Why are taxpayers being forced to bail out billion-pound defence contractors?
The reason offered is that Forgemasters are a crucial part of strategic defence supply chains, notably Britain’s fleet of nuclear submarines and cannot be replaced at short notice. This has some merit, jeopardising or delaying multi-billion deals vital to national security to avoid spending a few million now makes little sense. But this is an argument for very temporary state ownership, much as was proposed for the East Coast mainline in 2018 (just 2 years), not a ten-year investment plan. Fundamentally the business is either viable or it is not. Fundamentally, it can either be made viable by investment or it cannot. That no private sector operator was prepared to step in, including those who know it best and have the resources to do so, is clearly not a vote of confidence. That the Government think 10 years of investment is necessary before even thinking about privatisation is not either.
A second reason offered is the need to invest in domestic supply chains. This is a terrible argument, albeit good politics. Long-term however it helps no one to pretend that an industry accounting for less than 0.1% of GDP and 1.2% of manufacturing, in which we are net importers of product, is ‘too strategic to fail’. We’ve seen this before with Steel. In the 1970s nationalisation was used to protect jobs at the expense of everyone else, while it did nothing to stave off global competition. When privatised in 1988, dozens of zombie firms with no serious business model vanished. The UK used to be one of the world’s largest producers of steel. It has not dropped to a rounding error below Malaysia and Saudi Arabia in 24th place through failure, but the comparative success of other domestic industries, and comparative advantage in commodity manufacturing elsewhere. The main factor costs of production for steel are energy, raw material, plant and people. None of these things are relatively cheap in Britain, and it is a matter of national strategy to make nearly all of them more expensive in the longer term.
For example net zero is a plan for more expensive energy, much of it unsuitable for energy-intensive industry. Levelling Up is a plan to make labour more expensive, particularly in the manufacturing heartlands of Britain. The Government has consistently failed to remove plant and machinery from business rates. It has failed to free up more land with planning consents for manufacturing sites. It has failed to reduce the ability of locals to stop them being built. All of which make investment in factories here very unattractive. Raw materials are global commodities, and the UK is rather better at creating complex financial instruments for hedging that risk than at finding new sources or more efficient methods of extraction. You cannot even suggest opening a coal mine for coking steel in Britain these days without multiple NGOs proclaiming you hate the planet.
Oddly, the Government think their energy strategy may help save Forgemasters. They have some involvement in Rolls Royce’s prototype plans for small scale nuclear, they have the giant forges required to produce components for conventional nuclear. Their steel can be found in wind turbines and no doubt some of the support structures for various solar arrays. But these are not areas in which they can sustain comparative advantage. The ‘Green Growth Paradox’ is that the measures designed to incentivise demand for low carbon energy (general supply subsidies or carbon taxes) make the production of materials for those energy forms unaffordable. The net impact of three decades of planning for the low carbon transition has been to accelerate the offshoring of any industry with high energy needs. This will not change.
Nor is the Ministry of Defence an obvious partner for those who believe that the solution is just a better investment plan. British defence procurement has been widely and repeatedly criticised as wasteful and incompetent. It is not just the usual complaint that civil servants would not know a forge from a foundry, let alone understand how to grow a global export business, but that the top brass gold-plate everything. 40,000 tonne aircraft carriers become 70,000 tonne monsters, running years over time and budget, because size matters when you are floating next to the US Navy in a squall. Tanks do not work. Really interesting innovative ideas get retrofitted to unsuitable prototypes, and become unusable. And so it goes on. Sometimes it is better to buy anything but British and have guns that actually fire when it is hot or cold.
Now the armchair generals have a giant hammer to play with, and a mission to prepare the North for occupation by Conservatives, one would have to have a head of steel to believe that they will do anything other than meddle. Government investment might save Forgemasters as a viable business long-term. But if so, it will be more likely by accident than design. The losers in all this are you the taxpayer. The bill for this bailout will need to be paid. That in turn means higher taxes, which in turn means job losses and lower wages across the wider economy. It is only if you sincerely believe that the MOD has been transformed from Dad’s Accountants to the SAS of venture capitalism, that this will not happen. Meanwhile the question remains. Whatever we think about Forgemasters themselves, why are we bailing out the multi-billion-pound defence contractors who bet on them, and lost their bet?