British manufacturers are appealing to the government to implement offset agreements in upcoming military contracts involving foreign companies, ensuring that the surge in UK defence spending translates into investment in the domestic economy.

As the government finalizes its new defence industrial strategy, MakeUK Defence, which advocates for 600 engineering firms within Britain’s military hardware and technology supply chain, emphasizes the need for the Ministry of Defence (MoD) to prioritize small and medium-sized enterprises (SMEs).

“Encouraging foreign investment through defence deals should be a fundamental aspect of the government’s growth strategy,” stated Andrew Kinniburgh, director-general of MakeUK Defence. “British SMEs possess significant capabilities, and it is crucial for the MoD to engage these firms to ensure they gain from contracts with foreign entities.”

Offset agreements are policies requiring foreign defence contractors selling military equipment or services to reinvest a portion of the contract’s value back into the economy of the purchasing nation.

This practice has gained traction internationally, with at least 50 developed nations implementing offset policies. These can take the form of direct investments by companies like US prime contractors General Dynamics or Lockheed Martin, which have established operations in the UK, or through “indirect offsets,” where these companies enhance a country’s military capabilities.

For example, Poland has attracted substantial foreign investment in various defence initiatives following agreements to purchase missiles and fighter jets from the US, while Gulf nations have negotiated technology transfers and military training commitments in connection with their acquisitions of US missile systems and armoured vehicles.

Traditionally, the UK’s approach to offsets has been inconsistent and non-mandatory. Even when promises have been made, the MoD has lacked the authority to ensure compliance and the capability to verify that these commitments are fulfilled.

MakeUK Defence is advocating for a cohesive inward investment strategy as part of the forthcoming defence industrial strategy. The organization proposes that this strategy include a requirement for all foreign contractors to reinvest between 75% and 90% of the economic value of an MoD contract back into the UK economy over a decade, along with enforceable agreements during the selection process of preferred bidders prior to contract finalization.

This approach, according to MakeUK Defence, could significantly enhance opportunities for UK defence SMEs and an increasing number of “non-traditional” contractors from sectors like automotive or oil and gas, which possess relevant capabilities in defence manufacturing and technology.

Moreover, the proposed inward investment could support a regional growth strategy, directing investment to areas like the northeast or West Midlands that have historically received less defence spending.

According to the MoD’s data, UK SMEs currently obtain only 25% of the UK’s defence budget: receiving 4% directly from the MoD and an additional 21% through prime contractors.

The recommendations from MakeUK Defence essentially serve as a challenge to the Prime Minister to uphold his commitments. At a recent London Defence Conference, Sir Keir Starmer urged that Britain and its industries must “capitalize on the defence dividend” and ensure that defence expenditure is directly beneficial for working individuals.