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Defence manufacturers are urging the government to use private finance models to fill capability gaps as Britain looks to rearm rapidly.
They told PoliticsHome that ministers using private finance will ease pressure on the taxpayer as the government prepares to ramp up defence spending.
In February, the government announced it would increase defence spending to 2.5 per cent from April 2027, with the goal of reaching 3 per cent within the next Parliament.
Prime Minister Keir Starmer described the defence challenge facing the UK as “generational” as it prepares to provide military protection for a potential peace deal in Ukraine.
The pressure on the UK and other European governments to increase their defence has also come from president Donald Trump signalling that the US will play a reduced role in defending the West militarily.
Ministers took the controversial step of lowering aid spending to help fund the rise in defence spending, which Starmer said was an “extremely difficult” decision.
The government has said more difficult choices must be made to help boost the UK’s defence capabilities. Major welfare reforms announced on Tuesday by Secretary of State for Work and Pensions Liz Kendall upset many Labour MPs.
Defence manufacturers are now calling on the government to use private finance for procurement to save large outlays of public money on state-funded capital projects in the short term.
Tristan Crawford, chief executive officer of defence aviation firm Aeralis, told PoliticsHome that while the defence spend increase announcement was welcome, the government would inevitably have to make “very hard choices” on how it spends taxpayer money.
He said the government should instead turn to private finance models to access funding for defence equipment procurement, which would save the public an “enormous amount of money”.
Taking the example of procuring aircraft for the Ministry of Defence (MoD), he said that private financing could “pay the capital cost” and then “sell hours of access to those aircraft through a long-term contract using the MoD’s operating budget”.
He said this arrangement would “remove billions of pounds worth of capital spending out of the equation for taxpayers” as the public “don’t pay upfront”.
The government’s operating budget covers departmental day-to-day spending, while its capital expenditure covers any longer-term investment into material assets. The MoD’s operational budget is currently set at around £45bn, while its capital budget is roughly £21bn.
Crawford said Aeralis “remains committed” to offering government an advanced jet trainer aircraft system funded through industry, meaning the MoD would pay “more through its operating budget” than its capital budget.
The MoD is currently spending around £50m a year to send pilots abroad for training due to a lack of planes in the UK.
“That training should absolutely be done in the UK by the Royal Air Force, using private industry to take on the capital expenditure of bringing in a new aircraft and providing it as a service to the RAF training school,” said Crawford.
Crawford has now submitted his proposals for private financing to both the Strategic Defence Review and Treasury Spending Review.
“It is the only way in our humble opinion that the government is going to get the capability that it wants for the money that it has,” he said. “This is a widespread view across the industry that we can actually use that operating budget outside of public investment.”
Relying on private finance for government spending is gaining traction in other government departments. For instance, Health Secretary Wes Streeting recently said he is “very sympathetic to the argument that we should try and leverage private finance” and that he was “open to serious proposals from the NHS, or indeed anyone else”.
Using private finance would not be “saving money over the long term”, said Thomas Pope, deputy chief economist at the Institute for Government think tank, because the regular payments made to industry would “add up to the same” as the initial capital outlay.
However, he said: “The point is that they can spread that out over a much longer timeframe, in a context where we’re trying to increase defence spending quickly.”
Paul Everitt, chair of the Aerospace Technology Institute, said that using private finance is “much more expensive” because the government would be paying out of its current budget, not its capital budget.
However, he said the government would need to make a trade-off between the need to rearm and the higher price incurred through such contracts.
“If you need some assets now, then you might be prepared to accept that over the total life of that asset, costs will be a bit higher than if government had paid for it itself,” he said.
“If timing is an issue and availability of public finance is an issue, then why wouldn’t you consider it?”
Drew Michael, chief executive officer at defence manufacturer Overwatch Group, said that for “key enablers” – tanks, cargo planes, lorries and ships, for example – the government leasing assets from the private sector would be a “much more efficient way of doing things”.
However, he said that fund matching – where finance is raised in proportion to money raised from other sources – would be the “best approach”.
“The US Department of Defence is much better at lots of small test and evaluation style contracts that fund the SME community and allow businesses to raise private capital in part against those contracts. That doesn’t happen here and the venture capital market here is woefully short,” he said.
“The easiest capital is from defence companies, because they’re already in the industry. But the large primes are not very good at effectively doing defence venture,” he added.
Last week, Italian defence prime Leonardo launched its SME Collaboration Partner Programme in the UK with the aim of delivering “mutual commercial benefit for partner SMEs and Leonardo”.
However, Michael said such partnerships, “tend to come with caveats and conditions that aren’t necessarily great for the SME”.
In its statement of intent on the Defence Industrial Strategy, the government said it would “consider how best to create conditions needed for the private sector to invest more, and pro-actively”.
It added: “This ‘crowding-in’ goal is critical to the government’s agenda. We will maximise opportunities of dual-use technology and sectors to bring in investment that supports the broader industrial strategy as well as benefiting defence.”
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