‘We call it the valley of death’: inside Britain’s battle to rearm itself

Described as an Apache gunship that fits in the back of your car, the British-made Hydra drone has the potential to be a game-changer on the battlefield.

The unmanned device, which will use rotors and rocket boosters to lift up to 400kg, can be fitted out to carry everything from laser-guided Brimstone missiles to a heavy machine gun.

The Hydra was showcased by the Army at last September’s Defence and Security Equipment International (DSEI) exhibition in London. It is exactly the sort of innovation the military wants to see more of.

But after four years of fruitless talks with officials, Hydra says it still doesn’t know whether the Ministry of Defence will ever fund its idea to completion.

Bosses have already sunk more than £800,000 into the company, with demo versions of the drone tested in Army exercises at Salisbury Plain in 2022 and 2023.

To produce a final prototype the company needs to raise £500,000 – money it had hoped to secure from the MoD until January, when it was suddenly told that budget freezes would make this impossible. Since then, they have heard nothing.

The situation has forced Hydra to canvass further afield for potential partners. Indonesia is now among the countries that may buy the drone instead.

“We’ve got a British product that we want to sell into the British market, and everyone seems to like it – the Army put it on their exhibition stand,” says Stephen Prior, Hydra’s chief executive.

“But at the moment, no one’s willing to put in that relatively small amount of money to get the thing off the ground. So there’s a huge question mark.”

Hydra’s case underlines a problem facing Rishi Sunak as the Prime Minister pushes to revitalise Britain’s defence industry.

Last week he set out plans to fire up the country’s military industrial base by increasing defence spending to 2.5pc of GDP by the end of the decade. Sunak said it represented an “incredible opportunity” for Britain’s smartest defence start-ups.

The MoD has also talked up an ambition to work more closely with innovative small and medium-sized enterprises (SMEs) to develop cutting-edge technologies such as drones and autonomous weapons.

However, there are big questions about whether Whitehall can get its act together.

“The challenge is to encourage new ideas, new thinking,” says Keith Hartley, a defence expert and emeritus professor of economics at York University. “It will involve costs, and it will involve risks.”

These are two things the Government has been adverse to in recent years.

While Britain’s defence budget remains one of the biggest in the world, it has to fund a far wider range of military capabilities than most other countries.

A commitment to Nato and the security of the European continent sits at the heart of this, but Britain is also committed to projecting power globally in defence of its national interests.

That requires a wider range of hardware and was used to justify £8bn of spending on the HMS Queen Elizabeth and HMS Prince of Wales aircraft carriers, as well as the F-35 fighters that operate from them.

Another big chunk also goes towards the UK’s nuclear deterrent, with £41bn earmarked for the design and manufacture of four Dreadnought submarines that will carry Trident missiles in coming decades.

While maintaining these capabilities is still key to Britain’s industrial-defence plan, ministers have said the budget must also stretch to incorporate new technologies that are taking centre stage in modern conflicts such as the Ukraine war.

The world is at the very start of “the drone wars”, says Professor Trevor Taylor, director of defence industries at the Royal United Services Institute (RUSI).

The Government’s plan to lift defence spending is littered with references to how drones have been used by the Ukrainians to devastating effect against Russia – noting how these “low-cost solutions are increasingly outmatching more sophisticated systems” such as Putin’s Black Sea fleet.

Spending decisions made today will be key to fostering the growth of future would-be drone manufacturers, says Prof Taylor.

Yet quite how much additional funding there is for newer technologies is still subject to debate.

While the Government trumpeted an extra £75bn for defence by the end of this decade, the Institute for Fiscal Studies says the calculation assumes the defence budget would otherwise be frozen at current levels rather than rising with GDP.

If the existing pledge to spend 2.3pc of GDP on defence is taken into account, the real increase is about £20bn, the think tank calculates.

While that is undoubtedly a significant sum, there are fears it could be swallowed up by existing spending commitments. Analysts at Chatham House say there is already a £17bn shortfall between the requirements of the MoD’s 2023-33 defence-equipment plan and its actual budget – excluding the new capabilities the armed forces want to acquire.

Further eating into the sum is a commitment to devote £10bn over the next decade to rebuilding the country’s munitions stockpiles, partly to sustain Ukraine but also to enhance Britain’s ability to “sustain the fight”. That represents a near-doubling of current munitions spending, with BAE Systems set to be a major beneficiary.

That has left smaller defence companies wondering whether they will get anything more than crumbs, as the largest defence companies – known as the “primes” in industry jargon – hoover up further sums for huge programmes to build new fighter jets, submarines and warships.

Critics of the Ministry of Defence say officials have a fondness for large, cumbersome projects that tend to be delivered late and go wildly over-budget. Dominic Cummings, Boris Johnson’s former adviser, described defence procurement as a “s---show”.

Take, for example, the British Army’s Ajax programme, which aimed to produce 589 armoured fighting vehicles by 2017 for £3.5bn – but has delivered just 44 to date at a cost of £4bn.

Meanwhile, the two Queen Elizabeth-class aircraft carriers ended up costing more than £6bn compared to an original budget of £3.9bn – with the first delivered five years late in 2017. There were also cost overruns on the Navy’s Astute class of submarines and its six Type 45 destroyers.

RUSI’s Taylor puts this trend partly down to a British habit of seeking to acquire best-in-class equipment – known in the forces as “Gucci kit” – rather than opting for alternatives that are simply “good enough”.

Spending on research and development, which most directly helps startups and SMEs, has suffered in the face of these bigger projects – with funding for the costlier development side down by roughly 75pc compared to Cold War levels.

“We call it the ‘valley of death’,” says Taylor. “Good ideas gradually fall by the wayside.

“The MoD also tends to put the financial soundness of an SME ahead of considerations around innovation when it comes to providing funding.”

Sometimes the experience of dealing with Whitehall can also make smaller firms feel as though the cards are stacked against them.

Executives complain they are blocked from bidding for contracts worth more than half their annual revenues, while those that push forward with bids must wade through long questionnaires about “corporate social responsibility” and other ESG (environment, social and governance) requirements.

Meanwhile, the primes tend to hire large numbers of ex-service personnel, giving them insider knowledge of how procurement works and relationships with the people making purchase decisions.

“The primes hold all the cards because they have those relationships,” says Prior at Hydra Drones. “So as a fledgling company, you are trying to break into that very difficult marketplace.”

Another executive says: “The system is designed for mitigating risks. And to an extent that makes sense – you don’t want to suddenly give a five-man band a £100m contract and see what happens.

“But there are other ways of dealing with that. Right now, many firms are automatically excluded from participating.”

In many cases, it can leave SMEs feeling as though the only way to get access is to partner with a larger defence company – potentially meaning they have to sell up or dilute their ownership of key intellectual property.

This is not always a bad thing, argues John Howie, chief commercial officer of defence contracting giant Babcock, which has worked with a string of smaller companies to make their technology suitable for the Armed Forces.

An example of this is the company’s long-running deal with Supacat to manufacture the latter’s Jackal armoured vehicles for the Army at HMNB Devonport, Plymouth.

“Supacat are the prime contractor and it’s their intellectual property,” Howie explains. “But they lack the scale and capability to do mass production, which we have, so that partnership has actually worked well.

“Young companies are fantastic to work with because they move so quickly, but one of the challenges is that any form of government procurement tends to be very complex.

“Companies like ours have entire departments to deal with that stuff, so we can help them get to market.”

Another potential way forward is public-private collaboration. Ministers have recently trumpeted the success of the Dragonfire directed energy weapon, a new and powerful laser that could be used to shoot down drones and missiles.

Developed by the Defence, Science and Technology Laboratory (DSTL) in partnership with private firms including MBDA, Leonardo and QinetiQ, the ship-mounted device fires a concentrated beam capable of burning through a metal fuselage in seconds – and at a cost of just £10 a shot.

The project, first unveiled in 2018, is unusual for both its speedy delivery and the close collaboration it involved between the Government and businesses. It has progressed so quickly that the Royal Navy now aims to have the weapon onboard its ships by 2027, despite hold-ups during the pandemic.

Mike Sewart, chief technology officer at QinetiQ, says the Dragonfire is an example of how a “rapid prototyping” – rather than Whitehall issuing a shopping list of requirements – can get cutting-edge technologies into the hands of the military more quickly.

“Technologists, scientists and engineers love problem-solving,” he says, “and in the UK we have genuinely got some of the best people in the world across this industry.

“Giving them problems to solve, built around challenges, will maximise the effect of that brain power.”

In the UK, there are signs the MoD wants to emulate the model adopted by the Defense Advanced Research Projects Agency (Darpa) in the US – the “blue-sky” investment arm of the Pentagon, which back novel technologies that could have applications in defence.

As part of the commitment to boost spending, a new Defence Innovation Agency (DIA) will be established next year, charged with bringing together the “fragmented defence innovation landscape” under a single body.

The DIA will focus on emerging technologies and invest in SMEs. Some 5pc of the defence budget will be ring-fenced for research and development from 2025-26, with a further 2pc dedicated to exploiting military applications of promising science and technology.

Whether the DIA will be as effective as Darpa – which is credited with incubating everything from the global positioning system (GPS) to stealth aircraft and the Internet – remains to be seen.

The new agency joins a host of other initiatives set up to help SMEs over the years, to mixed success. It is arguably similar to the existing Defence and Security Accelerator, which is tasked with finding and funding “exploitable innovation for a safer future”.

On top of this, the MoD still lacks even “a telephone number with a person at the other end that an SME can speak with”, warns RUSI’s Taylor.

The Government has pushed through various changes that it says will help small businesses get more involved, included in the 2023 Procurement Act.

Officials have also been told to give SMEs more latitude on certain requirements, simplify the bidding process and split big contracts into smaller chunks to let them bid for more work.

Labour says it will match the Government’s defence-spending commitments “as soon as resources allow” if elected, although it has rejected Conservative proposals to fund the increase by cutting 70,000 civil service jobs.

John Healey, the party’s shadow defence secretary, has urged the MoD to “buy British” and argued that small and medium-sized defence businesses “are essential for our UK sovereignty, security and economy”.

SMEs say they need more than warm words to be convinced that politicians and the MoD are serious about change.

It did not escape the notice of companies, for instance, that the UK’s new drone strategy was unveiled at the Maidenhead base of Malloy Aeronautics – just three weeks after the company had been taken over by defence prime BAE.

“What the MoD likes to project and what actually happens is often a different story,” one executive complains.

Meanwhile, Hydra Drones is continuing talks with foreign governments and bigger defence companies. Bosses are also looking at potential equity investments by missile manufacturer MBDA UK or Airbus in order to secure a cash injection.

“We’re not quitters, and we have survived on a very skinny basis for four years, so we won’t give up,” insists chief executive Prior.

“But of course it’s difficult and it’s frustrating. We’ve always been up for a challenge – we just want to have a fair crack at the whip.”