Defence Sector Financing

Tulip Siddiq Excerpts

Wednesday 7th May 2025 Westminster Hall

[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.