UK manufacturers urge mod to communicate defense spending to small and medium-sized enterprises through binding offset transactions
British manufacturers have urged the government to ensure that SMEs are the main beneficiaries of rising UK defense spending by embedding legally binding offset agreements into future military procurement contracts.
Before unleashing the government’s revised defense industry strategy, Makeuk Defence, a trading body representing more than 600 British defence manufacturers, called for foreign contractors to reinvest the vast majority of their contract value back into the UK economy.
The offset agreements already prevalent in more than 50 developed countries force foreign companies to ensure that military contracts invest in a portion of the contract value locally – directly to defend against related output or indirectly in the broader economy. Advocates say these protocols can create thousands of highly skilled jobs and help ensure a sustainable domestic industrial base.
“Ensure that internal investment in defence transactions should be a backbone of the government’s growth agenda,” said Andrew Kinniburgh, Director General of Makeuk Defense. “The UK’s SMEs have tremendous capabilities and the Ministry of Defence must leverage, so they also benefit from defence contracts with overseas companies.”
The current counter-offsetting method in the UK is largely informal, with no formal obligations or law enforcement mechanisms. Makeuk Defense calls for the change, believing that the UK lags behind international competitors to ensure industrial benefits for defense procurement.
As part of its proposal, Makeuk calls for a legally binding requirement that the winners of foreign companies winning Department of Defense contracts reinvest between 75 and 90 percent of the economic value of these contracts over a decade. This may include establishing or expanding manufacturing sites, investing in supply chains or supporting technology transfers and training.
The group believes that such a policy is particularly valuable for UK small and medium-sized defence manufacturers and networks in neighboring industries such as automobiles, aerospace and oil and gas, which currently have relevant functions but are currently difficult to access the defence supply chain.
The proposal also includes a regional priority call to support the government’s open agenda. Kinniburgh said that offset investment could be used to strengthen regional growth strategies, focusing on historically undersupported regions such as the Northeast and the West Midlands.
Currently, small and medium-sized companies only receive 25% of the UK’s annual defense spending, 4% directly from the Ministry of Defense and 21% indirectly through major contractors, according to the Ministry of Defense.
By contrast, countries such as Poland and Gulf states have leveraged offset protocols to ensure long-term inward investment, military training and advanced technology transfers, which are part of the major purchases of fighter jets, missile systems and other equipment.
The call for change responds to the latest comments from Prime Minister Sir Keir Starmer, who told the London Defence Conference that it is time to “grab the defence dividend” and ensure that “feel military investment directly in the pockets of the working people”.
While the UK has pledged to increase defense spending from 2.3% of GDP to 2.5% in 2027, and in the next parliament, defense spending could increase to 3%, industry leaders say there is no targeted industrial policy, with much of this risk increasing risk abroad.
Makeuk’s recommendations will represent a significant shift in UK procurement strategy, bringing it in line with international norms and providing a potential boost to UK high-tech manufacturing bases.
“The UK needs to stop viewing defense spending as isolated costs and start seeing it as a long-term investment in industrial capacity, regional regeneration and national security,” Kinniburgh added. “A strong, enforceable offset policy is one of the easiest and most effective ways to achieve this.”
