Defence Procurement: Small and Medium-sized Enterprises

Tuesday 28th January 2025 Westminster Hall

16:40

[Alan Strickland (Newton Aycliffe and Spennymoor) (Lab)]

I beg to move,

That this House has considered SME participation in defence procurement.

It is a pleasure to serve under your chairmanship, Mr Stringer. I recognise that procurement is not usually a topic that gets pulses racing, but the threats posed to the UK and our allies certainly should. Central to our ability to rise to these challenges is using the defence industrial strategy to unleash the inventiveness, ingenuity and creativity of British industry.

I will cover three things: our need to respond to the changing face of warfare; adopting a proactive entrepreneurial approach to acquiring the defence supplies we need; and the practical steps we can take to place small and medium-sized enterprises innovation in the service of our national defence.

I turn first to our need to respond to the changing face of warfare. Technology has been rapidly altering the nature of warfare at a pace rarely witnessed before. We see this most clearly in Ukraine, where drone technology has rewritten the rules of modern conflict. Putin’s illegal invasion of Ukraine and the resulting war have shown us the incredible speed at which military technology is advancing. Reconnaissance drones paint detailed maps of occupied territory, helping to guide unmanned attack drones in strikes on Russian vehicles and equipment. The role of this technology is now so important that a dedicated branch of the Ukrainian military has been established to deploy it. Here at home, I have seen first hand the RAF’s latest unmanned air systems as part of an armed forces parliamentary scheme visit.

Drones, artificial intelligence and rapidly evolving satellite technology are being used to redefine all aspects of conflict, from the battlefield to the information war, to who controls space. Amid those significant and growing global threats, it is vital that Britain is at the forefront of developments to ensure that we can defend not only ourselves, but our allies and interests across the globe.

[Mr Tanmanjeet Singh Dhesi (Slough) (Lab)]

I congratulate my hon. Friend on securing today’s debate on SME participation in defence procurement. Having run my own start-up construction business in bonnie Scotland many years ago, I can appreciate full well that small and medium-sized enterprises are not given their due and rightful importance by Government structures, and more generally. The Government’s own Green Paper notes there is a need

“to address issues that inhibit or prevent growth in the defence sector”.

Does my hon. Friend agree that defence contract opportunities must be made more accessible to SMEs in order for us to support their growth and continue innovation?

[Alan Strickland]

I thank my hon. Friend for his intervention. He is absolutely right: across the economy with the Government’s growth mission, defence must be a crucial sector, but as he has said, too often SMEs are shut out by bureaucratic processes, which I will be keen to talk more about.

[Jim Shannon (Strangford) (DUP)]

I commend the hon. Gentleman for bringing this topic forward. He is absolutely right to recognise the importance of SMEs and what they can do. In Northern Ireland, Thales invented and produced the NLAW— the next-generation light anti-tank weapon—which slowed down the Russian advance; Thales is also at the forefront of cybersecurity, and all those things are very important. Does the hon. Gentleman agree that, when it comes to supporting all SMEs across the United Kingdom—those 434,000 jobs—Northern Ireland must be an integral part of that? I know that is what the hon. Gentleman and the Minister think, and it really is the way forward.

[Graham Stringer (in the Chair)]

Order. This debate is for an hour and is well-subscribed, so I ask hon. Members to be brief in their interventions.

[Alan Strickland]

I thank the hon. Member for his intervention. He is absolutely right that the commitment of Ministers and the defence industrial strategy to sovereign supply must include all parts of our United Kingdom, including the excellent capabilities in Northern Ireland.

Being war-ready for conflicts we cannot predict that will use technology that has not yet been invented, means giving our military the agility and capability to adapt to this changing landscape. Changing the way in which we think about defence procurement is central to this. My second point is around adopting a proactive, entrepreneurial approach to acquiring the defence supplies we need.

[Alison Bennett (Mid Sussex) (LD)]

I thank the hon. Gentleman for giving way and for securing this important debate.

Universal Quantum is an SME based in Haywards Heath, in my constituency, which builds utility scale quantum computers. It already works in partnership with leading organisations and investors in the field. Does the hon. Gentleman agree the Ministry of Defence should ensure emerging technologies, such as quantum computing, that are being spearheaded by SMEs like Universal Quantum are part of its procurement strategy?

[Alan Strickland]

I thank the hon. Member for her intervention. I agree. As she rightly says, warfare is developing very quickly and high-tech solutions, of the excellent type she described in her constituency, must absolutely be part of that.

When I talk to innovative SMEs at the Durham University spinout science park in my constituency, it is clear we need to think differently about defence procurement. NETPark in Sedgefield is home to more than 40 cutting-edge firms, many of which supply major defence companies and our allies across the globe. They include Kromek, which invented new ways of detecting radiation and biological weaponry; Filtronic, which manufactures satellite components; and Graphene Composites, which produces ultra-light ballistic shields. Their experiences suggest that we need to do more to remain globally competitive. As other hon. Members have rightly said, too often small businesses can feel that UK defence procurement focuses on process at the expense of outcomes and can stifle bottom-up inventiveness with top-down bureaucracy.

Our allies show us how we might do this differently. The United States Defence Department takes a broader approach to encouraging and funding military innovation. SMEs are encouraged to approach the Government directly with ideas for new products or with potential technologies they are developing and to showcase tech solutions to problems that may not have even been considered yet by officials. In turn the US Defence Department and its research agency, the Defence Advanced Research Projects Agency, proactively seek out innovative small companies that offer new ideas and technologies that contribute to tackling future military challenges.

[Matt Rodda (Reading Central) (Lab)]

I am grateful to my hon. Friend for securing today’s debate. Is he suggesting that the Ministry of Defence needs to completely change its culture and processes in the way it liaises with these important and innovative companies? Certainly that appears to be the issue in my constituency, where there are many very innovative SMEs.

[Alan Strickland]

I thank my hon. Friend for his intervention. I absolutely agree. In my previous life in the housing and the charity sector, I have interacted with Government procurement across Departments. There is a challenge with culture across Whitehall, as my hon. Friend says, of often struggling to deal with the realities of innovative and agile small firms.

The approach I described means the US spends around a quarter of its entire military budget directly with SMEs, much higher than the comparable figure for the UK. The UK Defence and Security Accelerator does good work in directly using SMEs to fill technology gaps. However Northern Defence Industries, representing more than 300 companies, has called on the MOD to do more to facilitate open call competition. That would allow SMEs to showcase their defence products directly to Government, without having to wait for specific procurement projects and tenders to be opened.

I strongly welcome the intention of Defence Ministers to use the defence industrial strategy to drive engagement with non-traditional contractors, including SMEs. We have a real opportunity to change the way Government think about procurement and a real chance to grow the culture, to which my hon. Friend the Member for Reading Central (Matt Rodda) referred, that gives us the wartime pace of innovation that we need. Just as Churchill’s groundbreaking military technology labs did during the second world war, let us use the resources of the British state to harness the inventiveness and ingenuity offered by our world-leading science and tech companies.

Turning finally to the practical steps we can take to place SME innovation in the service of our national defence, one of the key things we could look at is the reliance across Government on the prime contractor model. In practice this means that the Ministry of Defence often uses large contractors to work with SMEs further down the supply chain rather than engaging with them directly. For some years it has been common across Government, under all parties, to shift to working with smaller pools of larger suppliers. That has some obvious benefits, such as reducing the number of contracts that officials need to manage, transferring financial risk and outsourcing much day-to-day contract management, but there is also evidence that the approach can have its downsides, particularly in squeezing out smaller, innovative suppliers. When I worked in the charity sector, strengthening the prime contractor approach in delivering the Work programme led to a number of innovative charities with a real track record of getting people into jobs being unable to work with Government in the future.

So what can be done? Where possible, let us try to reserve complex framework contracts for large projects that genuinely need them, reducing the proportion of tenders available only to prime contractors. Where large contracts are required, can we look at these to see whether we can break them down into smaller components that are more accessible to SMEs? Secondly, where working through a prime contractor is the right answer, could we strengthen the requirements for them to engage with SMEs proactively and simplify contract arrangements? Thirdly, could we open up opportunities for the Ministry of Defence to contract directly with SMEs by removing red tape and doing so with an agile and entrepreneurial mindset? If businesses at NETpark can be direct suppliers to DARPA, the US Defence Department, NASA and other allied Governments, I am confident that, through the defence industrial strategy, we too can open up more opportunities for SMEs.

[Mrs Sharon Hodgson (Washington and Gateshead South) (Lab)]

My hon. Friend is making an excellent speech. To simplify the point he is making, we should all remember that from small acorns great oaks grow, and even big companies in my constituency such as Rolls-Royce and BAE Systems will have started at some point as an SME. What he is suggesting today would help those SMEs that we all have in our constituencies maybe one day to grow into those grand great oaks.

[Alan Strickland]

My hon. Friend makes a really important point. Considering that we have shop-bought drones making such a difference in Ukraine and that technology is being used in all sorts of ways, my hon. Friend is absolutely right that we need to hunt out and support the small, innovative businesses doing very different and distinctive work in constituencies around the country.

It has been a privilege to set out some of the challenges faced by our innovative SMEs and how the defence industrial strategy can address them. I look forward to welcoming the Minister to my constituency soon for a business roundtable to discuss these issues in more detail. I strongly welcome the Government’s putting growth at the heart of the new defence industrial strategy. The defence sector supports one in 60 jobs in the UK, the majority of which are outside London, so this is a real and tangible way of spreading growth, skills and opportunity to all corners of our country. More than that, if we can improve the way we work with SMEs, it will allow us to build an ironclad, sovereign supply of vital defence equipment. Not only will that provide jobs and drive growth but it will protect us from global shocks in the supply chain.

Warfare is changing, and we must change with it. Global production is threatened, so we must ensure sovereign supply. As the threat grows, so must our defence manufacturing base. I look forward to working with Defence Ministers on this important strategy and to further contributions from hon. Members of all parties in this debate.

[Graham Stringer (in the Chair)]

I remind Members that they should bob if they wish to speak in the debate. We will start with a three-minute time limit on speeches.

16:53

[Richard Foord (Honiton and Sidmouth) (LD)]

It is an honour to serve under your chairship, Mr Stringer, and I pay tribute to the hon. Member for Newton Aycliffe and Spennymoor (Alan Strickland), who has done us all a great service in securing this debate. I want to use my limited time to draw attention to some fantastic SMEs, including one in particular that is based near Honiton in the south-west.

The south-west has an absolutely fantastic defence industry, which is powering up the region and making for some fantastic industrial developments. The Ministry of Defence employs about 33,000 people directly in the south-west, but of course there is also a huge, integrated supply chain that supports many more jobs besides. It is surely the aim of the new Government to have a more innovative and resilient supply chain.

Supacat has been producing vehicles in Dunkeswell in Devon for more than 40 years and is at the forefront of designing and supplying cutting-edge tactical military vehicles. Its high-mobility transporter vehicles have been used by British forces in Afghanistan and on UN deployments in Mali. More than 95% of its supply chain comes from UK-based SMEs, 85% of which are in the south-west. It currently has a contract with Defence Equipment and Support; the Ministry of Defence is buying 70 Jackals and 53 Coyotes, as the Minister will know.

In the past, there has sometimes been an instinct to buy off the shelf and from overseas, which would be a huge mistake in relation to the procurement of vehicles for the impending short-range air defence—SHORAD—programme. That instinct to look overseas in the first instance weakens investment, reduces long-term job security and, ultimately, puts future domestic procurement at risk. Supacat has more than 150 skilled workers in Devon, but its future depends on orders that will be delivered beyond November 2025.

The Defence Secretary intends the new defence industrial strategy to boost world-class production and manufacturing, and I understand that supporting UK exports will be key to that. It is incumbent on us to buy from fantastic companies such as Supacat, if we then look to countries such as Saudi Arabia, Czechia and Ireland to buy the Jackal, as they have done. To conclude, there are some fantastic SMEs, including Supacat at Dunkeswell, and I commend to that company the House.

16:56

[Chris McDonald (Stockton North) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Stringer. I congratulate my hon. Friend the Member for Newton Aycliffe and Spennymoor (Alan Strickland) on bringing this debate to the House. I wholeheartedly agree that the Government need to work in close partnership with businesses of all sizes, and the Government have made it clear to me that they recognise the importance of small and medium-sized enterprises entering the defence procurement programme. I commend the Government’s engagement with the sector and I thank my right hon. Friend the Minister for agreeing to visit Stockton North to meet local businesses in a region steeped in industrial heritage, resilience and innovation.

Through the money spent on defence, the Government can satisfy their mission of building more in Britain and increasing skilled jobs in all corners of the country. Teesside and Stockton North are places that not only built the bridges and structures of the past, but are ready to lead the future of our nation’s defence capabilities. Teesside industries have long been the backbone of British manufacturing, and today the Teesside defence and innovation cluster stands poised to drive next-generation defence matériel. I will give the Minister a taster of some of the businesses that she will see on her visit to Stockton North.

Tracerco is a business based in Billingham in my constituency. Its cutting-edge detection equipment, already being deployed in Ukraine, is saving lives and ensuring the safety of soldiers in some of the most dangerous environments on Earth. Wilton, situated on the banks of the Tees, has a proud history of precision engineering and fabrication. It is expanding its work in the defence sector, demonstrating how Teesside’s industrial expertise can be the cornerstone for delivering the complex infrastructure projects that our armed forces need.

Of course, RelyOn Nutec is a facility with a name that is synonymous with world-class training. Generations of offshore workers have passed through its doors, and it is now preparing the workforce for the next wave of defence projects, ensuring that we have the skills that we need for the challenges ahead. Teesside is a region with a proud history, but more than that, a bold future, and is prepared to bolster the nation’s resilience in an era of increasing global volatility. From the steel forged in Redcar to the innovation being crafted today, we have always been a place of strength and ingenuity.

16:59

[Jim Allister (North Antrim) (TUV)]

It is a pleasure to serve under your chairmanship, Mr Stringer, and I commend the hon. Member for Newton Aycliffe and Spennymoor (Alan Strickland) for bringing this matter to the House.

As has already been referred to, Northern Ireland has a rich history in defence and in the production necessary to maintain defence. That is true in the large business sector where, for example, we have Thales, which of course has led the way in next-generation defence equipment. The primary thing I will say to the Minister today, however, is that we also have a great layer of SMEs under that in Northern Ireland that are not getting a fair crack of the whip when it comes to MOD procurement.

I say that on the strength of evidence given to a parliamentary inquiry by ADS Group—the trade association. It set out some very stark figures for 2022-23, the most recent year for which we have relevant data, that said that all the Government contracts to Northern Ireland SMEs in that year amounted to a paltry £2 million. For Scotland, the figure was £29 million and for the much-favoured south-west of England, the figure was £408 million. Even though 95% of ADS Group members are SMEs, Northern Ireland SMEs got only 0.15% of MOD expenditure in 2022-23. How can that be fair? My basic appeal to the Department and to the Minister is for fairness, a level playing field and equity in the distribution of contracts.

We have remarkable skills in many of our SMEs and we have many leaders in the digital and technology sector. Some of them subcontract to Thales, but all those firms have much to contribute in their own right. I say to the Minister that we must bring some equity to the situation. It can never be fair that in 2022-23, the MOD’s per capita spend on all contracts was £100 in Northern Ireland, £380 in Scotland and England, and £250 in Wales. Let us have some levelling up.

17:02

[Chris Evans (Caerphilly) (Lab/Co-op)]

It is a pleasure to serve under your chairmanship, Mr Stringer, and I congratulate my hon. Friend the Member for Newton Aycliffe and Spennymoor (Alan Strickland) on securing this timely debate.

I also welcome—quite belatedly—the Minister to her place. She has an extremely tough job, as was underlined by Sir Jeremy Quin, the former right hon. Member for Horsham, who had her role in the last Conservative Administration, when he said:

“Defence procurement is never easy—it is a tough thing to get right—and I have not yet found a state anywhere on earth that can really deliver to the kind of standards that I am sure the hon. Gentleman would wish to see.”—[Official Report, 18 July 2022; Vol. 684, c. 718.]

That is further underlined by the latest figures from the MOD about Government projects, which were set out in the portfolio in March 2024. That document said that 88 projects are on red, 18 are on amber and only one is on green. Behind those figures is a supply chain that will also be affected. Many firms in that supply chain will be small and medium-sized businesses that do not have large bid-writing or tendering teams. Under the Procurement Act 2023, if all goes according to plan, SMEs will spend less time bidding for contracts that they do not win and many of the tick-box exercises will be reserved for the company that is offered the work.

During my time in opposition, I was often told that the MOD has a tendency to change its mind at short notice. The best example of this, which I am sure the Minister has sleepless nights about, is the Ajax programme; it wasted £5.5 billion, including in my former constituency.

It is important to strike the right balance between removing unnecessary red tape and ensuring that contractors can prove that they are up to the job. When I was in opposition, the most important thing that I learned when speaking to SMEs was about late payments. In all the time that I shadowed the role of the Minister for Defence Procurement, I got angry only once, when a prime contractor stood in front of me and said, “Now we’ve finally been paid by the MOD, we can pay the supply chain”—18 months later.

The businesses involved in the supply chain are not large—very often, they consist of just five or six people being innovative—yet they lose out because prime contractors put the needs of other people above their needs. Of course, there will always be examples of good practice, but one major defence contractor operating here in the UK was, at the last count, taking an average of 101 days to pay its supply chain. Would any of us accept a three or four-month wait to get paid?

In 2020, multiple major defence firms were suspended from the prompt payment code for consistently failing to pay their suppliers on time. SMEs across all sectors spend a total of 50 million hours a year chasing payments. If the Government mean what they say about promoting productivity and growth in defence SMEs, addressing late payment must surely be a priority going forward.

Voluntary codes are all very well, but they are just that—voluntary. If we are serious about this issue, we must enshrine redress in legislation. It is unacceptable to pay our SMEs—the lifeblood of our economy—late, and there should be penalties for that. Late payments create cash-flow problems, which in turn affect SMEs’ access to finance. That cannot go on.

17:05

[Luke Myer (Middlesbrough South and East Cleveland) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Stringer. I congratulate my hon. Friend the Member for Newton Aycliffe and Spennymoor (Alan Strickland) on securing this important debate. He spoke about the importance of defence procurement for our region in particular, and our potential for strengthening our national economy and national security.

As my hon. Friend the Member for Stockton North (Chris McDonald) says, for decades, Teesside has helped to build and power our economy, and the steel forged in our furnaces became the bones of bridges, railways, and skyscrapers around the world. We once built the world, and today we stand ready to defend it. In addition to the examples that we have heard of Teesside innovators working at the cutting edge, I will give an example from my constituency—that of Tees Components.

Tees Components provides the precision machining required to service the state-of-the-art equipment that our Navy relies on, such as the bow thrusters used on Astute-class submarines. Such manufacturers play an integral role in developing local skills through high-level skills training and apprenticeships, and in delivering good-quality jobs in an area that really needs them, but where talent and tenacity are never in short supply. Too often, however, such companies—with world-leading innovation and a proven track record—are left to struggle for a seat at the table. It is clear to me, and to other Members, that there is much more to do to open up procurement for SMEs.

I agree with my hon. Friend the Member for Newton Aycliffe and Spennymoor on the need to improve engagement with SMEs. The Federation of Small Businesses has long called for a centrally managed body to oversee MOD contracts; I wonder whether the new strategic leadership of the national armaments director, as promised by the Government, can help to disaggregate some of those contracts and deliver the changes that are required.

Currently, only 4% of direct MOD expenditure goes to SMEs, and indirect involvement in the supply chain often proves unsustainable. Although large multinationals typically receive payments within five days, SMEs often face late payments, as we have heard. One solution could be specifically earmarking a portion of the prime contractor bid funding to support SME participation. That could include measures to mitigate financial risk, such as up-front payments.

I believe that the new Labour Government understand the challenges that we face. We have already heard some of the measures being taken to reform defence procurement and make it work for Britain. I am proud that the Government have identified defence as a growth-driving sector in our industrial strategy and I welcome the work under way in the SDR and in the defence industrial strategy to ensure that British business is prioritised in procurement.

This debate is about ensuring that we invest in defence, but it is also about ensuring that we invest in our communities—our workers, engineers and innovators who want a chance to contribute to Britain’s success. It is about remembering that national security does not begin and end on the battlefront, but in the workshops and design labs of Skelton or Sedgefield.

17:08

[Steve Yemm (Mansfield) (Lab)]

I thank you, Mr Stringer, for the opportunity to serve under your chairmanship and my hon. Friend the Member for Newton Aycliffe and Spennymoor (Alan Strickland) for tabling this important debate. The UK defence sector is recognised as a global leader: Government defence spending supports more than 400,000 jobs across the UK, and many jobs in my constituency. I therefore welcomed the Defence Secretary’s announcement of plans to develop a new defence industrial strategy with the aim of producing a better—more integrated, more innovative and more resilient—defence sector in the UK. I therefore want to make the point loud and clear to the Minister that, in my constituency of Mansfield, we are well prepared to support the Government in that mission, and indeed are already doing so.

I draw particular attention to a local business, Glenair, which I will visit next month. It employs about 1,000 people in my constituency and works to supply products that are critical to our defence, including military aerospace, nuclear and military land systems. Glenair is driving those innovations; in fact, it is on the cutting edge of innovation. I am pleased that the Government want to do all they can to support this industry, and therefore companies such as Glenair, here in the UK. Glenair is a fantastic example of an employer that is investing in its workforce. This year, it took on almost 60 apprentices across a wide range of disciplines, not just in engineering. It established those apprenticeships well before the apprenticeship levy was introduced, because it recognises how important well-supported, well-trained and highly skilled workers are to its business. This is also why it is crucial for us as a Government to invest in further and higher education.

Let me summarise my main points: first, we already have some fantastic innovative businesses here in the UK; secondly, investing in education and looking at how we can be more innovative will make a significant difference to delivering on our objectives; and, thirdly, in Mansfield we are unashamedly ready to support the Government in doing so. During the election campaign last summer, I promised to deliver on local missions for the people of Mansfield. One of them was to do everything in my power to help provide a stable and growing economy with good-quality jobs for everyone. With that in mind, I invite the Minister to visit Mansfield so that she can see for herself the fantastic opportunities that are available. Let us work together so that we can play our part in delivering that objective.

17:11

[Fred Thomas (Plymouth Moor View) (Lab)]

It is an honour to serve under your chairship, Mr Stringer. I thank my hon. Friend the Member for Newton Aycliffe and Spennymoor (Alan Strickland) for securing this important debate. He is a huge champion for SMEs in his constituency and for national security in general.

I will begin by pointing out that defence primes are not evil. They do not set out to harm British national security. They do amazing things, and some of the things we are proudest of in Britain—sovereign capabilities —are delivered by those primes. It is no surprise that a huge proportion of defence spending goes to them, because some of the capabilities that they deliver—things that give us our unique edge in the world—are the most expensive things on the British balance sheet.

Primes do not have to be negative in the context of SMEs either, because they can offer SMEs something that we all know is missing: the ability to communicate with the Government. By joining with primes, SMEs are sometimes able to advertise their ability to the Government in a way that they would not be able to otherwise.

[Richard Foord]

To reinforce the hon. Member’s point, the way that Supacat has teamed up with Babcock in Plymouth in recent years to scale up its skilled workforce by 60% is an example of what he is describing.

[Fred Thomas]

The hon. Member is absolutely correct. It is not quite in my constituency—it is in the neighbouring constituency, Plymouth Sutton and Devonport—but I agree.

In terms of SMEs, primes can also offer a service to the Government and the Ministry of Defence. If we had a massive change in system, which would be extremely hard to execute, and the MOD was suddenly able to procure directly from SMEs across the country, we would have an enormous challenge of integrating the different capabilities into a usable platform. Half of the things would not be able to talk to each other; they would be made to do their one task and we would then try to put on top of them a second radar system or some piece of satellite that could speak down to whatever comms link we were using. That is enormously expensive. However, primes can do that integration. They can go to the Government and say, “You have a demand signal to do something,” rather than to have a particular capability—to monitor the North sea, for example—and then go out to the SMEs in different constituencies that hon. Members have highlighted so fantastically, gather various bits of capability and knit that into one big package to sell to the Government. That would feel more expensive and slower to the Government, but it could be cheaper in the long term, in some instances.

That said, I and colleagues are overwhelmed almost daily by individuals in the UK defence industry reaching out on LinkedIn or by email, begging the Government to listen to what they are offering. They are patriotic people who think they can save us money and give us strategic advantage by delivering a piece of capability, when we currently spend obscene amounts of money on something that sometimes does not work well or produce the desired effect. I would love the Minister to give us a sense of what the Government are going to do differently from previous Governments to actively offer a forum for those SMEs to pitch their capabilities. I am immensely proud of the Secretary of State and the Minister who joins us today for their work so far—

[Graham Stringer (in the Chair)]

Order.

17:15

[Helen Maguire (Epsom and Ewell) (LD)]

It is a pleasure to serve under your chairmanship, Mr Stringer. I congratulate the hon. Member for Newton Aycliffe and Spennymoor (Alan Strickland) on securing this important debate.

SMEs are the backbone of the UK economy and a vital part of our defence industry. They bring agility, innovation and high-quality jobs to communities across the country. Yet despite their immense potential, SMEs face significant barriers to fully contributing to our national defence procurement. There is a real and long-standing problem across the MOD’s defence procurement system: it is beset by inefficiencies, including delays, overspends and rigid processes.

Liberal Democrats believe it is time for a fresh, ambitious approach to tackle those challenges. Our plan focuses on flexibility, accountability and long-term strategy. We would replace the current rigid system of defence reviews with a more flexible system of continuous reviews of security threats and evolution of defence plans. That would enable procurement to evolve in response to emerging security threats and rapidly advancing technologies. Further, we would integrate defence procurement into a comprehensive industrial strategy. That would ensure a reliable pipeline of equipment procurement, safeguard jobs and skills, and promote UK-based businesses.

Collaboration with NATO and European partners is key to developing cutting-edge technologies and ensuring interoperability. For the areas of defence where we wish to maintain our sovereign capabilities, we must achieve that through greater collaboration with domestic SMEs. The survival of SMEs, such as small technology businesses, is dependent on their ability to develop and deploy innovative products at extraordinary speed. They are configured for agility, fast-paced decision making and recruitment of high-value talent.

By contrast, Government organisations, including the MOD, operate within more complex mandates and constrained budgets. It is neither realistic nor efficient for the Government to attempt to replicate the private sector’s pace of innovation. The MOD must improve its procurement processes to leverage the agility of SMEs.

[Mr Dhesi]

I thank the Lib Dem defence spokesperson for allowing me to intervene. The Procurement Act 2023 was intended to make it easier for small businesses to access public sector procurement. Does she agree that it is now for the Government to set out clearly what other support will be made available to already busy SMEs, to remove the complexities and barriers as they seek to gain contracts within the pipeline?

[Helen Maguire]

I absolutely agree and will come to that later in my speech.

By focusing its limited research and development budget on adapting high potential dual-use technologies for defence purposes, the MOD can maximise innovation while delivering value for taxpayers. Furthermore, by involving more SMEs, we can manufacture critical components locally, reducing security risks associated with reliance on non-NATO or non-European allied suppliers. That approach also spreads the economic benefits, stimulating regional economies, creating jobs and fostering innovation.

Defence contracts provide stable revenue streams, enabling SMEs to invest, scale up and contribute more broadly to the economy. The previous Conservative Government let small businesses down. They created chaos and uncertainty when businesses needed certainty and stability, especially in the aftermath of the pandemic. Liberal Democrats are fighting for a fair deal for SMEs, starting with overhauling the unfair business rates system and providing more support with energy costs.

The current state of SME participation in MOD procurement is underwhelming. Only around 5% of the procurement budget is allocated to SMEs; 42% of contracts go to the same 10 suppliers. That is simply not good enough and we can do better. We welcome the announcement of a new defence industrial strategy, and we hope it is completed swiftly so that businesses can plan. I especially welcome that one of the six priorities of the strategy is to prioritise UK businesses, and another involves fostering a more diverse community of suppliers, including non-traditional SMEs. We will hold the Government to account on sticking to those priorities.

Ultimately, I want to see the strategy turn into meaningful action. SMEs need simpler access to contracts and reduced bureaucracy, including help to overcome defence-related banking challenges and support to compete on a level playing field with the largest suppliers. It is time for the Government to unlock the potential of SMEs to fuel local economies, increase the UK’s defence sovereignty and lead on innovative technologies.

17:20

[James Cartlidge (South Suffolk) (Con)]

It is a pleasure to serve under your chairmanship, Mr Stringer. I congratulate the hon. Member for Newton Aycliffe and Spennymoor (Alan Strickland) on securing an excellent and very timely debate. If I may say so, as someone who ran an SME, was involved in public procurement, and was Minister for Defence Procurement, this is a subject that gets my pulse racing. Perhaps I am an anorak, but it certainly does—particularly considering the changing nature of warfare and its extraordinary impact on procurement, which he rightly mentioned. Of course, we are talking about Ukraine.

There has been much criticism of procurement in recent years, and the Minister for the Armed Forces was pretty damning yesterday, but I am incredibly proud of what we did in government, uniquely in the world, in standing by Ukraine. That was one of the greatest procurement achievements in our country’s recent history. We shipped out there the NLAW—made in Belfast, as the hon. Member for Strangford (Jim Shannon) mentioned —despite legal advice to the Government that we should not. Ben Wallace took the risk, with the full support of then Prime Minister Boris Johnson, and we stood by Ukraine. If we had not, it may have capitulated, which would have been terrible for world peace.

That reminds us of the ethical importance of supporting the defence sector. Peace is the No. 1 ethical goal of the UN, but to have peace we need defence, and for that we need a thriving defence sector. Too often, we hear an ESG—environmental, social and governance—narrative that we should not invest in defence. As I understand it—it was in The Times—20 defence companies have either been advised against attending careers fairs because of safety fears or decided to cancel under pressure, which is shocking.

I have two specific questions for the Minister on ESG. Can she confirm that, in reviving the Higher Education (Freedom of Speech) Act 2023, the Government will seek to strengthen how protest against defence companies is dealt with on campus? The Chancellor mentioned in a speech yesterday the importance of opening up investment in the UK from our pension funds. She is 100% correct about that, but can the Minister confirm that we will be clear to those pension funds that investing in defence is ethically positive because it helps support the security of our country and the wider world?

Let me make a couple of economic points. When we talk about investment, we must understand the importance of laying out the pathway to 2.5% quickly. ADS, the trade body for SMEs in defence, is worried about the procurement freeze, tightening—whatever we want to call it—in the MOD, which is undoubtedly happening, and its impact on cash flow and confidence among defence SMEs, at a time when they are facing higher tax costs, regulations and so on. I hope that the Government can bring forward the pathway to give businesses the confidence to keep investing in the defence sector.

Equally, there is much to be positive about. The hon. Member for Newton Aycliffe and Spennymoor was absolutely right to say that because war is changing, procurement needs to change, and SMEs must play a huge part in that. There are some features of the integrated procurement model I announced that I think are particularly important. One is export. The hon. Member for Honiton and Sidmouth (Richard Foord) mentioned the Jackal, and he mentioned the Czech Republic, where I made my first ever trade visit. The Jackal was proudly on display, and I sincerely hope that that deal is successfully concluded. That underlines how, to support the defence sector, we need international market success, because our market is not big enough to support our defence sector.

Perhaps the most important point, which several colleagues referred to, is accessibility for SMEs. They can feel that it is difficult to penetrate the defence procurement system. As Minister, I spoke many times about the most uplifting experience I had in procurement, which was visiting an SME that had developed a drone that was being used in Ukraine. That is obviously very sensitive, but I can say that it had cutting-edge capability. When I was there, that SMEs was getting feedback within hours. To get that, there has to be access, at a secure level, to frontline data, so we wanted to develop far more engagement with defence SMEs at “Secret”. I strongly recommend to the Minister continuing to create that feedback loop between industry and Government, so that SMEs know what is happening.

Finally, on dual use, I was determined to recognise—if I had had more time in government, perhaps I would have got further with this—that there are so many brilliant companies in our economy that probably do not think about getting involved in defence. We need to fire up that talent base and get them involved in defence procurement, particularly in areas such as software, because that is what will drive procurement going forward. If we get the funding in place, back our defence companies and send the signal that investing in defence is morally right because of the threats we face, then we can look forward to a bright future for our defence companies.

[Graham Stringer (in the Chair)]

We have gained a few minutes. I ask the Minister to leave a couple of minutes at the end for the proposer of the debate to wind up.

17:25

[The Minister for Defence Procurement and Industry (Maria Eagle)]

I will certainly do that, Mr Stringer. This debate has been excellent, and it is good to see so many colleagues in the Chamber to participate, even if they could not make the length of speech that perhaps they had hoped. None the less, everybody was able to get the nub of what they wanted to say into the debate. For that we have my hon. Friend the Member for Newton Aycliffe and Spennymoor (Alan Strickland) to thank, because it is he who secured the debate; I congratulate him on it. I welcome this debate on the involvement of SMEs in defence procurement because this is an issue, as my hon. Friend and many others have said, that is of critical importance to the future of our military and to our capacity to deter potential adversaries.

We all know that Britain faces acute and growing dangers—conflict in the middle east, the war in Ukraine and tensions in the Indo-Pacific—and we also know that our armed forces have been underfunded and hollowed out over the last number of years, which is why we are having a root-and-branch strategic defence review to assess these threats and develop the capabilities we need to counter them. It is why we are boosting spending this year by just under £3 billion in real terms, and why we are going to set out a pathway to 2.5% of GDP on defence. I am not going to repeat everything that was said in the House yesterday on this, but I realise that it is a matter that everybody across the House is concerned about.

Our armed forces are only as strong as the industry and procurement system that supports and equips them. The procurement system itself was described during the last Parliament by the Public Accounts Committee as “broken”. It is clear that changes need to be made. My hon. Friend the Member for Newton Aycliffe and Spennymoor set out some of what he wants to see, including the ability to respond more swiftly to the changing face of warfare. A number of Members, including the hon. Member for South Suffolk (James Cartlidge), have set out some of what they have seen, during their time in this place, of that effort being achieved, particularly in respect of the support we have been giving over the past few years to Ukraine. There is nothing like an emergency situation like that to ensure that we innovate. It is important that we learn the lessons of that innovation for our procurement more generally.

I am particularly concerned, as is my hon. Friend the Member for Newton Aycliffe and Spennymoor, to get SMEs more involved in our procurement processes. He made a number of suggestions, as did other Members around Westminster Hall, of how we might be able to do that. The hon. Member for Honiton and Sidmouth (Richard Foord) mentioned Supacat, which I saw last week at the international armoured vehicles conference. Everything he said about Supacat is correct. It is an excellent example, and the hon. Gentleman was able to provide the Chamber with numbers in relation to jobs and the improved economic growth in his area that it is able to provide. That is precisely the kind of thing that we want the new defence industrial strategy, when it is published, to be able to pursue and do better with.

The hon. and learned Member for North Antrim (Jim Allister) said rightly that MOD spend in Northern Ireland is less than in some regions of England, and he quoted some numbers. He is quite right, but there is no indication that SMEs over there have less ability to innovate or to provide services of the type that the MOD needs. I hope to be able to do precisely what he asks and increase that number. I will be visiting in due course, not too far in the future, and I hope to hear from some of the SMEs that he and the hon. Member for Strangford (Jim Shannon)—who is, unusually, no longer in his place—talked about.

My hon. Friend the Member for Stockton North (Chris McDonald) talked about the Teesside defence and innovation cluster and some of the companies in his constituency. He is right: I promised him a visit—I think we are trying to organise it now. When I am considering which proposals to take forward in the defence industrial strategy, before it is published, it is tremendously helpful to hear directly from SMEs about their experience. I have already done some of that and, between now and the end of the consultation, I will be doing as much, in as many regions, as I possibly can, in all of our nations around the UK. I hope to be in a position to get a good sense of the big issues that smaller companies are raising with us.

My hon. Friend the Member for Caerphilly (Chris Evans) was passionate in making his points about late payment; this is not the first time that he has raised that issue in parliamentary settings. The Government do recognise the importance of fair payment practices. Direct suppliers to the MOD are required to sign up to the prompt payment code to be eligible for MOD contracts. The Director General Commercial recently wrote to large suppliers to remind them of that responsibility because some are better at complying than others.

My hon. Friend the Member for Plymouth Moor View (Fred Thomas) argued, “Let us not decide that all defence primes are evil”—I think that is the word he used. I thought that was going a bit far, but his point was that they are not the enemy; they can be part of the solution. There are examples of good practice, where primes have been very clear about involving small, innovative, agile companies. There are some examples that are not so good, and we need to improve the way in which small firms engage with MOD contracts, whether directly or through contracting with a prime on a particular programme.

My hon. Friend the Member for Mansfield (Steve Yemm) asked me to visit. I think I have offered to visit absolutely everybody else in Westminster Hall, so it would be churlish of me to say no to him. I cannot promise to visit before the end of February, but I can promise to come and see some of what his constituency has to offer. It obviously has a long history of engineering and of working hard in tough industries. I look forward to that visit. He mentioned that he is visiting a firm that supplies products across domains, and it sounds like he will have an interesting time.

I look forward also to dealing with the points made by the hon. Member for Epsom and Ewell (Helen Maguire). I was glad to hear her say that she is in favour of a comprehensive industrial strategy because the defence industrial strategy that we are going to bring forward is part of a thorough, countrywide industrial strategy for all Departments. She will recall that that strategy identified defence as one of the eight growth sectors on which we ought to rely to improve economic growth and spread prosperity across the nations and regions—and that is what we want to do. In fact, the defence industrial strategy that we will bring forward will act as the sector action plan for that broader strategy, so we will be joining up.

The hon. Member for South Suffolk raised the issue of protest-related activity on university campuses and what that means for the ability of defence companies to recruit the best talent. This Government recognise the crucial importance of attracting new entrants to the defence sector. Obviously, university campuses provide a way of engaging with young people who might want to work for existing companies or set up their own and get involved in the defence sector. We do need to do that. We are working closely with the Department for Education and with Skills England to address the skills landscape in the defence sector. Part of that is about making sure that young people at educational institutions such as universities can get the full range of information, at university careers fairs and so on. I hope that between all of us we can make an improvement, to the extent that there is a problem that was identified by The Times.

[James Cartlidge]

I think what everyone wants to see from the defence sector is that we champion the ethical value of investing in defence because it delivers security, and in doing so challenge those who protest as if these companies were somehow out there to harm us.

[Maria Eagle]

I agree with that and I think there would not be too much disagreement across the House of Commons about that. I think it is something we can agree on, and that we should try to get that sense out there. Increasingly, as people see the increasingly dangerous world we are living in, there is the capacity for any concerns that there might have been about defence in the past to be seen properly in context, and for it to be seen that actually, defence is a key part of our ability to continue with our way of life as we choose in a democracy.

I have a couple of minutes left before I hand over again to my hon. Friend the Member for Newton Aycliffe and Spennymoor. It has been an excellent debate. In many ways we have not had enough time to get through all the contributions that colleagues around Westminster Hall would have wanted to make, but as I go about trying to deal with our defence industrial strategy, it is helpful for me to hear from colleagues, just as it is helpful for me to get around the country as much as I can to listen directly to SMEs. It helps make sure that the policy prescriptions we come out with in the defence industrial strategy are the right ones; that we can change procurement in a way that will assist SMEs to have full involvement as they wish in defence procurement; and that we can spread prosperity and economic growth across all our regions in England and all the nations of the UK. That is the prize in front of us, and that is what we can do if we get this right.

17:37

[Alan Strickland]

I thank the Minister for her strong leadership on this vital issue. We have discussed these matters on a number of occasions and I know the Minister is committed to really driving this priority through the defence industrial strategy and the wider strategic defence review, which I strongly welcome.

I also thank hon. Members around Westminster Hall for what I think has been a strong shared sense of purpose about the importance of tapping in to our innovative small businesses to meet the challenges we face. We have heard about the real pride in defence contractors around the country from the hon. Member for Honiton and Sidmouth (Richard Foord), my hon. Friend the Member for Mansfield (Steve Yemm) and my hon. Friend the Member for Middlesbrough South and East Cleveland (Luke Myer). We have heard of the importance of ensuring that economic growth across the country is driven by the defence industry from the hon. Member for Strangford (Jim Shannon) and the hon. and learned Member for North Antrim (Jim Allister). We have also heard really important points about payments from the hon. Member for Caerphilly (Chris Evans). I thank the Minister and everybody who has taken part today.

We have all acknowledged that the global threat is growing, becoming more complex and evolving much more quickly. There has been broad agreement that part of the answer is ensuring that we can open up more opportunities to small, nimble, agile high-tech SMEs across the United Kingdom which can be at the forefront of helping us and our allies to meet this challenge.

Question put and agreed to.

Resolved,

That this House has considered SME participation in defence procurement.

17:39

Sitting adjourned.