Defence Sector Financing

Wednesday 7th May 2025 Westminster Hall

[Sir Edward Leigh in the Chair]

16:01

[Sir Edward Leigh (in the Chair)]

I will call Luke Charters to move the motion. I will then call the Minister to respond. I remind other Members that they may only make a speech with prior permission from the Member in charge of the debate and the Minister. As is the convention for 30-minute debates, there will not be an opportunity for the Member in charge to wind up.

[Mr Luke Charters (York Outer) (Lab)]

I beg to move,

That this House has considered barriers to defence sector financing.

It is a pleasure to serve under your chairship, Sir Edward. I thank my hon. Friend the Minister for responding today. Every era has ideas that capture imaginations, but only some give birth to institutions that genuinely have the chance to reshape history. The World Bank kick-started post-war reconstruction, and in 1949 NATO was founded, representing a giant, global step forward towards peace and security—frankly, it is hard to imagine a world without it. The lesson here is clear: when institutions are bold and are built for the long term, they secure the peace that prosperity depends on.

Today I want to present another bold idea about an institution that would strengthen and deepen our alliances for generations. What makes this opportunity even more unique is that one of the architects of the concept will hopefully be joining us later. I speak, of course, of the urgent need for a multilateral defence development bank. In my view, that is the single most transformative lever the Government could pull to fortify our collective security.

[Mr Tanmanjeet Singh Dhesi (Slough) (Lab)]

I congratulate my hon. Friend on securing today’s debate on defence sector financing. Given the current precarious security situation in Europe, we cannot be complacent and be left behind while our adversaries and others ramp up their military capabilities. Does he agree that it would be highly misguided to hold back British industry in such volatile and unpredictable times?

[Mr Charters]

I thank my hon. Friend for his sterling work on the Defence Committee. Through our collective industrial strength, what greater deterrent could there be to our adversaries?

[Jim Shannon (Strangford) (DUP)]

I spoke to the hon. Gentleman before, so he knows what is coming. Is it not ironic that at a time when the Government want to increase defence spending—most MPs support that, and I am one of them—the trustees of the Members’ pension fund have decided that there is to be no investment of MPs’ pension contributions in the defence industry? Is it not time for the pension trustees to change their attitude immediately? What a disgrace. I hardly believe it.

[Mr Charters]

There could be nothing more ethical than investing in the companies that support our Ukrainian friends.

I believe Britain’s membership of a multilateral defence development bank could cement Britain as a leader not only in financial services, but in defence. Today, I will also talk about how we can bolster our sovereign defence industries by fixing the capital stack here at home and by sorting out the credit and cash-flow issues for British companies.

I will just take a couple of steps back. When I was at the Bank of England and the Financial Conduct Authority, I was working on cross-border payments, sanctions and so many related things, but more importantly, I had a front-row seat to the regulatory and financial barriers that defence start-ups faced when I was acting head of compliance at a fintech. I saw how everything from export controls and dual-use rules to complex international regimes made it really difficult for those defence customers.

A few months ago, the Prime Minister pledged the largest defence spending rise since the cold war. That sent a clear signal that now is the time to invest in peace. Yet British defence innovators have told me they still face hurdles accessing finance, bank accounts and insurance. That is why my hon. Friend the Member for Aldershot (Alex Baker) and I brought together over 100 Labour parliamentarians to write to the sector, highlighting some of those challenges. Following that, we wrote to the FCA, which helpfully published a statement that, as we have heard from firms, has eased environmental, social and governance perception concerns.

[Mrs Sureena Brackenridge (Wolverhampton North East) (Lab)]

At this pivotal moment for national security, I welcome my hon. Friend’s call to clarify ESG rules to better back defence investment. Collins Aerospace in my constituency works really hard to create highly skilled jobs and apprenticeships. Does my hon. Friend agree that financial institutions play a vital role in supporting the defence sector, so we can further boost UK jobs in our economy?

[Mr Charters]

If we can get the financing environment right for Collins Aerospace, perhaps it can grow at more pace and deliver more high-skilled jobs in my hon. Friend’s constituency, for which I know she is such a powerful advocate. My hon. Friend the Member for Aldershot and I hosted a summit at the Guildhall last month, and we were kindly joined by the Minister for Defence Procurement and Industry, my right hon. Friend the Member for Liverpool Garston (Maria Eagle). Also joining us were defence primes, small and medium-sized enterprises, major banks and other stakeholders.

[Chris McDonald (Stockton North) (Lab)]

My hon. Friend mentioned small and medium-sized businesses. Would he agree that, for small businesses in defence-adjacent industries that want to grow into the defence market—such as those in the Teesside defence and innovation cluster in my constituency—a defence development bank, as he proposes, would give them that opportunity for market growth?

[Mr Charters]

My hon. Friend is a really powerful advocate for the businesses in his constituency, and as I will come on to, a multilateral commercial bank could help commercial lenders lend to the SMEs in his area.

When we were at the Guildhall, we were gathering evidence from UK banks, investors, defence primes, SMEs and start-ups. We drafted a light-hearted report, of more than 6,000 words, which is due in the coming weeks. It diagnoses domestic financing barriers for defence companies, which can be summarised as the six Cs: credit, cash flow, capital, contracts, compliance and consensus. I will focus on two of those, credit and cash flow, before returning to the concept of a multilateral defence bank.

If the UK is serious about strengthening its sovereign defence capability, we must build a proper defence financing stack, from early-stage equity to multilateral development finance. The stakes could not be higher, as one outstanding British SME founded by a veteran, told me they are likely to move to the US because some of the issues I am about to touch on.

We know funding challenges affect all SMEs, but those issues are more acute in defence. The sector’s unique risks, long procurement cycles, unpredictable cash flow and stringent compliance requirements all make commercial lending much harder. Let me start with some reflections on cash flow. We know cash flow constraints significantly increase defence SMEs’ working capital requirements. If a prime contractor delays payments, it creates a knock-on effect that constrains smaller suppliers. Commercial lenders see those risks and apply higher risk premiums to working capital loans—or, in some cases, deny lending altogether.

To its credit, the Ministry of Defence under this Government is leading by example, paying 95% of invoices within five days. That is world class. However, some primes are not at that standard, and their slow payment practices squeeze liquidity from the very companies we need to support. I have been told first hand by commercial lenders that they find it difficult to raise lending limits for existing borrowers in the defence sector, or even worse, are not always able to lend to those with promising growth potential.

One UK bank, which is doing quite a significant amount in this space, has written to me calling for the creation of a Government-backed defence guarantee scheme. That scheme would allow defence SMEs to access loans that might otherwise be unavailable commercially. It could also increase lending to those with a restricted borrowing capacity, and it could be modelled on existing schemes run by the British Business Bank.

We also need to address, head-on, poor payment practices of some of the major contractors. I thought about naming some of the firms under parliamentary privilege, but I shall not. One commercial lender wrote to me with the idea of a prime contractor scheme, where major contractors are required to reduce payment terms or even pay some British defence companies in advance. That could be transformative for SMEs operating in this high-risk sector. Let us back British defence SMEs, not just with warm words but with the finance stack, fair terms and funding guarantees they need to succeed.

The two ideas I have set out—a prime contractor scheme and a Government-backed defence guarantee scheme—would both tackle the classic market failure, which is more prevalent in defence. This is where information asymmetries and high-risk premia leave a segment of the market undercapitalised. By underwriting a proportion of commercial lending via Government guarantees, we would be able to reduce some of those borrowing spreads, lower the cost of capital for those firms and better align commercial lending with our national security aims. I warmly invite the Minister to work with colleagues in the Department for Business and Trade and the Ministry of Defence to see whether those ideas have merit.

I am delighted to be joined today by Rob Murray, an outstanding ex-Army officer. He has been working on the concept of a multilateral defence bank, known as the Defence, Security and Resilience bank. It would be not-for-profit and is one of the strongest proposals out there because of his expertise and that of his team. A multilateral bank, backed by allies across the world, be it the EU, our North Atlantic friends or Indo-Pacific allies, is the right fit for Britain at this time. Let me set out why.

Take the ongoing war in Ukraine. We are already feeling the effects of that in the UK, industrially and financially. While Russia is fighting with artillery, we are fighting with accounting rules. That is why now is the time to be involved as a founding member of a multilateral defence bank. On my earlier concept of the defence financing stack, a multilateral bank would supply a much larger funding source to support large-scale industrial capacity. It would sit alongside the other two ideas I mentioned. It would be a World Bank-style financial vehicle, focused on defence, and it is ready to launch. Owned by nation states, it would mobilise capital into allied defence production and supply chain resilience. It would raise capital at triple A rates and guarantee working capital loans to commercial banks, who would then in turn lend to individual companies. That would mean that commercial lenders would be able to get credit at sensible prices backstopped by a multilateral bank.

Not only that but, through its triple-A rating, it could save 50 to 100 basis points for some countries. It would hold factories, tooling and inventory on its own balance sheet, meaning that Governments would not need to borrow and book public debt, creating vital fiscal headroom in the process for nation states. It would crowd in private sector capital and kick-start reindustrialisation in Britain and Europe without breaching fiscal rules, such as my favourite acronym in fiscal politics: PSNFL or public sector net financial liabilities.

The reason this idea ultimately wins for me is on value for money. I know through my work on the Public Accounts Committee that it is not just about how much money is spent but how smartly it is spent. This is a great opportunity to continue the Prime Minister’s work to make Britain a leader on the world stage once again. A multilateral bank could unite our allies, and the UK could anchor a multilateral defence bank at the heart of any future defence pact with Europe. The UK and EU summit on 19 May could be an excellent place to start this conversation. It could also include like-minded partners from around the world, be it Canada, Australia, Japan or Ukraine on the frontline.

[Tulip Siddiq (Hampstead and Highgate) (Lab)]

I thank my hon. Friend for giving way and congratulate him on a very important speech. I know he has been vocal on this topic since he was elected. He will not be surprised to know that I agree with him: the City has an important role to play in mobilising capital to support the defence industry, as he mentioned.

I also know how important it is for UK companies to have access to EU finance. For example, there is the Horizon scheme. British scientists have already secured £500 million in research funding, thanks to the UK rejoining the programme. He just mentioned the summit coming up. Does my hon. Friend agree that co-operative defence procurement should be a high priority for the Government at the UK-EU summit?

[Mr Charters]

As always, my hon. Friend is absolutely right. To secure lasting peace, we need greater co-operation in defence procurement and financing with the EU and allies across the world.

Last month, my hon. Friend the Member for Aldershot and I warned that Russia plans to produce 4,500 tanks and armoured vehicles this year, plus 250,000 shells per month. That would lead to stockpiles three times larger than those of the US and Europe combined. Let that sink in. This is not a temporary surge; it is a long-term shift. We must match military strategy with financial and industrial muscle through a multilateral defence bank.

[Mike Martin (Tunbridge Wells) (LD)]

The hon. Member is speaking eloquently about the need for joined-up financing and fundraising for defence, but the other side of that issue is clarity about what the Government want. A key example is space: the UK has significantly underperformed and punches well below its weight in defence space, which is spread across two Ministries. There is no clarity. The sector says, “We want just one person in Government to tell us what they want.” Does he agree that, as well as sorting out the funding, the Government’s key role is to be clear about what they want? I think that that is the strategy of which he speaks.

[Mr Charters]

Growth in the defence sector, and allied sectors such as space, will deliver prosperity across the UK. If we can get commercial lending working for defence, it will support growth in those allied sectors too.

My hon. Friend the Economic Secretary to the Treasury is one of the most erudite Members, and understands the City of London better than anyone else, so I am sure she agrees with me that there is no better home for the bank than the Square Mile, not least because of our relationships across the Atlantic and our proximity to Europe. My simple ask today is that the Government invite officials from finance Departments around the world to meet in London to discuss and explore the concept of a multilateral defence bank.

[Steve Barclay (North East Cambridgeshire) (Con)]

I join colleagues in welcoming this debate. The hon. Member is making some constructive suggestions, but a simple thing that the Government could do, because they have sole control of it, is look at the British Business Bank, which is sector-agnostic. That would be persuasive to international partners and would fit with the arguments he makes. Why are Ministers not willing to give a steer to the British Business Bank?

[Mr Charters]

I praise the last Government for their role in setting up the national security strategic investment fund as part of the British Business Bank. One of the problems with it is that it allows lending only to dual-use parts of the defence supply chain. That is an interesting point for the Government to look at. We must not think about these institutions in silos; we have to look at the BBB, the national wealth fund and UK Defence Innovation as a collective to find out how they can best support the sector.

Defence has always operated on two fronts: economic and military. This week, we reflect on VE Day 80 years ago. During world war two, factories in Britain were transformed overnight to churn out Spitfires, tanks and munitions, while rationing and war bonds mobilised a home front economy to sustain the fight. Let me be clear: Britain faces strategic competition not just on the battlefield but in our factories, our budgets and our very financial systems. This is not a challenge on the horizon; it is one that is already confronting us, economically, industrially and financially. Turbocharging financial support for our defence industrial base will empower companies of every size and truly build a powerful economic and industrial deterrent. It is time to remove the barriers and act faster, further and more decisively in supporting British defence.

16:19

[The Economic Secretary to the Treasury (Emma Reynolds)]

It is a great pleasure to serve under your chairmanship, Sir Edward. I congratulate my hon. Friend the Member for York Outer (Mr Charters) on securing this debate. I also thank the Chair of the Defence Committee, my hon. Friend the Member for Slough (Mr Dhesi), and the hon. Member for Strangford (Jim Shannon) for their contributions.

I am going to embarrass a few people now. I thank my hon. Friend the Member for Wolverhampton North East (Mrs Brackenridge), who is one of my successors in a seat I represented between 2010 and 2019. It was great to hear about the success of Collins Aerospace, which is in that constituency. I also thank my hon. Friends the Members for Stockton North (Chris McDonald) and for Hampstead and Highgate (Tulip Siddiq), as well as the right hon. Member for North East Cambridgeshire (Steve Barclay), for their interventions.

Today’s discussion and the fantastic speech from my hon. Friend the Member for York Outer have highlighted the complexities and challenges we face in ensuring that our defence sector is robust enough to protect our national security and support our growth mission, which is the No. 1 mission of this Government. In recent years, the world has been reshaped by global geopolitical instability, including Russia’s aggression and its illegal invasion of Ukraine—a war on our continent—as well as increasing threats from malign actors. This, combined with the challenging economic and fiscal context, makes it essential that we address the barriers to finance in the defence sector, so I thank my hon. Friend again for securing this debate in Westminster Hall.

National security is the first duty of the Government, as highlighted in our plan for change. We have demonstrated our commitment in recent announcements, such as the Prime Minister committing to reach defence spending of 2.5% of GDP from April 2027. As he said at Prime Minister’s questions today, the last time the UK reached that level of spending was under the last Labour Government. Our ambition is to reach 3% of GDP in the next Parliament, as economic and fiscal conditions allow.

Given that uplift in defence spending and the challenging fiscal and economic context we find ourselves in, this Government want to ensure that the defence sector contributes to achieving our No. 1 mission of economic growth. The Chancellor reiterated that message at the spring statement, when she announced a package of defence and growth-focused measures. That included the creation of a new organisation, UK Defence Innovation, with the explicit aim of supporting the scale-up of SMEs, start-ups and non-traditional defence suppliers, enabling them to grow and thrive, fostering an innovative defence tech ecosystem and crowding in private capital.

As has been discussed in this excellent debate, we have been made aware of a number of financing issues in the defence sector, and I will come on to them shortly. I will first respond to the final part of the speech made by my hon. Friend the Member for York Outer, on the proposals for a multilateral defence bank. I thank him for drawing our attention to these proposals, and I thank Rob Murray, the founder of the multilateral Defence, Security and Resilience bank, who has been liaising with the Government and championing this proposal. We recognise the issues that my hon. Friend raised today. We are looking carefully at the proposals and actively discussing with our allies a range of multilateral options.

My hon. Friend the Member for Hampstead and Highgate mentioned the EU, and I should say that we are looking forward to the UK-EU leaders’ summit on 19 May. We welcome the EU’s efforts to bolster Europe’s defence, including the ambitions set out in the ReArm Europe package and the defence White Paper. We have been clear that we are keen to work with EU allies on common challenges to our shared security. The Chancellor discussed this with counterparts at the G20 in February, and we are discussing the shared challenges with our European partners. I cannot comment in detail on those discussions at this time, but we will continue to work together with our European allies on this incredibly important issue.

My hon. Friend the Member for York Outer talked about some of the spillover effects, and I assure him that the Treasury and the MOD are keen to maximise spillovers and synergies between the civil and military sectors for both economic growth and military reasons. We are considering how to maximise these benefits as we develop the defence industrial strategy.

My hon. Friend mentioned a number of issues to do with defence companies’ access to finance, and I welcome the recent meeting he held with our hon. Friend the Member for Aldershot (Alex Baker) at Guildhall in the City. I know that my right hon. Friend the Minister for Defence Procurement and Industry was present at that meeting, as were representatives of the defence sector and a number of trade associations representing the City and financial services.

My hon. Friend the Member for York Outer brings to this House a great wealth of experience in financial services, from both a firm and a regulatory perspective, so he will know that decisions regarding the provision of financial services to businesses are a commercial matter; banks and insurers need to make an assessment of the relevant risks and conduct appropriate due diligence. However, we are very clear that no company should be denied access to financial services purely on the basis that it works in defence. I encourage all defence firms to read the very helpful guidance published by UK Finance and ADA Group. It is excellent to see the trade associations coming together, working from the different perspectives of the defence sector and finance, to produce that guidance.

[Gavin Robinson (Belfast East) (DUP)]

The proposal for a multilateral bank is a fascinating, but part of this debate has been to focus on some of the inhibitors on providing private finance and investment in the United Kingdom. The situation is getting worse with large-scale pension funds. My hon. Friend the Member for Strangford (Jim Shannon) mentioned the parliamentary pension fund, but it pales into insignificance when we consider that Aviva, Royal London and the National Employment Savings Trust are all divesting from defence in our own country. That contrasts with the efforts that this Government and previous Governments have made to invest in this space.

Will the Minister consider—perhaps through FCA guidance—strengthening the fiduciary duty that the trustees of these funds have to increase the coffers and increase growth? That would show that Government are prepared to do more than just issue guidance, but that they will challenge and encourage investment in this vital sector in our country.

[Emma Reynolds]

We have been clear that there is no contradiction between ESG considerations and investment in defence, and that investing in our defence industry is a way to protect our democracy and borders, and to work in solidarity with our European neighbours. I will write to the hon. Gentleman about the specifics, but I know that various accusations have been levelled at some of the companies he mentions and others. We need to be very careful about that.

I heard what the hon. Member for Strangford said about our own pension funds. There is huge potential in our pensions industry. We should ensure that that industry is in a position to leverage the great returns that can come from defence companies, but there is a lot of muddying the waters around certain firms and what they are doing. I do not want to name particular companies, but I am happy to discuss it with the hon. Gentleman in detail after the debate. Aspersions have been cast against certain companies managing pension funds that are not absolutely accurate when it comes to ESG. A lot of things are piled under the ESG banner. We are very keen that opaque ESG ratings should not impede the attractiveness of the defence sector.

I am running out of time. I believe that the Member who moved the motion replies?

[Sir Edward Leigh (in the Chair)]

No.

[Emma Reynolds]

I have a bit more time then.

My hon. Friend the Member for York Outer talked about access to finance for defence companies with regard to bank accounts. That is a commercial decision. He also mentioned access to credit, loans and cash flow, where we know defence SMEs often face challenges. We want to work across the Government, with SMEs in the defence sector and with the main players in financial services to ensure that we bring down some of the barriers to finance. My hon. Friend suggested a Government-backed growth guarantee scheme, and made a strong, thoughtful and compelling case for that. With other interventions, that is being considered as part of the defence industrial strategy.

I look forward to working with my hon. Friend and other Members with a keen interest in this vital sector. We want to see a thriving UK defence sector, with both large defence firms and SMEs in the supply chain, that provides security for the United Kingdom and helps to deliver the economic growth that the country needs to raise living standards across the country.

Question put and agreed to.