Defence Committee
Tuesday 20th October 2026
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11:54
Speaker 1
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Speaker 1
The fact that the tech industry particularly. But I also think it's true of the broader defense industry is an international industry. And therefore, what countries need to do is to understand what capability they need, understand what they have, the capacity and the and the ability to provide for themselves and invest in that, focus on that, analyze what capability gaps they have, and then work out which trusted partners they're going to get that from. And then look at how do they control that when they have it? How do you make sure it can't be switched off?
How do you make sure you've got then choices in the event that you, you need to have a, you know, an alternative approach. And we think that is much more helpful in the context of our international defense industry and our broader international tech industry than saying by British, because if you say by British, you're really giving a license to. And the EU is the one that's currently doing this mostly to say, well, you should buy EU then.
And they've shown they're capable of doing that. And if we give them a justification.
How do you make sure you've got then choices in the event that you, you need to have a, you know, an alternative approach. And we think that is much more helpful in the context of our international defense industry and our broader international tech industry than saying by British, because if you say by British, you're really giving a license to. And the EU is the one that's currently doing this mostly to say, well, you should buy EU then.
And they've shown they're capable of doing that. And if we give them a justification.
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11:55
Speaker 1
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Speaker 1
And we've said to to the government repeated again this morning the Chancellor. This is not just a business department issue. It's not just the you know, Minister Falconer's responsibility. This must be a central plank of the EU discussions. And we have plenty of value to add. I won't call it leverage because you get into strange diplomatic places there. The UK has a lot of value in both of these conversations, and I don't think we push that enough.
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11:56
Speaker 3
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Speaker 3
So look, we welcome the desire to drive up UK industrial capability and capacity. But the definition of sovereignty and we've been working with the Mod. I think we've run now 4 or 5 workshops on how to derive an appropriate definition of sovereignty. But that's got to be focused on the substantive economic and national security value to the UK, rather than just a registered address, you know, so we really have to be clear, it's at that capability level rather than a pure sort of brass plate on the door type of level, because we are a very open economy already.
We have a large number of heritage British firms that have been acquired by foreign headquarters, and they have treated those firms and the workers with respect, and they still have a significant part to play in this conversation. The the geopolitical points in terms of competition with Europe is an important one which needs to be addressed at the UK, EU security pact level, rather than a made in Europe or by British level, which is sort of punch and Judy.
We have a large number of heritage British firms that have been acquired by foreign headquarters, and they have treated those firms and the workers with respect, and they still have a significant part to play in this conversation. The the geopolitical points in terms of competition with Europe is an important one which needs to be addressed at the UK, EU security pact level, rather than a made in Europe or by British level, which is sort of punch and Judy.
11:57
Speaker 2
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Speaker 2
You think we'll get a a kind of shared view of what constitutes adequate definition of British for purposes of sovereignty from your organisations? Or is really the argument going to be much more specific about capability? Obviously, some of our most important capabilities, as you pointed out, are owned by foreign companies. Steven.
11:58
Speaker 4
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Speaker 4
Jesse, I would say, I mean, when I was the head of defence exports for the government, we were very clear about where sovereign capability was, and there were a number of its well controlled within the Mod about how we protect the IP, how we have Chinese rules, and how we make sure that none of that leaks out, because that's obviously critical to the defence of the country. So they're quite good at defining that. I think the frustration around and we've all had the workshops, we've all done the gold, silver, bronze and everything else, what different flavors of.
And actually it happens in other sectors as well. Just to say it's not limited only to defence. I think Julian's point is not to be underestimated here about Made in Europe. We're in a very difficult place with Industrial Accelerator Act at the moment, and the more we go out on the TV saying by British, the more we're not going to be part of the European system, which accounts for nearly half the exports of the country. So really serious place we're in at the moment. And I've just spent two days with my counterparts across Europe doing Made in Europe in actually we did it in Madrid for two days, which sounds lovely, but it was commission work.
Brutal.
And actually it happens in other sectors as well. Just to say it's not limited only to defence. I think Julian's point is not to be underestimated here about Made in Europe. We're in a very difficult place with Industrial Accelerator Act at the moment, and the more we go out on the TV saying by British, the more we're not going to be part of the European system, which accounts for nearly half the exports of the country. So really serious place we're in at the moment. And I've just spent two days with my counterparts across Europe doing Made in Europe in actually we did it in Madrid for two days, which sounds lovely, but it was commission work.
Brutal.
11:59
11:59
Speaker 4
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Speaker 4
Thank you. And we are not in a good place. And the and the and the French government is very much against the UK being part of this. Yes, quite. Which will substantially affect all of us, not just in defence but in other sectors as well. So. So we have to be there's a balance here, but I, I would just reassure the Committee that my experience, without going into too much detail, because we can't, is that this is very well controlled about making sure we protect. The frustration often is about buying purely American platforms without any noble UK work happening here.
That sort of thing is, I think, is what we're trying to get to in terms of doing more in the UK. Yeah.
That sort of thing is, I think, is what we're trying to get to in terms of doing more in the UK. Yeah.
11:59
Speaker 2
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Speaker 2
I suppose the other question arises is, is look, when when the guano starts flying, the whole sector is going to go. Europe is going to go into some kind of lockdown. Right? At that point, we've got to know that we've got the things we need on hand. Right? We can't. It'll be like the global financial crisis everyone thought they could sell. It turns out no one could sell because the market had fallen so fast.
So how does that get out? How do we build that into the picture?
So how does that get out? How do we build that into the picture?
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Speaker 1
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Speaker 1
Yeah. And understanding if we're getting it from somewhere else, do we control it? Yeah. And, and, and, and then it's much also a case of, you know, grow the British industry base here, including foreign investment, as Kevin and Stephen have pointed out, which is very willing generally to actually invest and to give us that, that kind of security. And you can do a lot by really getting on, by investing and encouraging SMEs directly. You can do a lot by using the Procurement act, social value. All of those things are available to be used, which don't say this is a nationalistic exclusion.
It just says, these are things where we're trying to to make a difference.
It just says, these are things where we're trying to to make a difference.
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12:01
Fred Thomas
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Fred Thomas
Thank you chair. Yes. So post Dipp, which we are living in now, we are expecting, of course, this defense finance investment strategy to come forward. And we have this investment summit, which we're all looking forward to pretty soon. So I want to ask you some questions around that , and also around the currency of the Dipp, particularly as regards AI and emerging technologies, which maybe I can come to yourself, Julian, around the emerging technologies in a second. But but Kevin, can I ask you the this defence coming forward, what do you think are the key things that it needs to clarify so that people are kind of clear, clearer of what to produce and what to invest in?
12:01
Speaker 3
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Speaker 3
Yes. So I mean, private finance and capital follows viable markets. And at the moment, you know, defence does not necessarily here in the UK represent a very attractive market for defence investments. So that longer term certainty, which we've discussed at length this morning, is a key component of that. But equally the attractiveness of the mod as a customer. So those investors don't want to pay for the poor performance of the mod as a procurer, for example, is something that is unhelpful. Risk sharing is probably one of those things that is important to understand. Again, you know, investors are not attracted to high risk ventures, which by definition defence feels like in some instances.
But there is defence infrastructure, which is much less low risk. And the recent announcements on the mobile docks for the Clyde was a really good example of something which could be funded perhaps by private finance as an example. So there's a number of things, but I'd maybe just also draw attention to SMEs financing. And we've talked about the difficulties they face in procurement, but equally face a challenge in terms of funding for working capital, bonding , insurance, that type of thing. And again, in the same way as the Mod has challenged in terms of the capacity to address 7 or 8000 suppliers, the finance industry and the capital investment industry in the UK is also wrestling with finding viable SM pathways for investment.
But there is defence infrastructure, which is much less low risk. And the recent announcements on the mobile docks for the Clyde was a really good example of something which could be funded perhaps by private finance as an example. So there's a number of things, but I'd maybe just also draw attention to SMEs financing. And we've talked about the difficulties they face in procurement, but equally face a challenge in terms of funding for working capital, bonding , insurance, that type of thing. And again, in the same way as the Mod has challenged in terms of the capacity to address 7 or 8000 suppliers, the finance industry and the capital investment industry in the UK is also wrestling with finding viable SM pathways for investment.
12:03
Fred Thomas
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Fred Thomas
Do you find that you have SMEs who are accessing financing from high street banks in a slightly more risky way? And the context of that question is, I'm briefed by a number of high street banks that they have what they would call venture debt teams, where they're very keen to apparently support growing British startups such that they wouldn't have to sell equity to venture capital funds, but could borrow money from high street banks. Are your members doing that, or how what does that look from an industry point of view?
12:04
Speaker 3
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Speaker 3
We're working with a number of the high street banks, not all of them by any stretch of the imagination, who are better at supporting SMEs in their difficult journey. Some of it is a second tier problem. So, for example, using a contract award as a surety for mezzanine type finance or debt finance, in terms of that's hard to come by in the current climate, but they are as is any as many sectors are attracted into defence and the possibilities of participating. Because globally, defence spending is up sort of 25% 30%. It simply hasn't manifested here in the UK at the same speed.
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12:05
Speaker 4
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Speaker 4
Just a few comments on the financing part because we do this not only in defence but across the rest of the manufacturing sector. We have got some we can get start up financing in the high street. Banks have got a role to play in that. We've seen still see some banking in the defence sector, which is another subject we might want to get on to separately, even though the larger banks have done a much better job recently than we saw. But some of those smaller banks are still very challenged with it. But what is a real problem?
And actually the government's done quite well with the British Business Bank and the National Wealth Fund about financing those SMEs. What is a big problem in this country is series B funding. This is a big problem. So series A getting that start up, getting it going fine once they get going and then they want to build a factory, they want to do the next round of financing. The last five deals in the manufacturing sector this year all went to the Americans, all of them. And no financial institution in the UK wants to pick them up.
We've got a serious problem, something we talk to Treasury about every week at the moment, about why is it that this patient capital is not available to on the series B in particular, and why is it National Wealth Fund are in that series A and then won't go on to series B and help the next stage of development of those companies. So there's a whole area there that needs exploring. But we are an outlier. And the American the American companies are taking advantage of it. So some of our high tech businesses, not specifically in defence, recently have gone to American investors because they will take the risk of serious B and we won't.
So there's something around there, and there's still something around D banking, which we need to address on the defence sector as well. I would say.
And actually the government's done quite well with the British Business Bank and the National Wealth Fund about financing those SMEs. What is a big problem in this country is series B funding. This is a big problem. So series A getting that start up, getting it going fine once they get going and then they want to build a factory, they want to do the next round of financing. The last five deals in the manufacturing sector this year all went to the Americans, all of them. And no financial institution in the UK wants to pick them up.
We've got a serious problem, something we talk to Treasury about every week at the moment, about why is it that this patient capital is not available to on the series B in particular, and why is it National Wealth Fund are in that series A and then won't go on to series B and help the next stage of development of those companies. So there's a whole area there that needs exploring. But we are an outlier. And the American the American companies are taking advantage of it. So some of our high tech businesses, not specifically in defence, recently have gone to American investors because they will take the risk of serious B and we won't.
So there's something around there, and there's still something around D banking, which we need to address on the defence sector as well. I would say.
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12:07
Fred Thomas
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Fred Thomas
Tracking. Yeah. Let me come back to my question, Julie. We're talking about the dip and I'm moved us on to talk about defence investment strategy and the summit that's coming up. There's an element where the SDR was written in 2020 425. Dip was written in 2526. We're now sort of in 26, 2027. Some of the movement with AI is so recent, there's unreasonable to expect that it would be accommodated and acknowledged in a document written two years ago. So you know, how current is the dip from a tech point of view, how urgently do you think we need to review procurement decisions based around shifts in technology?
12:07
Speaker 1
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Speaker 1
So I think the, the point about the, the dip and the SDR is they did talk a lot more about outcomes. And one of the things that's bedeviled government contracting the past is they actually try and specify inputs and they try and actually say, we want this, not this, this capacity, not this meet this requirement. They actually say we need, we need this kind of technology in this kind of approach. So that was welcome. We would like them to go even further and actually shift, you know, to, to software being the core of, of, of everything and equipment being brought in to work around the software core and the, and the secure compute and the secure comms infrastructure to go with it.
So, so the dip in itself doesn't need to, to keep pace with which is the best AI model. And they never will. What needs to happen is they need to have this idea of a software enabled approach so things can be modified and changed. So we so we don't get into the situation where we've got to cut the hole holes in the side of ships that were being built, because the computers that are in there need to be changed and they can't actually be taken out. Yeah. You know, so, so we need to shift to everything being designed around the idea that that it will be upgraded, it will be changed, components will be swapped in and out in, in an architecture.
And if we do that, that's fine. I would like to, to sort of pick up on, on the procurement point, because what we find all the time, both in defence tech , but also in dual use tech, is that there is not an appetite for the long term in investment in the UK. So companies in all parts of emerging tech find a much better conversation when they talk to us, particularly investors that that.
So, so the dip in itself doesn't need to, to keep pace with which is the best AI model. And they never will. What needs to happen is they need to have this idea of a software enabled approach so things can be modified and changed. So we so we don't get into the situation where we've got to cut the hole holes in the side of ships that were being built, because the computers that are in there need to be changed and they can't actually be taken out. Yeah. You know, so, so we need to shift to everything being designed around the idea that that it will be upgraded, it will be changed, components will be swapped in and out in, in an architecture.
And if we do that, that's fine. I would like to, to sort of pick up on, on the procurement point, because what we find all the time, both in defence tech , but also in dual use tech, is that there is not an appetite for the long term in investment in the UK. So companies in all parts of emerging tech find a much better conversation when they talk to us, particularly investors that that.
12:09
12:09
Speaker 1
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Speaker 1
Yeah. And and that's why they are so prominent in our funding landscape. And that's why there are so many trade acquisitions as well, because these these people all have a longer term view of what's going on. And they're prepared to offer much higher valuations. They think they're getting bargains. Our investment community seems to think there's something they don't want to pay for.
12:10
Fred Thomas
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Fred Thomas
Can I ask you very quickly, since the dip came out, the government has stood up sovereign AI as a solve AI, the fund run out best. So there's different bits of government procuring AI. It's perfectly reasonable. You could say every government department should be procuring AI. What does that look like from an industry point of view? And who is kind of seen as the the moving, most kind of progressive bit of government that's moving forward with, with AI.
12:10
Speaker 1
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Speaker 1
So look, there are there are two elements to AI, I would say simplistically. One is that the development of the frontier, the, the, the new type of AI, which is, which is actually becoming quite an interesting and varied environment now with with various options there. So solve AI is a, is a very welcome and, and useful development. And then there's applied AI, which is what can you do now with it? I think, and I'll ask colleagues, their perspective is as well. I don't see a lot of connection between the activities of the AI and the necessity for national security and defence.
There didn't seem to be any connection. I would also highlight the fact that we have a, you know, a futuristic investment vehicle and discovery vehicle called Aria, supposedly modeled on DARPA. Again, I don't see any connection between that and defence and security requirements. So, you know, we do seem to have a lot of initiatives that don't fit to a national purpose, particularly one around resilience and and defence.
There didn't seem to be any connection. I would also highlight the fact that we have a, you know, a futuristic investment vehicle and discovery vehicle called Aria, supposedly modeled on DARPA. Again, I don't see any connection between that and defence and security requirements. So, you know, we do seem to have a lot of initiatives that don't fit to a national purpose, particularly one around resilience and and defence.
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Speaker 2
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Speaker 2
Thank you very much indeed, chair. For interesting comment earlier on about the Defence Office of Small Business Growth and how it was for people, rather than 29 in it at the moment. Can we just focus on that for a second and just talk a bit about whether it's been effective? Took a while to get set up, what it's doing, what your read is on it.
12:12
Speaker 3
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Speaker 3
I'm happy to start. So, so look, we are very supportive of the concept. I think as with many things in the dip, the funding of the resource required to deliver it to full implementation is a challenge. And at the moment it is more of a signposting function and information function than it is an actual helping individual SMEs to work within the defence sector. So great concepts and some good ideas, but still limited in its effectiveness in terms of changing the landscape for our SMEs.
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Speaker 4
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Speaker 4
Yeah, absolutely agree. I agree, but so so yes, we're in that first phase at the moment of set up. I think having a single front door, as Kevin said for SMEs is a good idea. Very good idea. We haven't had that before and should act as a champion. We want to see them being more front footed when they get to FOC. Absolutely critical. They do that, so we're giving them a little bit of the benefit of the doubt at the moment until they now declare that they're fully operational and off and running, but we are engaged with them.
And I think that's a good thing.
And I think that's a good thing.
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12:14
Calvin Bailey
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Calvin Bailey
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Speaker 1
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Speaker 1
There's no KPIs on the way. And if you if you look at what they, you know, everything that they say, they talk about, we are going to do this not, you know, Billy Smith or Sally Scott. It's, you know, we really think if you're in business, if you want to change something, you put somebody responsible for it, you give them targets and you have a periodic reporting on how it's going. And we don't see that.
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Speaker 2
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Speaker 2
No. Quite so so so in terms of looking at it from the point of view of a of a defence small business, you'll be aware that this kind of links to other conversations we're having to some extent, where you end up as a company is often being driven, not as it were, headfirst, but tail first, because the lack of defence orders, the slowness in creating defence demand then causes companies to go into a kind of status where they're trying to build capability, but they don't have the revenue to do that. They might have foreign revenue, might have quite a lot of foreign revenue.
You know, Norway, Scandinavia, the US, the Gulf, places like that, UK revenue. So they're running out of credibility locally, possibly with their financial institutions. Then of course, a VC comes up to them and says, great, take some money. And then once you're on that treadmill, you know, you're, you're, you're having to feed the, the demand for growth possibly faster than you think the market actually, or the product actually needs. Do you see that in your own businesses?
You know, Norway, Scandinavia, the US, the Gulf, places like that, UK revenue. So they're running out of credibility locally, possibly with their financial institutions. Then of course, a VC comes up to them and says, great, take some money. And then once you're on that treadmill, you know, you're, you're, you're having to feed the, the demand for growth possibly faster than you think the market actually, or the product actually needs. Do you see that in your own businesses?
12:18
Speaker 4
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Speaker 4
Definitely. We see that all the time. I think I mean, we've we've got thousands of SMEs in the community and they their focus is on either they are dual use, i.e. they've got another market they're servicing. So they're in automotive, for example, and in defence or aerospace to be more, more, more accurate, or they're in exports and they're doing well. There's very few doing just mod work.
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Calvin Bailey
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Calvin Bailey
We find that, you know, there are other government departments that are doing some brilliant work on market pre engagement and, you know, signalling where the pipelines are coming from, how much will be spent, you know, which are the regions that they want to engage with and going out there and getting those SMEs ready and informed about what's ahead. Now that in itself is, is a huge move and it makes all the difference in the world. So, you know, when someone has to make a decision, do I go abroad? But if if I'm being engaged with by Mod saying, look, this is coming down the tracks, you know, those businesses can then prepare rather than being caught by surprise.
So this is a really important part of what we want our mod to do as far as FSB is concerned.
So this is a really important part of what we want our mod to do as far as FSB is concerned.
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12:21
Tanmanjeet Singh Dhesi
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Tanmanjeet Singh Dhesi
Thank you. I just want to come on to a couple of issues that the committee has raised previously. Firstly, around MDM and the SRB. So we know that the government has made a commitment of about £400 million to the multilateral defence mechanism with the UK, Netherlands, Poland and also Finland contributing to that joint procurement. But at the same time, we don't have any clarity around the defence, Security and Resilience Bank. What are your views on the SRB? Should we be in or out and are you expecting a decision on that? Within the Defence Finance and investment strategy?
Short, clear answers would be good because we've had a lot of woolliness around some of this, so we just be good. Are you in favor or not? And are you expecting this to be announced within the d. FIS? Mr. Craven.
Short, clear answers would be good because we've had a lot of woolliness around some of this, so we just be good. Are you in favor or not? And are you expecting this to be announced within the d. FIS? Mr. Craven.
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Speaker 1
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Speaker 1
I think, you know, we don't we don't really know because we don't know whether our technologies are going to be included in the defence, security and resilience bank provisioning. If it is, that will be a good thing. I think on the MDM, again, more significant to us is the NATO Communications and Information agency role in this space. Again, if it gets expanded to include more dual use and more tech, that will make a difference. And I refer you back again to if we get locked out of Cada, that will make all these other things less.
We estimate it's going to be a 30 to £60 billion hit to the UK economy. If we don't have a trusted status over five years.
We estimate it's going to be a 30 to £60 billion hit to the UK economy. If we don't have a trusted status over five years.
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Tanmanjeet Singh Dhesi
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Tanmanjeet Singh Dhesi
Yeah brilliant. All right. That brings me on to the last point. Before we wrap up for today. We couldn't get a clear answer from either the defence secretary or the permanent secretary or anybody else regarding why the UK is not making better use of the NATO Support and Procurement agency. So. Mr.. You mentioned it. Why do you think that is?
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Speaker 3
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Speaker 3
In actual. fact the problem is getting worse. In 19. In 2022, we were the fifth largest user of the Nspa. We're now the eighth largest and during that time the size of the Nspa budget has trebled. So it's a significant problem and we strongly recommend that we should be better engaged in making more use of it.
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Tanmanjeet Singh Dhesi
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Tanmanjeet Singh Dhesi
Very sobering thought on which to end. Thank you so much for your time that you've taken. As was mentioned, you're all very, very busy individuals with respect to your trade associations. But I think that has really helped to inform not just the committee in terms of future deliberations, but also the wider public as to the importance of taking full advantage of what the Dipp has to offer and the implications that have been on your sectors. Thank you very much.
And with that, I call to order today's House of Commons Defence Committee evidence session. Order.
And with that, I call to order today's House of Commons Defence Committee evidence session. Order.