The dollar exchange rate is vital to all government departments, but with $35bn in contract liability, the MOD is particularly exposed to fluctuations.
$35bn in contract liability for a department with an annual budget of around £40bn is not desirable. Indeed, it’s a weak position for a department to be in. It means that, when the pound depreciates against the dollar, as it regularly does, it effectively shrinks the defence budget.
The latest figures indicate that, in 2019, the MOD suffered £850mn in FOREX losses against the dollar, or around 2 per cent of the entire defence budget. This year, given the rise of dollar liability over the past few years and the pounds’ depreciation in the last week, this figure could be significantly higher.
The growth of this liability lies in the MOD’s Equipment Plan. More specifically, the MOD’s predilection to favour off-the-shelf purchases from the United States over domestic industry.
In 2016, 10 per cent of defence equipment was bought in dollars. In 2020-21, over 31 per cent of defence equipment was bought in dollars.
Unfortunately for the UK’s defence industry, the MOD’s growing addiction to off-the-shelf US equipment shows little sign of abating. The purchase of 3 E-7 Wedgetail airborne early warning and control aircraft and 9 P-8A maritime patrol aircraft are the latest multi-billion-dollar purchases to be selected with no benefit for UK Plc. Neither contract will have intellectual property transfer, meaningful workshare, or the establishment of local depth maintenance facilities. With none of these components, the UK will have to pay dollars for the United States to maintain, furnish and retrofit these aircraft.
The UK used to insist on data support packages and workshare. Contracts on C-130 Hercules, and the helicopters Chinook and Apache, all had UK workshare built-in. This insistence protects you from purchases bleeding out against the dollar and supports your domestic industry. It also indicates to the world that the UK government is comfortable handing work to its industry and supply chains, thus boosting export interest.
For years, the MOD has not fought for domestic industry. We’ve had a defence procurement regimen which has amounted to little more than ‘Make America Great Again.’
Two common-sense measures must be adopted immediately. Firstly, the MOD must account for anticipated FOREX losses when tendering a contract. Secondly, it should also consider the amount returned to the public purse through tax receipts and national insurance contributions if a contract were awarded domestically (usually around 20-30 per cent). These measures would at least allow us to quantify the true cost of our defence equipment.