Despite ongoing involvement in Afghanistan and Libya, UK Defence officials have steadfastly denied any need to review budget cuts. It can’t be denied, however, that new threats are mounting and rising tension across the Middle East, threats to cybersecurity and the ongoing war against terror will all make for a hot-blooded UK defence market to 2015.
In 2010-15, UK defence expenditure will grow at a compound annual growth rate (CAGR) of nearly 2% but will decline by a value of approximately $10m according to market data from ICD research titled ‘UK Defence Industry – Market Opportunities and Entry Strategies, Analyses and Forecasts to 2015’.
Defence expenditure in the UK is driven by its active participation in Afghanistan and Iraq, and domestic anti-terrorism activities. Budget cuts through the government have, however, forced a reduction in size of the UK military reducing military expenditure and a decrease in defence imports, and an increase in exports.
The UK will be bolstered, however, by remaining an attractive destination for foreign defence companies due to its relaxed foreign direct investment (FDI) and offset policies. Also, 11 of the world’s top defence companies reside in the UK.
Defence expenditure to decline in the forecast period
From 2005-09, UK defence expenditure increased at a CAGR of approximately 1.50% and was valued at just under $65bn. This growth was primarily due to the UK’s active participation in anti-terrorist activities in Iraq and Afghanistan, and its involvement in UN peacekeeping missions. For the same reasons, UK defence expenditure is expected to increase at a CAGR of over 2% from 2010-15, and value just over $55bn. However, this represents a decline in value of $10bn.
Capital expenditure allocation will increase by over 25% due to the Ministry of Defence’s (MoD) modernisation plans, and defence capability expenditure is set to hold the highest allocation of capital expenditure in the forecast period. Homeland security expenditure will register a CARC of approximately -3.5% from 2010-15, and decline by $10bn. The UK expects to allocate a large amount of its homeland security budget on a cyber security programme and long-term cyber security research, and savings will be made through efficiency measures in the police service.
Peacekeeping, war and anti-terrorism activities drive UK defence industry
The UK is involved in peacekeeping operations in Libya, Afghanistan, Iraq, Sudan and Cyprus through the UN, and it is a member of the EU and Nato.
The UK has nearly 10,000 troops in Afghanistan and 150 Royal Naval and Royal Marine personnel in Iraq. The war and peacekeeping effort in Afghanistan cost the UK over $6bn from 2009-10 alone, and in the same year, operations in Iraq cost nearly $550m.
In addition to this, the level of terrorist activity in the UK has increased since the 2001 11 September attacks in the US, and this has led to UK involvement in international military operations against the Taliban and al-Qaeda. In July 2005, the UK was attacked by terrorists who killed 52 citizens, and as a result the UK’s terrorist threat level is high. The government therefore invests heavily in border security, including electronic checks of all people entering the UK against police and immigration watch lists.
The total cost of the ongoing war in Libya, is at the time of writing, unclear. Industry sources suggest the cost to be at £200m, an amount that could rise depending on how long the conflict continues. At present, it has been suggested that the MoD will foot the bill, with the option to claim some expenses from government special reserves.
War pension benefits to decline in forecast period
Since 2007, defence budget allocation for war pensions has declined, and in the forecast period this is expected to register a CARC of nearly -4%. From the review to the forecast period, it is expected that the amount paid out in war pensions will decline by about $2m due to the UK Government’s plans to reduce its military by over 40,000 personnel.
Defence budget cuts will reduce imports but increase exports
From 2005-09, of total defence imports, over 50% came from the US and approximately 30% from Europe, and in 2009 Singapore entered the UK defence import market with a market share of nearly 30%.
In the review period, aircraft, missiles and armoured vehicles accounted for the largest amount of UK imports due to its ongoing operations in Afghanistan.
As the UK defence budget is set to decrease from 3% of GDP to 2% of GDP in the forecast period, imports will decline in line with this.
In this period, the UK was the fifth-largest arms exporter in the world due to its advanced technological capabilities. A large amount of these exports were destined for the US, India and Saudi Arabia, and the vast majority of these, nearly 80%, was aircraft and aircraft parts. Due to the UK’s planned defence budget decrease in the forecast period, exports are set to increase and it is expected that jets, helicopters and electronic systems are likely to account for the largest amount of exports.
The UK has flexible offset regulations and high levels of FDI
The UK allows 100% FDI in its defence industry, and this means foreign companies are able to acquire a domestic company or form a subsidiary in a domestic company with relative ease. The UK houses 11 of the top 100 defence companies in the world, and a further 20 have significant operations in the country. It also has a minimum offset range of 100% of a contract value, which ensures interest from many companies. Eligible offset activities include UK companies carrying out work on an MoD programme, a free of charge technology transfer with a UK company, and research and development (R&D) activities.
However, the UK government’s preference of awarding defence contracts to UK and European countries may be detrimental for companies based outside of the EU. According to EU procurement regulations, preference must be given to EU firms over non-EU firms when awarding contracts to similar financial and technical bids.
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