Defence Procurement: Small and Medium-sized Enterprises

Tanmanjeet Singh Dhesi Excerpts

Tuesday 28th January 2025 Westminster Hall

[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.

--- Later in debate ---

[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.