Independence Would Destroy Scotland’s Defence Industry

Scotland would lose out on the billions of pounds of defence spending from the British government through independence, the British defence minister and industry experts have said.

In the event of a vote in favour of leaving the UK, Scotland would become an entirely new state (at least in the eyes of the defence industry). Companies based in an independent Scottish state would therefore no longer be eligible for contracts that the continuing UK chose to place or compete domestically for national security reasons; and where they could continue to compete they would be pitching for business in an international market. This would also apply to Scotland-based subsidiaries of UK companies.

As much as a certain political party like to pretend otherwise, the defence sector is an important part of Scotland’s industry. It employs over 12,600 people, but is highly dependent upon UK domestic defence spending, particularly in the maritime sector. MOD has spent around £1.9 billion on work billed to the programme by BAE Systems on the Clyde and Babcock at Rosyth on the Queen Elizabeth Class aircraft carriers alone, with around 4,000 jobs in the yards directly linked to the programme; and over £300 million of sub-contracts have been placed with Scotland-based companies by the Aircraft Carrier Alliance. Other examples of MOD contracts involving work in Scotland include a £25 million order for additional Paveway IV bombs awarded to Raytheon in November 2012, which secured around 300 highly skilled jobs in Glenrothes, as well as sustaining jobs at Raytheon’s subcontractors, including Chemring in Ardeer. In total, the MOD awarded contracts worth more than £100 million to Raytheon in 2012, for orders of around 1,600 Paveway IV bombs; work on Typhoon Captor Radar equipment (M-scan and E-scan) being undertaken by Selex ES, estimated to be worth £200 million per annum, with approximately 700 people in Edinburgh working on Typhoon-related projects; a range of optronic and night-vision equipment provided by Thales; and the provision and support of hydraulic equipment from MacTaggart Scott & Company Ltd, worth around £26 million. All of the contracts mentioned only exist in Scotland because it’s part of the domestic UK defence industry and this certainly represents a huge boost to local economies.

Future MOD plans for complex warships currently include the proposals for the Type 26 Global Combat Ship programme. There are currently about 300 industry jobs in Scotland linked directly to this programme at the BAE Systems Maritime Naval Ships site in Scotstoun working on design, project management and supply chain. Final decisions on the programme, including where the ships will be built will not be taken until the middle of the decade but it’s no industry secret that BAE want to build the ships in Glasgow assuming the people of Scotland stay in the union. It is estimated that shipbuilding work on the programme would be worth billions of pounds and support thousands of jobs not just at the shipyard that will build these vessels, but also at suppliers across the UK, including Scotland.

Other than procurement activity undertaken during the World Wars, the UK has not had a complex warship built outside of the UK since the start of the 20th century at least. All the Royal Navy’s new complex warships are being built in UK shipyards and the UK Government remains committed to utilising the strengths of UK industry in this specialist and complex area. The MOD has a 15-year Terms of Business Agreement with BAE Systems MNS, giving the company certainty about the UK Government’s commitment to a minimum level of capacity in the areas of warship design and build work, including the Type 26 as mentioned above, and elements of support covering complex warships. The MOD has a similar 15-year agreement with Babcock Marine in respect of support work for surface warships and submarines.

Companies based in an independent Scottish state would no longer be eligible for contracts that the UK chose to place or compete domestically for national security reasons (due to Article 346, I’ll explain that later in the article). Where they could continue to compete, they would be pitching for business in an international market dominated by major economic powers.

There’s also the matter of contracts using US technology, defence contractors that work with items or technology of US origin are also covered by undertakings given in accordance with the US International Traffic in Arms Regulations (ITAR), under which any change to an existing US export licence requires US State Department approval. An independent Scottish state would be a third-party country, not covered by existing UK-US ITAR agreements. UK companies would not have authority to transfer items and information that is subject to ITAR licence to their subsidiaries or other companies in an independent Scottish state or to a Scottish national, without US approval, anymore than it could transfer such material to organisations or individuals in other foreign states. Every licence held by companies in Scotland working on ITAR-controlled items would have to be re-approved if Scotland became independent, a very lengthy and politically charged process.

BAE is the third largest defence contractor in the world, with a 17 per cent share of new global defence export orders, worth £8.8 billion in 2012. This success in a highly competitive market is testament both to the strength and quality of the UK defence industrial base and to the worldwide reputation of the UK Armed Forces; nations want to use equipment that the UK Armed Forces use.

The UK Government is committed to using the exemption under Article 346 of the Treaty on the Functioning of the European Union to retain an industrial capability in the UK to protect its operational advantage or freedom of action where it is strictly necessary for national security. If at any time the UK Government were to decide not to apply an Article 346 exemption, it would be obliged to adhere to the rules governing open competition. In these circumstances, if an independent Scottish state were a member of the EU, the UK would be legally obliged not to discriminate on the grounds of nationality and would therefore treat all potential suppliers from EU member states on an equal basis. If an independent Scottish state were not in the EU, suppliers established there would have no right to participate in defence procurements under EU Defence and Security Public Contracts Regulations, although the UK would have discretion to allow such participation. The UK would only do business with suppliers in an independent Scottish state where they demonstrated that they offered best value for money.

The future of the shipbuilding industry in an independent Scottish state might therefore depend on orders from its government and any export orders that it might be able to obtain in the international market. On this, the House of Commons Scottish Affairs Committee has concluded that Scottish shipyards“will have little prospect of winning export work” and that the “needs of any Scottish Navy will be insufficient to maintain capacity”.

This concern was also expressed in evidence to the Committee by representatives of the Confederation of Shipbuilding and Engineering Unions, who commented that “unless an independent Scottish Government could provide equivalent-type orders [which it cannot do], we would be greatly reduced or completely finished as a shipbuilding industry”.

Significantly increasing Scotland’s share of the global naval ship export market would be very challenging. The existing major naval ship exporting nations are: USA, Korea, Russia, France, Germany, Turkey and the Netherlands. These are likely to be joined soon by Brazil and Japan. Servicing and repair of ships takes place in all of these countries plus Chile, and this list is likely to be joined by the United Arab Emirates. Many of these nations benefit from having significant sized navies of their own, with economies of scale supporting competitiveness in the international market. India, Pakistan and China also aspire to develop their own industries, and would benefit from low production costs in line with their status as developing nations.

It stands to reason that an independent Scottish state would certainly see lower domestic demand for defence goods due to a much smaller budget. It would also lose the support to exports provided by the UK’s international defence engagement and facilitated by the UK’s global reputation. The sustainability of the defence industry in Scotland would be largely impossible in the event of a vote in favour of leaving the UK.