4 December 2023

It’s time to march on with defence privatisation

By Keith Hartley

Defence and markets are unusual bedfellows. Typically, defence is regarded as an activity which is state-provided and state-funded with very few opportunities for market solutions. However, this is not the case. As I discuss in my new paper for the Institute of Economic Affairs, there are massive opportunities for the application of private markets in defence.

Traditionally, the Armed Forces have purchased equipment and services from within. For example, the Armed Forces traditionally train their own military personnel, such as air force pilots and army drivers, and maintain their own equipment through army base repair workshops and naval dockyards. These in-house solutions, like all monopolies, are prone to inefficiencies, and ignoring clear opportunities for improving efficiency in defence means that the sector may eventually become unaffordable.

There is nothing revolutionary in using private markets to provide defence services. Competitive markets have economic benefits over monopolies, and lead to lower prices and improved services. They also encourage innovation, leading to new ideas and new products. These are the same private markets which serve consumers daily by allowing firms such as Aldi and Lidl to compete with established giants such as Asda and Sainsbury’s, all to the benefit of shoppers.

The UK has considerable experience of using private markets in defence in the form of outsourcing. Examples include catering, cleaning, driver training, vehicle repair and transport services. However, this can be taken much further, and should be used for air tankers, military flying training and helicopter search and rescue operations. Defence outsourcing should be employed where it offers lower costs compared to in-house solutions.

However, there are legitimate questions to be asked about what the limits of outsourcing are. For example, can it be applied to combat missions? Mercenaries may spring to mind, but they are limited by the sheer scale and complexity of negotiating, agreeing, enforcing and monitoring extremely complex and costly contracts for combat tasks. In short, outsourcing combat missions involves high and probably unacceptable transaction costs.

Despite this, there are further opportunities for applying market principles to defence. For example, UK defence equipment, which is often beset by cost overruns, delays and a failure to achieve operational requirements could be purchased off-the-shelf from overseas suppliers. Such proposals for the competitive procurement of equipment need to be properly evaluated by considering their economic benefits and costs. Similarly, the UK Armed Forces might consider hiring rather than purchasing defence equipment: for example, renting tanks and military transport aircraft. There is no shortage of economic policies for improving the efficiency with which the UK and other Armed Forces operate.

The study concludes by suggesting some economic principles for the UK and other countries. These include a focus on defence outputs and on the principle of substitution. Defence outputs are difficult to measure. Often, policymakers mistakenly focus on inputs, such as the numbers of military personnel, the numbers of warships, tanks and combat aircraft. But the key consideration is what the contribution of these inputs is to final outputs in the form of peace, protection and security. Regrettably, there is no monetary valuation of peace, protection and security – everyone benefits from them, but there are usually incentives to let other people pay.

The second principle of substitution is also controversial. There are many examples of possible substitutions for defence. For example, reserves might replace regular personnel; civilians might replace military personnel, women might replace men, helicopters might replace tanks, uninhabited maritime patrol aircraft might replace naval frigates and ground-based missiles might replace manned fighter aircraft for air defence. Some of these substitutions have major implications for the traditional monopoly property rights of the Armed Forces. For example, the Air Force regards air missions as their property – similarly, sea missions are usually undertaken by the Navy and the Army normally own the rights to land missions. Substitution questions these traditional roles of the Armed Forces. For example, helicopters operated by the Army might replace ground attack aircraft operated the Air Force, land-based cruise missiles might replace manned bomber aircraft operated by the Air Force and cheap drones might replace costly weapons systems.

The application of free market economics and proposals for more defence outsourcing will lead to new ideas and insights into traditional thinking. Not all proposals for more defence outsourcing will be successful – as with all innovations, there will be failures. But overall there will be benefits from what will be a voyage of discovery.

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Keith Hartley is an Emeritus Professor in the Economics Department at the University of York and a former advisor to the Ministry of Defence.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.