THE British state is subsidising the UK arms industry to the tune of billions of pounds to the benefit of its wealthy private owners and shareholders, a new report by the ‘Common-wealth’ think tank has confirmed.
The executive summary of the report ‘The Asset Manage Arsenal: Who Owns the UK Arms Industry?’ says the industry ‘is the recipient of significant state intervention that reduces risk for investors: not only is the Ministry of Defence (MoD) its primary client, but research and development costs for arms companies are predominantly paid for by the state and by export customers as a component of procurement contracts.’
The report examines ‘the nature of private ownership in the industry and the degree to which public subsidy and procurement expenditure flow to investment firm returns.’
It stresses: ‘As the academic literature makes clear, these returns are further underpinned by export relationships – the most prominent and lucrative of which is with Saudi Arabia – that help enable the violent repression of civilians in countries around the world with the support and involvement of the UK government.’
The summary adds: ‘Our analysis shows that the UK arms industry averaged 12.5 per cent returns on invested capital between 2013 and 2020 compared to a FTSE 100 median of 11.7 per cent.
‘Moreover, analysis of three of the MoD’s prime suppliers – QinetiQ, BAE Systems and Babcock International – demonstrates the same pattern of returns on investment in companies that generate over 20 per cent of their global revenue from the MoD.
‘Export customers provide another source of revenue for the industry, although export contracts delivered by private companies are secured with financial and institutional support from the UK government in order to safeguard geopolitical relationships.
‘Given the increasing concentration of the UK’s arms export base — in 2022, 45 per cent of the value of Standard Individual Export Licenses (SIELs) for arms went to Qatar and Saudi Arabia – the arms export industry serves in part to maintain relationships with a few close military allies.’
The report’s key findings are:
- State guarantees – including institutional support for exports, state investment in research and development and public procurement — appear to support strong average returns for the UK arms industry and its investors. Between 2013 and 2020, average returns on invested capital in the UK arms industry were 12.5 per cent compared to the FTSE100 median of 11.7 per cent.
Returns on invested capital at BAE Systems, QinetiQ and Babcock International all outstripped the FTSE median: BAE Systems averaged 13.8 per cent returns, QinetiQ 24.2 per cent and Babcock 12.3 per cent.
- The major companies that form the UK arms industry are controlled by investment firms and asset managers. These investors, and the clients and beneficiaries whose assets they use to invest, benefit from state support.
Ownership of the UK’s arms industry is concentrated, with just three investment firms (BlackRock, Vanguard and State Street) holding a combined average of 16.3 per cent of shares listed in the major arms companies operating in the UK.
- Just two investment firms – BlackRock and Capital Group – together control more than a quarter of the MoD’s prime supplier, BAE Systems (successor to the publicly owned company British Aerospace).
- The UK’s arms export base has grown more concentrated since the Cold War, increasing the UK’s economic ties to a limited pool of export partners and its dependence on political relationships with Gulf monarchies – 47 per cent of the value of Standard Individual Export Licenses (SIELs) for arms went to Gulf Cooperation Council (GCC) countries in 2022.
In a section on UK industrial strategy, the report notes: ‘Arms companies operating in the UK are backstopped by public sector demand, with the MoD spending £242 billion on equipment procurement and support over the next ten years …
‘The MOD further provides the arms industry with support for export production. For instance, the government strategically uses procurement to reduce the cost of export deals and provides institutional support to reach export agreements.
‘Research and development costs in the arms industry are predominantly paid for by state customers, with research and development forming part of the overall cost of contracts. Between 1987 and 2009, defence production on average received 35 per cent of the UK’s public research and development funding …
‘Excluding Foreign Military Sales agreements with the US, the MoD paid £28.6 billion to UK and foreign-owned organisations (including public and private organisations in all sectors) in 2021/22, 42 per cent of which was directed to the MoD’s top ten suppliers. £4 billion was spent on the leading supplier BAE Systems alone, of which 91 per cent was awarded through non-competitive contracts.
‘Overall, 37 per cent of MoD contracts were awarded following a non-competitive process and 39 per cent after a competitive process – 24 per cent of contracts are not recorded …
‘The arms industry is further backstopped by export relationships – last year the UK provided £8.6 billion of Standard Issue Export Licenses for arms – that the MoD provides financial and institutional support to help secure.’
The report further notes that ‘research and development expenditure in the arms industry is primarily covered by public customers, meaning that returns on private capital invested are comparatively high and public investment helps develop technologies from which firms can benefit.’
The report adds that in the arms industry: ‘Overspending and rising costs within arms production are augmented by the costs of corruption, which forms a pattern within the arms trade.’ And ‘many jobs in the industry are insecure, contingent on shifting geopolitics and the procurement practices and political alliances that shape the industry.’
In a section ‘Who Owns the UK Arms Industry? the report states: ‘While the arms industry relies on state subsidy, shares in the arms companies operating in the UK – nearly all of which are publicly listed – are predominantly controlled by private investment firms’ (asset managers).
‘Due to their fee-based model, asset managers do not retain their returns on investment. Instead, returns flow to their beneficiaries who are overwhelmingly wealthy: the top ten per cent of UK households by income own 35 per cent of both direct and pension-mediated equities.’
The report says of exports: ‘Beyond funding from the MoD for domestic production, the UK arms industry draws significant revenue from exports. As with arms produced for the UK military, exports are backstopped by MoD procurement and extensive institutional support, part of a symbiotic relationship that encourages production for the UK’s military and political allies.’
It adds: ‘Since the Cold War, Gulf monarchies have emerged as the UK’s primary customers for arms export, providing one means for Gulf sovereign wealth to be “recycled” through the UK economy.
‘Through geopolitical alliances founded in part on arms export, the UK military and its allies have been involved in attacks on civilian infrastructure, civilian deaths and internal repression.
‘In 2022, the UK ratified £8.6 billion of military export orders accounted for by Standard Individual Export Licenses (SIELs). . . . In 2022, 47 per cent of the value of SIEL exports went to GCC countries and 45 per cent to Qatar and Saudi Arabia alone.
‘While the UK has been a leading arms donor to Ukraine since the Russian invasion in 2022, these arms transfers operate distinctly from export orders: the MoD provides direct military support to Ukraine through donations from existing stockpiles, whereas export orders are contracts facilitated by the MoD between nation state customers and private arms companies.
‘Other than the GCC countries, the leading customers for the UK arms industry since the early 2000s have been the US and India …
‘The MoD also runs two projects operated by British staff and personnel (although funded by the Saudi government) to facilitate arms sales to Saudi Arabia.
‘The MoD Saudi Armed Forces Project (MODSAP) oversees Tornado and Typhoon contracts while the Saudi Arabian National Guard Communications Project (SANGCOM) provides communications equipment for internal security forces.
‘In 2019, SANGCOM employed 55 civilian staff between the UK and Saudi Arabia, while MODSAP employed 107. BAE Systems also provides technical support and training to the Saudi Air Force and Navy under the terms of the Saudi British Defence Co-operation agreement.’
The report further notes: ‘In addition to rising costs associated with the production process, UK arms companies have been subject to scrutiny over their use of bribery, and spending on “commission payments” in the arms trade.
‘Most famously, BAE Systems was investigated by both the UK and US governments over the al-Yamamah arms deal — still the UK’s largest ever arms sale yielding a net £43 billion in revenue for BAE between 1985 and 2007.
‘Commission payments totalling £600 million were revealed in MoD documents made temporarily available by mistake, while an estimated £1 billion was paid to accounts controlled by Prince Bandar al-Saud (a key figure in the deal) alone.
‘In 2006, the Serious Fraud Office (SFO) abandoned its investigation into bribery in the al-Yamamah deal under pressure from the Saudi government, and after concerns were raised by senior UK politicians.
‘After the Saudi government suspended negotiations on a follow up arms deal to al-Yamamah in protest at perceived scrutiny from the SFO, the British Prime Minister, (Tony Blair) Foreign Secretary (Jack Straw) and Defence Secretary (Des Browne) all expressed the view that the SFO investigation endangered the UK’s relationship with Saudi Arabia.’
