case, because of not only the significantly raised threat level but also the fact that we are missing out on defence as an engine for growth. There is also the issue of British global leadership on defence. Many of our European allies are looking to us for that leadership, whether it is in JEF or in European security with respect to Ukraine and so on. We have seen the likes of Germany deciding that it is now going to be investing huge amounts to make the Bundeswehr the largest conventional army in Europe, not to mention that, within four years, it will be spending as much on defence as the UK and France. That is why we need that clarity to have that 3%. In your opinion, at the same time, within the spending review, do we need to have a clear pathway to reach 3.5% or can that be done at a later date?

Kevin Craven

We need a clear pathway to 3.5%. It is critical for our allies and for the UK that we have that certainty.

Julian David

I absolutely agree, and we should take it away from the annual test around whether we are still going to do it.

Chair

Basically, we have a well-managed process.

Julian David

We need to show the pathway and bring as much forward as possible—I agree with you there, Chair—and show that we are not going to deviate from it.

Arnab Dutt

It is absolutely critical in terms of capacity and growth, as well as a huge demand signal for the broader economy. It is incredibly important.

Chair

Mr Phipson, do you agree?

Stephen Phipson

I do. We get involved in lots of long-term discussions about investments with big manufacturing groups, which are talking about 10-year plans here, and so of course you need to have it now.

Chair

That is exactly what we have been making the case for. We do not want the British taxpayer to be stung by defence inflation. We need a well-managed process and a strategic plan for the next decade in order that we can have that increased, gradual profile of spending on defence.

Jesse Norman

Welcome, everyone, and I apologise for arriving late. In relation to monetary policy, the Bank of England takes particular steps, and has done in the past, to articulate forward guidance about where it expects interest rates to be, precisely in order to allow industry to organise itself and plan on a more secure monetary basis. One of the reasons why it does that is that it reduces not just the uncertainty cost to the businesses but the wider cost to the country of the additional insecurity. Does the same argument apply to defence? In your judgment, do you get not just a lack of planning but a wider lack of certainty and, therefore, in some sense, almost encouragement to our opponents that comes out of that lack of guidance?

Julian David

I would absolutely agree that we do, and that is the case. The problem is that the capital goes somewhere else. This investment capital that is looked at by the manufacturing businesses to invest in the sector, if they do not have clarity, goes where there is clarity. That is the problem. We are seeing lots of the groups investing overseas. We are seeing other investment activities happening. Some of it is due to cost, but some is due to the fact that they can invest only in something that is real and has an attached commitment to it. We need to see that, otherwise it is the same guidance, and capital will flow somewhere else.

Jesse Norman

So movement from a Budget to a spending review, and then delay in a spending review, just racks up uncertainty even more.

Julian David

Yes, which was the beauty of having a long-term equipment plan: you could see what people needed to invest in.

Jesse Norman

Yes, quite.

Kevin Craven

There are probably two effects that are relevant. One is that lack of certainty, and the other is that the costs of doing business in the UK are increasing as we speak, including things such as national insurance, which has been well debated. The steel measures introducing 50% tariffs on out-of-quota orders are also an unhelpful development for the defence industry.

Jesse Norman

What is that last point?

Kevin Craven

There were new steel measures that placed a tariff of some 50% on out-of-quota supplies of specialist steels. That has particularly impacted on defence and aerospace industries in terms of the cost of doing business, and is likely to make UK steel businesses less competitive in this marketplace. All of these things add up to a point where overseas marketplaces are becoming more attractive, particularly if you are a large global company that has perhaps a big business in the UK but also has choices about where it can place its discretionary—

Jesse Norman

The anchoring effects of capital investment are not being felt as well.

Kevin Craven

That is correct.

Jesse Norman

Mr David and Mr Dutt, are you seeing foreign companies come to this country because they are worried about uncertainty elsewhere? Is there a countervailing effect or is it really only going away from us and towards other countries, in your experience?

Julian David

In tech, there is a huge amount of inward investment still happening. The broader context of defence tech is tech.

Chair

Is that mainly AI and LLM model-related?

Julian David

It is all of those things, and you will have seen the inference that the better growth than the UK was expecting during this year has been driven by AI adoption. I would like to make the point that we need to understand the broader business environment. Tech infrastructure is really important to people’s adoption of these technologies, which are now fundamental to modern defence production, and that is becoming difficult in the UK. Quite high-profile people are stopping investment in data centres in other parts of the tech infrastructure because of planning problems and because of the cost of doing anything here, and the delays. It is not just the price of energy, is it, Stephen? It is the ability to get connections, which is now running at eight to 10 years versus an average of about four years anywhere else. You can see that in skills and the supply of componentry. We have to have a broader economic focus in order to secure our defence tech and broader defence sector.

Arnab Dutt

There is another context, which is that the lack of visibility on this spend is having a huge impact on confidence for businesses. In the last quarter, we saw that small business confidence is at minus 57%. Certainty of spend would go a long way to shore up business confidence. That is really important. Going back to what Julian said about costs, from our reports and our own research, 30% of our members that reported were experiencing annual cost increases of greater than 10% in their businesses. That is massive.

Michelle Scrogham

Good morning. We are seeing inflation in defence much higher than standard inflation. The Minister for Defence Readiness has said that this is down to workforce, supply chain uncertainty and the investment environment. Do you recognise these as the drivers? If so, to what extent can Government levers be used to remedy that? I am going to come to Kevin first.

Kevin Craven

Certainly, we recognise that defence inflation does run higher than the norm, which is unhelpful in the current environment where defence is expected to find efficiencies alongside building capacity and capability. In terms of ameliorating that, Government can help with that by supporting in areas of enablement such as skills—that is a possibility—and by thinking about the general business context. I mentioned the steel measures. The carbon border adjustment mechanism is coming down the track as well. There are a number of general business measures that are making it expensive to do business in the UK.

Michelle Scrogham

When you say that the Government can help out with skills, whose responsibility do you see it as being to ensure that we have all those skills in the UK, given that we have a global shortage in an awful lot of these sectors? They do not appear out of nowhere. If you need them, what is the industry’s role in training?

Kevin Craven

One of the huge industrial advantages that the UK has is its creative engineering and innovation ability. That is why tech firms come here. It is why defence firms come here. It is why there are a lot of sectors that operate in the UK. The thing that supports that skill base is orders. Going back to the old refrain, I am afraid, certainty over the next 10 years would be enormously helpful in enabling industry to invest in both production lines and things like skills. There are some exemplars, as you well know, in your own constituency, where we are seeing great progress in developing the community and the surrounding environment to support a major industry.

Michelle Scrogham

I understand. When we know that we have a global shortage in these skills, why is industry waiting for an order rather than getting ahead of the game and understanding that they will need those people to deliver any contract? If we have a global shortage, why is industry not training more?

Stephen Phipson

Let me try to explain the situation. This is a subject that we constantly talk to Pat McFadden about. UK manufacturing, all manufacturing, is 800 large companies and 130,000 SMEs. That includes defence. If you look at the 800, most of them are investing really heavily in skills. At the moment, the UK manufacturing workforce is 2.6 million people and we have 50,000 vacancies. Those vacancies are vocational skills. They are welders, toolmakers, robot technicians and service techs. They are all the things that normally come from apprenticeships. BAE Systems and Leonardo have great training facilities. They have been investing themselves, recognising that the system is not pumping out enough of these skilled people. The big gap is the SME community. The challenge with SMEs is that they rely on FE. Nowadays, because we have not revised the apprentice levy system since 2016, a lot of FE colleges have dropped out of doing engineering courses because you have to buy capital to do it. If you are a little machine shop doing defence work in East Anglia, whereas you used to take on one apprentice a year, now you have nowhere to send them, because the local college does not do it anymore. We need to redo apprenticeships. It is well understood, certainly by the Government Ministers that we engage with, that we need to have another look at how we are using apprentice funding to make sure we can encourage FE to get back into it. There are some pockets of great work going on. I would point you towards Yeovil College, for example, and what is happening with the defence technical colleges. There is excellent work there with the additional money that has gone in to do that in that particular area. We need to do it across the country. A lot of those SMEs cannot send their apprentices anywhere, so they just do not take them on.

Michelle Scrogham

Does anybody have a comment on the overtraining of apprentices in some industries where they do have that capacity?

Julian David

We have called for more flexibility and focus in the skills and growth levy, as it is now called. We have not really seen it. As you say, there are exemplars of concentrations. I was reading about your constituency’s efforts there, Mr Norman. That is really encouraging. The tech industry is trying to address the supply of skilled people. We have recently put together a platform, funded entirely by the industry, with eight career paths, to show people how they can get into the tech industry. It is really aimed at NEETs and returners. It starts from a point that says, “What sort of person are you? What are you interested in?” and shows them pathways to do those things, all of which are supported by industry connections and engagement. So far, we are not really seeing Skills England step up to this. We are not really seeing the MOD publish a real skills plan with the skills that it thinks the defence investment plan is going to be calling for. There are other people that could help here. The final point is that the bulk of industry are SMEs. SMEs do not have the capacity to take people on who are not productive. They map them against where business is. Tech skills are very well sought after, as are welders, strangely enough. There is a high price on these people. If you do not have a contract, you are not going to take them on.

Michelle Scrogham

When it comes to welders, I would suggest that their high price is down to the fact that they are like hen’s teeth. Maybe overtraining a few of them would not be a bad thing. In Germany, we are seeing automotive facilities being repurposed, and quite a few of the industries in the UK are saying that they have capacity for that. Do you see that being a solution here in the UK?

Stephen Phipson

Yes, absolutely. We have all the automotive companies in membership. They are all very interested in this. There is quite a lot of available capacity at the moment. They are all very interested. They come along to all the meetings that we do with the MOD. They are very interested in providing help and capability. Again, they want to know where to invest and which programmes they need to be involved in. JLR is involved in the new light vehicle programme, but we can do much more than that. Yes, it is available. It is about being clear about what the priorities are and what the investment is going to look like going forward.

Kevin Craven

It is not a straightforward conversion process, though. There are compliance certifications, security ratings and elements of specialist engineering. We are working very closely with the SMMT, the trade association for automotive, on bringing forward how you might do that, but it has not yet happened again because of the uncertainty of future demand.

Julian David

I would refer you back to the point about security clearances. The automotive supply chain is made up of SMEs. They are not typically people who have had security clearance. That has now become more difficult to obtain, if you are an SME.

Michelle Scrogham

Moving on to a different topic altogether, on Saturday, the Times reported that the police are investigating incidents where defence executives have been targeted by activists. What impact does this have on the wider industry? Have Government recognised the security issues?

Kevin Craven

Certainly, this is not a new problem. What is new is the escalation from premises to individuals, which is most unwelcome and resembles very closely what happened with Huntingdon Life Sciences some 10 years ago. These are individuals working at their day jobs who are now being punished—and their families are being punished—for involvement in the defence industry, which is a major part of the UK’s industrial base. It is a very unwelcome escalation and one that we strongly hope the Government will pay attention to. Prior to this latest escalation, we have worked very closely with the Home Office on the policing of protests and this type of activity. There have been some improvements, but, as with everything, the threat morphs; it has moved to something else. It is going to have an impact on morale and the desirability of working in the defence industry if you come home and find your house has been painted red, for example.

Michelle Scrogham

Does anybody else want to comment?

Julian David

This is something that is very unwelcome and has to be addressed. All these companies can operate in different geographies. A lot of the executives come here on assignment from elsewhere. They are going to start to think, “Perhaps this is not a good idea”. It does seem to be a particular political angle that is driving this, because the general acceptance of defence companies seems to have become much better. You see a change in attitude in terms of people wanting to join defence companies. You see a change in the financing now. There is money from institutions that they want to put to defence. The tech companies are all switching to dual use and defence. This kind of politically oriented and targeted attack is really very unwelcome.

Michelle Scrogham

Do the public have a wide enough understanding of some of these particular groups, such as Palestine Action, and what their activists are doing? Is that publicised enough in the media or through Government structures?

Stephen Phipson

Having been around this issue for a number of years, there is a really important story to tell about how this industry is defending our way of life. It is defending the rights of those protesters to protest. Without it, we would be in a very different country. We need to keep reinforcing that point to the public. It is a point that we all reinforced very much with the financial community about banking the defence industry. You are defending the way of life in this country. It is an absolutely vital mission that is done by these companies. We need the Government to constantly reinforce that message. Sometimes there is too much airtime on the counternarrative and not on what we are actually doing here, which is defending our way of life.

Julian David

The broader question about the whole-of-country or whole-of-society defence posture really needs some focus. In other parts of Europe, they are really getting to that message and they are really picking it up. Until that kind of messaging gets through to the general public, they will not understand why these things matter.

Chair

I couldn’t agree more. It is deplorable that people are being attacked in their homes at a time when we are trying to encourage more people to get involved in the national endeavour of defending our country. Mr David, I just wanted to come back on something that you said around security clearances. Can you just explain in greater detail the issues around security clearances? What has changed? Why is it more difficult? When we raised this issue around security clearances, we were advised that things are much better now and that it is all sorted. What has changed and why is it more difficult?

Julian David

In summary, to sponsor someone’s security clearance a company now requires a contract specific sponsor access letter. At the moment, Government Departments do not seem to be able to agree who pays to process that. The impact is real. One provider has estimated that thousands of people are affected. One SME that we know of lost 163 clearances on a single date, costing it £68,000 in 12 months, including 14 redrafts of the access letter to put right. This change is affecting small companies, but it is now beginning to affect large companies as well. Effectively, the way that it is done has been changed, but they have not put in place the capability to process it in the new way. We have raised that through the Defence Industrial Joint Council. It is being looked at by Jim Carter’s team, but so far there has been no answer.

Chair

Just so we can pursue this further as a Committee, can anybody else give me any other examples around security clearances and the messy situation that you are faced with?

Kevin Craven

I can help a little bit, Chair. There are two problems. One is that MOD is currently providing security clearances that can be used by other Departments that do not necessarily have their own security clearing apparatus. That appears to be a source of concern. That is one issue. A separate issue is that the MOD is looking at organisations that provide third-party sponsorship for those security clearances, including my own organisation. We are currently sponsoring some 14,000 security clearances for 700 SMEs and other organisations in the supply chain. If that authorisation were removed, the burden for supplying those clearances would shift in some instances to the primes, which are already struggling with security clearances for their own staff. There are large numbers of SMEs that want direct access to the MOD and are using these third-party clearance houses to obtain their security clearances. That would be a major problem, and it looks like it is a major problem at the moment.

Chair

Just to reassure you, we have been on the case on security clearance. In fact, it featured prominently within our AUKUS report, because that was another area where we thought we needed to get matters resolved before it impedes progress on delivery.

Jesse Norman

I will just draw attention to my role not just as MP for Hereford but as chair of NMITE, our new technology university, which, I should say, is a member of MakeUK. Thank you all very much indeed. You are absolutely right about the point about public conversation. I had this conversation, you may have seen, with the Defence Secretary the other day. The previous Prime Minister promised a proper public debate about these things. We had a lamentable shortfall, as I would say. Members across this Committee were worried about it, regardless of party. This Secretary of State has said he is going to lead a conversation on this. The paradox is that many of our younger people are not the snowflakes that they are depicted as. They are thoroughly engaged. Could you comment on any of that? What would you like to see?

Julian David

We would like to see the Government taking a lead in explaining what is going on, the fact that we are already under attack in a hybrid way, the fact that we are being scoped for a future attack and the fact that interference through social media is influencing people’s attitudes to things in a way that is really naive and bizarre and is not being counteracted. That is my view. This really does need almost a UK Government campaign approach from the whole of Government. There needs to be a change to this idea that defence companies that have relationships in the US and other parts of the world are necessarily bad people. It really has to stop.

Jesse Norman

You want an information campaign that is led from the top of Government and covers the whole of Government.

Julian David

Yes. MPs have a really clear responsibility here, because you are responsible for your constituents and keeping them safe. Ideological posturing on defence, which some MPs have done, is really unhelpful.

Kevin Craven

The national conversation on defence as a priority is a desperately important one. This Committee has played a major part in raising the profile of that, which we welcome very strongly. It is clear, though, that the two major regional conflicts around the world at the moment are impacting on Britain in a number of different ways, not least of which is the fuel price at the moment. The grey-zone and hybrid-warfare impacts on Britain are already happening. We are seeing attacks on major retailers. We are seeing social media influence campaigns, et cetera. It is really important that the Government lead this conversation and we move on from this characterisation of defence spending as being something contrasted with welfare spending. That is a very simplistic approach that does not begin to approach the right conversation around the place of national security of the UK.

Jesse Norman

Stephen, what is your view? We do not need to go around everyone, but I just want to get the consensus quickly.

Stephen Phipson

Some of the characterisations in the press about youngsters are very unfortunate. We run an apprentice training centre with 2,000 young apprentices in it, and I am also the chair of an educational trust with 21,000 school-leaver-age students in it. When you talk to them about defence, it is not that they do not want to be involved in it; they are not sure how to get involved in it. There is no route; there is no programme; there is no national conversation that says, “This is great. This is how to get involved in the reservist movement”, or something else. They do not know how to get involved unless there is one of those pockets. Hereford is a good example of a pocket where that is happening, but the rest of the country is not like that. Youngsters are not saying, “We do not want to be involved”; it is a matter of us explaining how they can become involved in it.

Arnab Dutt

I would like to echo what Stephen says. I meet a lot of young people. I am lucky enough to mentor some. The ones who I meet are absolutely fabulous. I compare them to my generation, going back 40 years, and I am absolutely sure that we have fabulous people out there. Of course, the opportunities within defence now are far more and greater and varied than they have ever been before. As Julian said, it is also about software development. It is not just about hardware. Adaptability and change in software is happening on the frontline. The opportunities across a whole bunch of areas in tech and manufacturing are phenomenal, but, as Stephen says, it is about explaining that.

Jesse Norman

We need a national conversation led from the top, covering the whole of Government, setting out specific opportunities and articulating the specific ways you can get involved. That is very helpful. Thank you. There is a real worry about what a UK company is at the moment. MOD is committed to spending with UK companies, but it does not seem able to define it. What is the right definition of a UK company, acknowledging that it is fuzzy and difficult?

Julian David

We have published a document on this, talking about what we call confident sovereignty. It talks about looking through the lens of capability, control and choice. That reflects the fact that the tech industry particularly—it is also true of the broader defence industry—is an international industry. Therefore, countries need to understand what capability they need; they need to understand what they have the capacity and ability to provide for themselves and then invest in and focus on that; they need to analyse what capability gaps they have and work out which trusted partners they are going to get that from; and then they need to look at how they control it when they have it. How do you make sure it cannot be switched off? How do you make sure you have choices in the event that you need to have an alternative approach? We think that is much more helpful in the context of our international defence industry and the broader international tech industry than saying, “Buy British”. If you say, “Buy British”, you are really giving a licence to the EU—it is the EU that is currently doing this, mostly—to say, “You should buy EU, then”. The EU has shown that it is capable of doing that.

Jesse Norman

It feels like SAFE is an internal racket that does not want to buy some of the best technologies on the market because they come from this country.

Julian David

Yes. We should challenge that. We also have to challenge the Cloud and AI Development Act because that really affects dual use and technology infrastructure.

Jesse Norman

That is interesting. That is a further interesting point.

Julian David

We have said to the Government—we repeated it again this morning to the Chancellor—that this is not just a Business Department issue. It is not just Minister Falconer’s responsibility. This must be a central plank of the EU discussions. We have plenty of value to add; I will not call it leverage because you get into strange diplomatic places. The UK has a lot of value in both these conversations. We do not push that enough.

Jesse Norman

Do you guys all broadly agree around the three Cs, or would you like a more postcode-based approach?

Kevin Craven

We welcome the desire to drive up UK industrial capability and capacity, but the definition of sovereignty—we have run four or five workshops with the MOD on how to derive an appropriate definition of sovereignty—has to be focused on the substantive economic and national security value to the UK rather than just a registered address. We really have to be clear that it is at that capability level rather than the pure brass plate on the door-type level. We are already a very open economy. We have a large number of heritage British firms that have been acquired by foreign headquarters. They have treated those firms and the workers with respect and they still have a significant part to play in this conversation. The geopolitical point in terms of competition with Europe is an important one that needs to be addressed at the UK-EU security pact level rather than a “Made in Europe” or “Buy British” level, which is sort of Punch and Judy.

Jesse Norman

Will we get a shared view of what constitutes an adequate definition of “British” for the purposes of sovereignty from your organisations? Is the argument really going to be much more specific about capability? Some of our most important capabilities, as you pointed out, are owned by foreign companies.

Stephen Phipson

When I was the head of defence exports for the Government, we were very clear about where the sovereign capability is. It is well controlled within the MOD. We protect the IP, we have Chinese walls and we make sure that none of that leaks out, because that is critical to the defence of the country. The MOD is quite good at defining that. We have all done workshops. We have all done gold, silver and bronze and all the other flavours of it. It happens in other sectors as well. It is not limited to defence. Julian’s point about Made In Europe is not to be underestimated here. We are in a very difficult place with the Industrial Accelerator Act at the moment. The more we go out on the TV saying, “Buy British”, the more we are not going to be part of the European system, which accounts for nearly half the exports of the country. We are in a really serious place at the moment. I have just spent two days with my counterparts across Europe doing Made in Europe. We did it in Madrid for two days, which sounds lovely, but it was Commission—

Jesse Norman

It is brutal work.

Stephen Phipson

It is brutal work, and we are not in a good place. The French Government are very much against the UK being part of this, which will substantially affect all of us, not just in defence but in other sectors as well. There is a balance here, but I would just reassure the Committee that my experience, without going into too much detail, as we cannot, is that this kind of protection is very well controlled in the MOD. The frustration is often about buying purely American platforms without any noble UK work happening here. That sort of thing is what we are trying to get at in terms of doing more in the UK.

Jesse Norman

The other question arises is that, when the guano starts flying, the whole sector, including Europe, is going to go into some lockdown. At that point, we have to know that we have the things that we need on hand. It will be like the global financial crisis. Everyone thought they could sell, but it turned out that no one could sell because the market had fallen so fast. How do we build that into the picture?

Julian David

It is about a couple of things. First, we need the analysis that says what we need and where we are getting it.

Jesse Norman

It is about making us robust enough for the possibility that everyone is failing.

Julian David

Yes. We need to understand, if we are getting something from somewhere else, whether we control it. It is also a case of growing the British industry base here, including foreign investment, as Kevin and Stephen have pointed out, which is generally very willing to invest and to give us that kind of security. You can do a lot by really investing in and encouraging SMEs directly and you can do a lot by using the Procurement Act and social value. All those things are available to be used, which do not say, “This is a nationalistic exclusion”. It just says, “These are things where we are trying to make a difference”.

Fred Thomas

Post DIP, which we are living in now, we are expecting the defence finance investment strategy to come forward, and pretty soon we have this investment summit, which we are all looking forward to. I want to ask you some questions around that and around the currency of the DIP, particularly as regards AI and emerging technologies. I will come to you, Julian, around emerging technologies in a second. Kevin, DFIS is coming forward. What are the key things that it needs to clarify so that people are clearer on what to produce and what to invest in?

Kevin Craven

Private finance and capital follows viable markets. At the moment, defence here in the UK does not necessarily represent a very attractive market for investment. Longer-term certainty, which we have discussed at length this morning, is a key component of that, but, equally, it is about the attractiveness of the MOD as a customer. Those investors do not want to pay for the poor performance of the MOD as a procurer, for example. That is unhelpful. Risk sharing is probably one of those things that is important to understand. Again, investors are not attracted to high-risk ventures. By definition, defence feels like a high-risk investment in some instances. Defence infrastructure is much lower-risk. The recent announcement on the mobile docks for the Clyde was a really good example of something that could be funded perhaps by private finance as an example. There are a number of things, but I would also draw attention to SME financing. We have talked about the difficulties they face in procurement, but they equally face a challenge in terms of funding for working capital, bonding, insurance and that type of thing. Again, in the same way as the MOD has a challenge in terms of the capacity to address 7,000 or 8,000 suppliers, the finance industry and the capital investment industry in the UK is also wrestling with finding viable SME pathways for investment.

Fred Thomas

Are some SMEs accessing financing from high-street banks in a slightly riskier way? The context of that question is that I am briefed by a number of high-street banks that they have what they would call venture debt teams. They are apparently very keen to support growing British start-ups, such that they would not have to sell equity to venture capital funds but could borrow money from high-street banks. Are your members doing that? What does that look like from an industry point of view?

Kevin Craven

We are working with a number of the high-street banks, though not all of them by any stretch of the imagination, that are better at supporting SMEs on that difficult journey. Some of it is a second-tier problem, such as using a contract award as a surety for mezzanine-type finance or debt finance. That is hard to come by in the current climate. As many sectors are, they are attracted to defence and the possibilities of participating because globally defence spending is up 25% or 30%. It simply has not manifested here in the UK at the same speed.

Fred Thomas

I am going to come to Stephen and then I will come back to Julian to ask about that tech comment.

Stephen Phipson

I have a few comments on the financing part. We do this not only in defence but across the rest of the manufacturing sector. We can get start-up financing, and the high-street banks have a role to play in that. We still see some debanking in the defence sector, which is another subject that we might want to get on to separately, even though the larger banks have done a much better job recently. Some of the smaller banks are still very challenged by that. The Government have done quite well, with the British Business Bank and the National Wealth Fund, on financing those SMEs. What is a big problem in this country is series B funding. This is a big problem. For series A funding, getting that start-up going, it is fine. Once they get going, they want to build a factory or do the next round of financing. The last five deals in the manufacturing sector this year all went to the Americans—all of them. No financial institution in the UK wants to pick them up. We have a serious problem. This is something that we talk to Treasury about every week at the moment. Why is it that patient capital is not available for series B in particular? Why is it that the National Wealth Fund is in series A and will not go on to series B and help the next stage of the development of those companies? That is a whole area that needs exploring. We are an outlier, and the American companies are taking advantage of it. Some of our high-tech businesses, not specifically in defence, recently have gone to American investors because they will take the risk at series B and we will not. There is something around that and there is still something around debanking in the defence sector that we need to address.

Fred Thomas

Just to reassure you, this Committee has heard evidence about the funding journey from series B onwards and growth-stage capital. We are aware of that.

Stephen Phipson

It is across the sector. It is not just defence; it is everywhere.

Fred Thomas

Let me come back to my earlier question, Julian. We are talking about the DIP, and I moved us on to talk about defence investment strategy and the summit that is coming up. The SDR was written in 2024-25. The DIP was written in 2025-26. We are now in 2026 and moving to 2027. Some of the movement with AI is so recent that it is unreasonable to expect that it would have been accommodated and acknowledged in a document written two years ago. How current is the DIP? From a tech point of view, how urgently do we need to review procurement decisions based on shifts in technology?

Julian David

The point about the DIP and the SDR is that they did talk a lot more about outcomes. One of the things that has bedevilled Government contracting in the past is the attempt to specify inputs. They try to say, “We want this”. They do not say, “We want this capacity” or, “We want to meet this requirement”. They say, “We need this technology or this approach”. That was welcome. We would like them to go even further and shift to software being the core of everything and equipment being brought in to work around the software core, the secure compute and the secure comms infrastructure to go with it. The DIP in itself does not need to keep pace with which AI model is the best, and it never will. We need to have this idea of a software-enabled approach, so that things can be modified and changed. We do not want to get into a situation where we have to cut a hole into the side of a ship being built because the computers in there need to be changed and they cannot be taken out. We need to shift to everything being designed around the idea that it will be upgraded and changed and that components will be swapped in and out of an architecture. If we do that, it will be fine. I would like to pick up on the procurement point. We find all the time, both in defence tech and dual-use tech, that there is not an appetite for long-term investment in the UK. Companies in all parts of emerging tech find a much better conversation when they talk to US investors, particularly.

Fred Thomas

You are talking about private capital.

Julian David

Yes. That is why they are so prominent in our funding landscape and that is why there are so many trade acquisitions as well. These people all have a longer-term view of what is going on and they are prepared to offer much higher valuations. They think they are getting bargains. Our investment community seems to think that this is something that they do not want to pay for.

Fred Thomas

Since the DIP came out, the Government have stood up SovAI, the UK Sovereign AI Fund. There are different bits of Government procuring AI, which is perfectly reasonable. You could say every Government Department should be procuring AI. What does that look like from an industry point of view? Which bit of Government is seen as being the most progressive on moving forward with AI?

Julian David

There are two elements to AI, putting it simplistically. One is the development of frontier AI, the new type of AI, which is becoming quite an interesting and varied environment now with various options. SovAI is a very welcome and useful development. Secondly, there is applied AI, which is, “What can you do with it now?” I will ask colleagues on their perspective as well, but I do not see a lot of connection between the activities of SovAI and the necessity for national security and defence. There does not seem to be any connection. I would also highlight the fact that we have a futuristic investment and discovery vehicle called ARIA, which is supposedly modelled on DARPA. Again, I do not see any connection between that and the defence and security requirements. We seem to have a lot of initiatives that do not fit to any national purpose, particularly around resilience and defence.

Jesse Norman

There was a very interesting comment earlier on about the Defence Office for Small Business Growth and how at the moment it has four people rather than 29. Can we just focus on that for a second? Has it been effective? It took a while to get set up. What is it doing? What is your read on it?

Kevin Craven

I am happy to start. We are very supportive of the concept. As with many things in the DIP, the funding required to deliver full implementation is a challenge. At the moment, it is more of a signposting and information function than it is helping individual SMEs to work within the defence sector. It is a great concept and has some good ideas, but it is still limited in its effectiveness in terms of changing the landscape for our SMEs.

Jesse Norman

You would like it to be more than a signpost. You would like it to be fighting for the voice of SMEs within MOD.

Kevin Craven

Yes. It should be publishing best practice. For example, I mentioned the Commercial X neutral vendor framework. There are some other rapid procurement pathways that can and do work. Those could be shared around as best practice within the MOD or promulgated—

Jesse Norman

That is not happening at the moment. They are basically quiescent. They are not advocating within the organisation.

Kevin Craven

They are not doing it at a large enough scale.

Stephen Phipson

We understand that they will reach full operational capability by the end of the year. That is the plan.

Jesse Norman

You mean the end of the calendar year, not the financial year.

Stephen Phipson

Yes. By the end of this calendar year, we were told.

Jesse Norman

That is two months away. They are going from four to 29. That is interesting.

Stephen Phipson

Yes, absolutely. I agree. They are in the first phase of set-up at the moment. Having a single front door for SMEs, as Kevin said, is a good idea. It is a very good idea. We have not had that before. It should act as a champion. We want to see them being more front-footed when they get to FOC. It is absolutely critical that they do that. We are giving them a little bit of the benefit of the doubt at the moment until they declare that they are fully operational and up and running. We are engaged with them, and that is a good thing.

Jesse Norman

They get three or four out of 10 so far.

Stephen Phipson

Yes, so far.

Arnab Dutt

We have had very little formal engagement and communication. What we hope for is regular and structured meetings, at least on a quarterly basis, through which we can support them. As I said, we love the ambition. We await for it to perform. We want to support them as much as we can.

Jesse Norman

What about internal transparency? “These are the 50 small businesses that we have supported over the last quarter. Here are the 100 that we are working on. Here are the 200 that we have done so far”. Is that the kind of thing that you would be thinking about as well?

Arnab Dutt

That would be incredibly useful for us, especially engaging and showing where the hurdles are and where the real challenges lie.

Jesse Norman

It would get you guys off their back, apart from anything else. That would be quite a good outcome.

Arnab Dutt

It would be. With MOD, we often feel like we are complaining a lot. We do not want to be complaining. We want to be critical friends.

Jesse Norman

You would like to know about the successes.

Arnab Dutt

We want to help with the successes.

Julian David

I would go further, though. They should have targets and KPIs that are allocated to people responsible for delivering them. We are very concerned about the fact that we still do not have clarity on the 2024-25 spend with SMEs.

Jesse Norman

You do not know the 2024-25 spend. That was a while ago.

Julian David

Yes. The proposal is that after 2028 there will be a report produced saying whether or not they made the targets that they have set for this.

Jesse Norman

We do not know what they are anyway.

Julian David

There are no KPIs on the way. If you look at everything that they say, they talk about, “We are going to do this”. They do not say that Billy Smith or Sally Scott is going to do it. In business, if you want to change something, you make somebody responsible for it, give them targets and you have periodic reporting on how it is going. We do not see that.

Jesse Norman

You want to see internal advocacy, metrics, KPIs and named individuals.

Julian David

There needs to be responsibility. It does not have to be an individual. It could be a particular branch of the MOD.

Stephen Phipson

We have been saying that they should be publishing an impact report each year, like we see in other Departments. That is what we want to see.

Julian David

The danger, I am afraid, in allowing them to publish the examples of what they are doing really well is that that is what it becomes.

Jesse Norman

You mean that it becomes a show-and-tell rather than a proper view of the whole thing.

Julian David

It becomes, “Look, this one is all right”.

Jesse Norman

Yes, “Ignore the 10 that failed, but this one is all right”.

Julian David

What about the overall? That is not the way to grow British capability.

Jesse Norman

No, quite. Looking at it from the point of view of a defence small business, you will be aware—this links to other conversations that we were having—that, to some extent, companies often end up being driven not head first but tail first, because the lack of defence orders and the slowness in creating defence demand causes companies to go into a stasis where they are trying to build capability, but they do not have the revenue to do that. They might have foreign revenue. They might have quite a lot of foreign revenue from Norway, Scandinavia, the US, the Gulf and places like that, but they do not have UK revenue. They can run out of credibility locally, possibly with their financial institutions. A VC comes up to them and says, “Take some money”. Once you are on that treadmill, you are having to feed the demand for growth possibly faster than the market or the product needs. Do you see that in your own businesses?

Stephen Phipson

Yes, definitely. We see that all the time. We have thousands of SMEs in the community. Some of them are dual use, i.e. they are servicing another market. For example, they might be in automotive and defence, or aerospace, to be more accurate. Some of them are in exports. There are very few doing just MOD work.

Jesse Norman

Who can take that risk?

Stephen Phipson

Exactly, yes.

Jesse Norman

If both sides could talk or at least signal to each other that they were moving forward, you could get quite a rapid overall acceleration in capacity and capability.

Arnab Dutt

We find that there are other Government Departments that are doing some brilliant work on market pre-engagement and signalling on where the pipelines are coming from, how much will be spent and which regions they want to engage with and then going out there and getting SMEs ready and informed about what is ahead. That in itself is a huge move, and it makes all the difference in the world. When someone has to make a decision, they think, “Should I go abroad?” If they are engaged by MOD and told, “This is coming down the tracks”, those businesses can prepare rather than being caught by surprise. This is a really important part of what we want MOD to do, as far as FSB is concerned.

Jesse Norman

Gentlemen, do you have any further comments on that? Do you see this interplay between lack of orders and getting your money from elsewhere? Could they felicitously work together if we had more rapid defence procurement? Kevin, I know this is an issue that you have already touched on.

Kevin Craven

Yes. Simplistically, if you think about a small company, the sales resource generally is the principal, the owner, and perhaps one other. If they are turning their attention to exports, they are not able to service the domestic market as well.

Julian David

The other thing that I would add is that new companies’ solutions should be able to get a reference that says, “This is used by UK Armed Forces” or, “This is used by UK security agencies”. Having that reference is hugely powerful in being able to get orders outside the UK.

Stephen Phipson

It is almost the most essential thing.

Julian David

If you do not have it, people ask, “Why do your own defence establishment do not use your stuff?”

Jesse Norman

Your product may be the best in the market, but, if MOD are not buying it for whatever reason, if it has got lost in Abbey Wood or something, you are not selling to anyone else.

Stephen Phipson

As a former head of defence exports for the Government, I can tell you: when you are out there talking to other Governments, the first question is, “Is it in service with your military? If it is not, do not talk to me about it”.

Jesse Norman

It is like drones in Ukraine: “Is it being sold in Ukraine?”

Stephen Phipson

Absolutely, yes.

Chair

I just want to come on to a couple of issues that the Committee has raised previously. First, I want to talk about the MDM and DSRB. We know that the Government have made a commitment of about £400 million to the multilateral defence mechanism, with the UK, Netherlands, Poland and Finland contributing to that joint procurement. At the same time, we do not have any clarity around the Defence, Security and Resilience Bank. What are your views on the DSRB? Should we be in or out? Are you expecting a decision on that within the defence finance and investment strategy? Short and clear answers would be good because we have had a lot of woolliness around some of this. Are you in favour or not? Are you expecting this to be announced within the DFIS?

Kevin Craven

We are very supportive of the concept of the DSRB. We think it complements the MDM, which is all about the aggregation of demand across those nations. The DSRB will be about how we build capacity here in the UK to support that aggregated demand.

Chair

Are you expecting a decision within the DFIS strategy?

Kevin Craven

We are expecting some news on that. Whether it will be the actual decision I do not know. It is encouraging that the UK has observers in the DSRB. We have not heard any specific decision.

Chair

That was very clear and concise on where you stand on the issue.

Julian David

We do not really know because we do not know whether our technologies are going to be included in the Defence Security and Resilience Bank provisioning. If they are, it would be a good thing. On the MDM, again, more significant to us is the NATO Communications and Information Agency role in this space. If it gets expanded to include more dual use and tech, that would make a difference. Again, if we get locked out of CADA, that will make all these other things worse. We estimate that it is going to be a £30 billion to £60 billion hit to the UK economy, if we do not have CADA trusted status over five years.

Arnab Dutt

We are very supportive of DSRB, from what it looks like, but we are really interested in how we get more SMEs registered on the NATO Support and Procurement Agency.

Chair

I will be coming on to that. Your answer on DSRB is clear.

Stephen Phipson

DSRB is good and positive. It would be excellent to merge it with MDM. MDM needs to be deliverable. We do not need another procurement agency because we already have one with NATO. You are going to come on to that in a second, Chair.

Chair

That is brilliant. That brings me on to the last point before we wrap up for today. We could not get a clear answer from the Defence Secretary, the Permanent Secretary or anybody else regarding why the UK is not making better use of the NATO Support and Procurement Agency. Mr Dutt, you mentioned it. Why do you think that is?

Arnab Dutt

I really do not know. It seems the obvious thing to do. It is something that will facilitate more SMEs working with counterparts in Europe. It seems like low-hanging fruit for the Government.

Chair

Yes, agreed. Mr Phipson, perhaps you could enlighten us. Why is it not being used?

Stephen Phipson

No, not at all. We should be using it more. We do not need to create another one with the MDM. We need to be focusing on what we have already and trying to utilise it.

Chair

Mr Craven and Mr David, given your background and ADS or techUK members, do you know why the UK is not using it?

Kevin Craven

In actual fact, the problem is getting worse. In 2022, we were the fifth-largest user of the NSPA; we are now the eighth-largest. During that time, the size of the NSPA’s budget has trebled. It is a significant problem. We strongly recommend that we should be better engaged and making more use of it.

Chair

I assume that your nodding means you are in concurrence.

Julian David

I would echo those comments as well. It does seem, in a sense, to highlight that we do not have such an expansive view of international opportunities as we once had. That may lead back to the fact we are not proceeding with our own activities as fast as we should be.

Chair

That is a very sobering thought on which to end. Thank you so much, gentlemen, for the time that you have taken. As mentioned, you are all very busy individuals with respect to your trade associations. That has really helped to inform not just the Committee’s future deliberations but also the wider public as to the importance of taking full advantage of what the DIP has to offer and the implications that it is having on your sectors. Thank you very much. With that, I call to order today’s House of Commons Defence Committee evidence session.