Written evidence submitted by ADS Group, relating to Defence Spending in Northern Ireland inquiry (DSN0005)
1.1. ADS is the trade association for the UK’s aerospace, defence, security, and space industries, representing more than 1,300 members. We work with those sectors to secure the UK’s advantage, enhance our international positioning as a go-to destination for innovation, and deliver on our sustainable leadership goals.
1.2. Whether representing industry, connecting our members with business opportunities, or driving forward innovation and growth, ADS is at the forefront of an array of activities, events and programmes that benefit our members. ADS members are the custodians of a world-leading advanced engineering and services workforce, fuelling UK prosperity, and providing more than 417,000 jobs to the UK each year.
2.1. The aerospace, defence, security and space sectors make a major contribution to Northern Ireland’s prosperity. In 2022, ADS sectors in Northern Ireland generated almost £1billion in value add to the UK economy, employed 9,000 people, and generated an estimated £1.9billion turnover. Northern Ireland develops and exports next-generation defence capabilities and equipment and has been recognised internationally for its support of Ukraine. Northern Ireland has a legacy of innovation dating back more than 100 years, and a history of involvement in the defence industry, with companies such as Thales and Spirit AeroSystems having a presence in the region for many years. In addition to traditional defence contractors, Northern Ireland is also home to a thriving cybersecurity sector providing specialised services to government agencies and defence organisations. In the coming years, there is an opportunity to grow the defence engineering supply chain with increased regional MOD expenditure.
2.2. MOD spending with industry in Northern Ireland has typically been lower than other regions in the UK owing to several factors including historical conflicts and the demographics of the defence industry in Northern Ireland, with the majority of defence companies being SMEs. The difficulty that the MOD has in engaging directly with SMEs, combined with long procurement cycles, have also contributed to the lower levels of defence spending in Northern Ireland, which is home to a large proportion of SMEs compared to Primes.
2.3. However, Northern Ireland has a strong defence industrial base and cyber security capabilities that could be further leveraged by the MOD and other government agencies, providing opportunities for growth and to secure the UK’s advantage. The workforce in Northern Ireland is highly skilled and could support the scale-up of the defence and security industries. With the right, sustained, support from the government and a collaborative approach with industry, Northern Ireland has the potential to become a key player in the defence and security sectors, further strengthening the local economy and driving growth in the region.
3.1. Several factors have contributed to the historical and ongoing low levels of MOD spending with industry in Northern Ireland compared to other regions and nations in the UK, despite the rich and vibrant defence and security SME community there. In 2022/23, MOD expenditure per person with UK industry was £100 in Northern Ireland, compared to a regional average of £380 in Scotland and England, and £250 in Wales. The decades of conflict in Northern Ireland have shaped the makeup of the defence sector in Northern Ireland, as well as the views of both local and national politicians, which will have undoubtedly impacted MOD decision making in Northern Ireland. This in turn has had a considerable effect on the demographics of the defence industry in Northern Ireland.
3.2. Historically, there has only been one major defence prime in Northern Ireland, that being Thales. While this is now changing, with Spirit AeroSystems and Harland & Wolff entering the defence ecosystem as significant players, the impact of this has been twofold. Firstly, it has meant that there are fewer large prime contracts placed in Northern Ireland compared with other areas of the UK with multiple primes present. This reduces the opportunities for SMEs to be brought in through the primes’ supply chains. Secondly, as 95% of the defence companies in Northern Ireland are SMEs, the difficulty of the MOD in engaging directly with SMEs impacts the overall expenditure in the area. In 2022/23, the MOD spent only £2 million with SMEs in Northern Ireland. In Scotland £29 million was spent with SMEs, and in the South West of England alone, the MOD spent £408 million with SMEs. As a proportion of the MOD’s expenditure with SMEs, Northern Ireland only received 0.15%.
4.1. Despite the challenges mentioned in answer to question 3, Northern Ireland has huge potential in its defence industrial base and cyber security capabilities, which is not being leveraged enough. The increasing presence of primes in the defence sector, with Spirit AeroSystems and Harland & Wolff, highlights the wide-ranging potential of the Northern Ireland defence industrial base across domains.
4.2. The Northern Ireland defence and security sectors have an incredibly rich SME ecosystem, with many companies operating in the digital manufacturing and technology sectors. ADS has over 100 member companies in Northern Ireland, predominantly SMEs. Northern Ireland has an award-winning supply chain, with 70% of the UK’s SC21 Business Excellence Gold Awards held by companies in Northern Ireland. The significance of award status is an indicator that these companies are renowned for their customer focus and agility within the supply chain and offer an excellent opportunity to secure the UK’s advantage, and our national security and prosperity.
4.3. By not fully engaging with the whole of the defence industrial base in Northern Ireland, the MOD is missing out on innovative companies and critical technologies. With few major primes in Northern Ireland, it is already difficult for SMEs to enter the prime supply chain. The MOD could look to work with primes who are not based in Northern Ireland to encourage them to take advantage of the innovative SMEs that Northern Ireland has to offer. This could be through encouraging primes to participate in more supply chain and knowledge sharing events in all regions and countries of the UK, including Northern Ireland.
4.4. The strength of the civil aerospace sector, and the vibrant cyber security sector in Northern Ireland should also be leveraged by the MOD. The increase of dual-use technologies is a vital opportunity for the UK to ensure technological innovation and economic growth. Further, skills that exist in these sectors are often transferrable, and offer opportunities for cross-pollination of ideas and innovation. The Northern Ireland civil aerospace sector is a key industrial asset in particular, and MOD should look to utilise this capability as much as possible in growing the defence industrial base in Northern Ireland. Meanwhile, through the cyber-security clusters and centre of excellence present in Northern Ireland at Queen’s University Belfast, there is a clear opportunity for the MOD to tap into the thriving cyber security sector present in Northern Ireland.
4.5. Northern Ireland’s strong industrial base, pedigree in advanced manufacturing, and significant cyber security capabilities create strong potential for growth, and a key opportunity for the MOD to deliver the capabilities it requires in a more innovative way. With the correct support from MOD, Northern Ireland could play a far larger role in the UK’s defence industry. One method of unlocking this potential could be through MOD support for an official defence and security cluster in Northern Ireland, similar to the South West Regional Defence and Security Cluster. This could build on the existing NI Cyber Security cluster to mirror the cluster that currently exists in the southwest of England, which has had much success. MOD should also consider specified actions or targets for increasing the amount of defence work in Northern Ireland above the current levels.
5.1. It is difficult to determine whether future planned increases in the MOD capital budget will lead to an increase in spending with industry in Northern Ireland. The increased defence budget as detailed in the Spending Review 2020 did coincide with an increase in MOD expenditure in Northern Ireland, with MOD expenditure growing from £110m in 2021/22 to £190m in 2022/23, representing a 70% increase. It is worth noting that MOD expenditure in Northern Ireland has risen to £100 per person in 2022/2023, but the broader economic and political landscape will play a crucial role in determining where and how the increases are spent.
5.2. However, unless there is a focused plan for MOD to engage with companies in Northern Ireland, there is no indication that Northern Ireland would necessarily benefit from this expenditure. The increase in spending last year in Northern Ireland due to the contracts with Thales for NLAW missile systems offers some hope of growth in MOD spending with industry in the region, but further engagement is required both with defence primes and with the SME supply chains in Northern Ireland. It is also important to highlight that for sustainable growth, the MOD must be careful to avoid a “feast and famine” approach in its procurement relations with industry. Stop-start procurement could increase costs over time despite short term savings, and risks skills losses in low spending years.
5.3. It is important to recognise recent announcements on defence expenditure in context of real terms spending and overall budgets. The Spending Review 2020 allocated an additional £16.5 billion to the defence budget over the period 2020/21 to 2024/25, while subsequent specific increases to spending in the Spring Statement 2023 also contributed to an uplift in defence spending. However, despite this additional funding allocated to capital budgets, the MOD’s day-to-day budget is set to decline in real terms over this period.
6.1. The MOD, through its SME Action Plan, has set a target to spend 25% of its procurement budget with SMEs. MOD recognises the benefits of working directly with SMEs and is aiming to increase its engagement on this front. However, MOD has historically found it difficult to engage directly with SMEs (and vice versa), and as 95% of the companies in Northern Ireland are SMEs, this creates a barrier for direct MOD engagement in Northern Ireland. Complex lengthy contracts, security clearance requirements and long procurement cycles all make it very difficult for SMEs to engage with the MOD.
6.2. As mentioned in 3.2, there has only been one major defence prime in Northern Ireland historically, Thales. The presence of primes brings the opportunity for a flow of business from prime contracts into the supply chains, increasing business for SMEs. In this area, there are positive signs of change. Prominent businesses such as Harland & Wolff and Spirit AeroSystems are expanding into the defence sector, which could provide more MOD contracts with opportunities for SMEs in the supply chain.
7.1. Northern Ireland has a very skilled workforce, with the highest percentage of students receiving the top A level grades (A and A*) of all UK regions. A clear vote of confidence in this workforce has been shown by the civil aerospace industry in Northern Ireland, which has spent years developing a highly skilled industrial workforce. As mentioned in question 4, Northern Ireland possesses huge potential in the defence sector by leveraging those who have easily transferrable skills. There is also a strength in learning from other sectors, and the cross-pollination that Northern Ireland could offer through its workforce presents a large opportunity for the UK to take advantage of technological innovation and secure the UK’s strategic and economic advantage.
7.2. ADS has strong links with both Queens University and Ulster University on curriculum and skills development. Partnerships between industry and academia are incredibly important for building the skills pipeline of the future. ADS is working with Queens University and several local companies on the “Schools Build a plane project”, which inspires young people to get involved in the sector. The UK Rocketry Challenge also gets good participation from schools across Northern Ireland.
7.3. Through the Northern Ireland cyber security cluster and academic centres of excellence, Northern Ireland has built its expertise in engineering, and has established leading R&D programmes. However, despite the concerted effort of both industry and academia, there is a shortfall in the number of people directly employed in both the defence and the civil aerospace sectors in Northern Ireland, which is reflective of the ongoing skills and workforce shortages across the UK. To secure long-term advantage, there must be collaborative effort across the UK to promote the diverse, highly skilled jobs available in the defence sector.
7.4. Alongside strengthening the current collaboration between industry and academia in Northern Ireland, reforms to the apprentice levy are needed to allow greater flexibility, and to enable Northern Irish companies to utilise the levy fully. This should include increasing the levy transfer percentage from 25% to 35%, which would support SMEs and supply chains. Removing the requirement for businesses in devolved nations to apply for levy money through central funding is also essential to businesses in Northern Ireland as it would enable more opportunities and reduce demand on devolved budgets.
8.1. The approach to defence procurement as set out in the Defence and Security Industrial Strategy (DSIS) and the Defence Command Paper Refresh was warmly welcomed by industry. Since then, there has been some progress on the work from Government to implement reforms for defence procurement, such as the 2023 Procurement Act, and the recent announcement of the new Integrated Procurement Model. DSIS references a need to move towards a deeper government-industry partnership, and to adopt a more flexible approach to procurement. This is then built upon in the Defence Command Paper Refresh. However, the impact of these changes require a shift in mentality within the MOD, moving beyond a transactional customer-supplier relationship with industry, towards a philosophy of strategic partnerships, and a view within MOD that the UK defence industry is a national asset.
8.2. The 2023 Procurement Act aims to simplify the bidding process, and implement flexible commercial frameworks, which could be incredibly helpful to remove barriers for smaller companies in direct procurement from Government. Industry are yet to see the implementation of this Act, as it is due to come in later this year, so the impact is yet to be seen. Similarly, the announcements in the Integrated Procurement Model, particularly the prioritisation of exportability and the desire to engage with industry on future requirements has the potential to forge a far more strategic relationship with industry and enable growth. The Integrated Procurement Model has only recently been published, so industry look forward to engaging with government on the implementation of this at an operational level.
8.3. The impacts on Northern Ireland are therefore not yet clear. If the philosophy of collaboration, joint implementation and early engagement is adopted by both industry and by the MOD, then Northern Ireland could benefit from this. This must be paired with a steady supply of work rather than a short injection of MOD expenditure, to ensure skills retention and provide the long-term certainty needed for investment. However, given that the Northern Ireland defence sector is predominantly SMEs, greater direct engagement with SMEs from the MOD is also needed, alongside a focus on supply chain resilience.
9.1. The value of exporting and trade to the defence and security sectors cannot be understated. Trade drives international collaboration and sustains our domestic industrial base. In an era of fiscal constraint, it is not possible to foster growth in the defence and security sectors through domestic sales alone. Exports should therefore be treated as a national priority. Fostering defence and security exports requires dedicated attention, and political leadership, given the nature of these markets and governmental customers. Enhanced government – to – government engagement would help to build trust and foster strategic relationships and open new opportunities. The Government should also address the current barriers to exporting, by bolstering the Government’s export support functions, including the UK Defence and Security Exports, as well as its export licensing functions through the Export Control Joint Unit.
9.2. Exports are key to mid-tier and SME growth, and so are vital for the defence industry in Northern Ireland, however government support for these companies is currently lacking. Ambitions to increase the level of UK exports are currently undermined by a lack of support for industry with international trade show costs. Trade shows are a valuable route for securing export opportunities for SMEs but SMEs are not being adequately supported or incentivised to attend these shows. UK competitors are providing greater direct assistance to be present internationally than the UK is currently. Given the growth in defence and security spending globally, the UK, and Northern Ireland, risks missing out on key business if similar support is not given to UK companies.
9.3. ADS would support the creation of a direct grant scheme to support SMEs with international trade show costs, with the support of the Department for Business and Trade. This should offer support to SMEs by offering financial backing to participate in international trade shows.
March 2024