SME participation in defence procurement
A Westminster Hall debate on SME participation in defence procurement is scheduled for Tuesday 28 January 2025, from 4:30pm to 5:30pm. The debate will be led by Alan Strickland MP.
In October 2024, the Department for Business and Trade published an industrial strategy green paper, entitled Invest 2035: the UK’s modern industrial strategy. The green paper identified defence as one of eight “growth-driving sectors” which will be prioritised by the government. The paper described the UK’s defence sector as a “global leader”, with government defence spending supporting around 434,000 jobs across the UK. The paper said that defence “drives innovation through investment in research and development”.
However, the green paper also argued there has been a “lack of UK government strategy on its defence industrial base in recent years” and that the government “needs to address issues that inhibit or prevent growth in the defence sector”.
The green paper said the Defence Secretary will commission a defence industrial strategy which “will be the sector plan for defence in the industrial strategy”.
A consultation on the industrial strategy closed on 24 November 2024 and the government said it expects to publish the final industrial strategy in spring 2025, alongside the multi-year spending review.
Defence Secretary launches defence industrial strategyOn 2 December 2024, in a written statement, the Defence Secretary announced plans to develop a new defence industrial strategy, to be published in late spring 2025. He said the aim is “to produce a better, more integrated, more innovative and more resilient defence sector”.
The MOD published an accompanying statement of intent for the strategy, in which the Defence Secretary committed to “reform procurement to reduce waste” and ensure industry “can innovate at the pace of the threat to stay ahead”. The statement of intent set out six priorities around which the strategy will be developed:
- Prioritise UK businesses. This includes promoting UK based businesses without losing the benefits of competition, promoting UK leadership related sectors and technologies, and boosting sovereign defence industrial capacity.
- Create partnerships. The MOD suggests it will create new research and industrial ventures between itself and industry to “broaden the spectrum of capabilities and technologies we can produce together”. This also encompasses working with allies to “identify common military requirements, collaborate on capabilities to boost production and support our respective strengths in different parts of the defence value chain”.
- Certainty and stability. The MOD intends to “send signals that enhance the incentives for long-term investment in the UK in order to crowd-in private investment alongside public money”. The MOD wants to mobilise the private sector, including SMEs, technology companies, innovators, and private capital.
- Seize the future. Increasing the pace of procurement, research and innovation and the acquisition of “new, clean and emerging technology” will involve a more diverse community of suppliers, including nontraditional SMEs, and exploit civil technology and ensure the “rapid pull-through of early-stage technologies”.
- Spread prosperity. The MOD intends to use defence procurement and investment to “actively generate wealth, boost export potential and create high quality jobs”.
- Ensure the strategy also “enhances the credibility of our deterrence against aggression” and supports the UK in fulfilling its NATO commitments.
The MOD said it will be a sector plan as part of the wider government’s Industrial Strategy.
Stakeholders can respond to the statement of intent by 28 February 2025. The MOD says it will then engage in “extensive consultation” with the sector.
The Minister for Defence Procurement, Maria Eagle, speaking at the International Armoured Vehicle Conference on 21 January 2025, said the MOD is currently consulting industry and trade unions to “help shape” the strategy.
The strategy and SMEsThe Minister for Defence Procurement, Maria Eagle, has said that the statement of intent “recognises our intention to foster a more diverse community of suppliers, and will prompt a refresh of our SME Action Plan”.
This is a reference to MOD action plan for SMEs, published by the previous government in January 2022. In that plan, the government noted both the benefits SMEs bring to defence with some of the challenges they face:
We recognise that Small and Medium-sized Enterprises (SMEs) are at the heart of the vibrant and flexible UK defence industry supporting a wide variety of high quality jobs across the four nations of the United Kingdom. However, we also recognise that these smaller businesses face unique challenges and barriers preventing them from fulfilling their potential of delivering both defence capability and contributing to UK prosperity.
The action plan set out a series of commitments with a timeframe for implementation. It also reflected on action taken since the first SME action plan was published in 2019. The SME action plan also refers to the Defence and Security Industrial Strategy, published in March 2021 by the previous government.
Marie Eagle has said SMEs make a “vital contribution to economic growth” and are a “valuable source of technical innovation in defence”. In early January, the Minister said the MOD is working with industry partners to “develop a new SME Action Plan which will simplify and make more accessible opportunities to Defence contracts for smaller suppliers.”
New procurement legislationThe Procurement Act 2023 will repeal and replace the existing Defence and Security Public Contracts Regulations 2011 (DSCPR) from 24 February 2025.
The act introduces a single system for public procurement, repealing and replacing several regulatory systems including the DSPCR. It includes specific defence and security provisions that provide derogations and flexibility to cater for the ways defence and security contracts may operate compared to other public contracts.
During second reading of the bill, then Cabinet Minister, Alex Burghart, said the bill would “accelerate spending with small businesses”.
Maria Eagle, the Minister for Defence Procurement, has said the act should make it easier for small business to access public sector procurements, highlighting the requirement for contracting authorities to “consider barriers to participation and whether they can be removed or reduced”.
Section 4.7 of Commons Library briefing Procurement Bill 2022-23 provides more information on the bill and SMEs.
Spending on SMEsThe 2022 SME action plan set a target “that 25% of our procurement spend will go directly and indirectly to SMEs in 2022”. The plan said progress against this target would be reported in the Cabinet Office’s reporting of central government with SMEs. The most recent report was published in August 2023 and covers financial year 2021/22. This showed that 25.5% of MOD spending was with SMEs, most of which was indirect expenditure.
The MOD’s annual regional expenditure with industry bulletins provides data on direct spending on SMEs (so does not include indirect expenditure). This shows that 4% of MOD direct expenditure with UK industry was with SMEs in 2023/24. The bulletin also shows MOD expenditure with SMEs by region; the top 3 regions with the highest proportion of expenditure with SMEs were the North East, the West Midlands, and Yorkshire and the Humber.
The Conservative government approachCommons Library briefing Defence procurement reform summarises the approach taken by the previous government.
This includes the MOD’s announcement in early 2024 of a new integrated procurement model for defence, intended to speed up acquisition, reduce over-programming (more programmes than there is money for) and to make more informed decisions on procurement at an early stage. An accompanying booklet explaining the model was laid in the Library by the then Minister for Defence Procurement, James Cartlidge (now Shadow Defence Secretary).