How the UK’s arms trade funnels public cash into private pockets

The Defence and Security Equipment International (DSEI) hosted in London this week has arrived at a moment to savour for arms companies. The bi-annual exhibition where representatives of arms firms congregate alongside their customers is taking place with global military spending at a record high – in part the result of rearmament following Russia’s invasion of Ukraine and geopolitical competition in the Pacific.

Lurking under the surface of festivities at London’s ExCeL centre is a British arms procurement system described as “broken” by two parliamentary inquiries this year. The financial accounts of the multinationals that supply the Ministry of Defence (MoD) reveal an industry propped up by state subsidy – to the benefit of international shareholders – and structural flaws in the UK’s most active area of industrial strategy.

Even beyond the fundamental entwinement of the industry with civilian deaths as a result of UK foreign policy, or the leading role of the UK’s arms export customers in global conflicts, the supposed economic benefits often used to justify arms production actually flow to private shareholders. Over the past decade, the MoD’s leading suppliers have paid their shareholders billions despite high-profile failures in defence programmes.

Aircraft contracts negotiated upwards in price; newly-built frigates sawn open to install delayed gearboxes; flagship tanks that injure testing personnel – the litany of expensive errors in MoD contracts is near comical. With the department set to spend a further £242bn on procurement over the next decade, greater examination of both defence contracts and the balance sheets of contractors is a necessity and can offer a starting point to develop an alternative industrial strategy.

The London arms fair captures the core dynamic of the defence sector in broad strokes: the exhibition is sponsored by the MoD and UK Defence and Security Exports (a government division that markets arms to export customers) and is attended by the representatives of private firms. Arms companies rely on heavy subsidy from state customers – in part through direct support for research and development included in defence contracts. The largest UK-headquartered arms firm, BAE Systems, spent £2bn on research and development in 2022 – only 14% of which was paid for by the company itself. States therefore “de-risk” the early stages of arms projects while ultimately facing another layer of risk if their product is not delivered.

The list of the MoD’s top ten suppliers illustrates their hugely varied reliance on UK business: from firms like QinetiQ, which has derived nearly 60% of its global revenue from UK contracts over the past decade; to BAE, which has subsidiaries in Saudi Arabia, the US and Australia but has still received a minimum of £3bn each year in MoD contracts since 2012; and US giants like Boeing, at which MoD revenue is barely visible on the balance sheet.

Despite this record of failure, the MoD’s top five suppliers paid their shareholders £15bn between 2012 and 2022

Exports also provide a source of revenue for arms production in the UK. With the MoD providing direct institutional and financial support for export agreements, arms companies operating in the UK are supported in selling to a select pool of customers. In 2022, 45% of arms exports for which data was available went to Qatar and Saudi Arabia.

Even accounting for their variable reliance on UK-specific business, defence companies still depend on the support of state customers overall. Meanwhile, the economic benefits of arms production are questionable: in 2022, the defence sector added less value to the UK economy than the chemicals industry in the North West of England alone, despite the subsidy afforded to the former. The defence industry benefits from a far more active industrial strategy than most other sectors of the economy yet its economic contribution is limited while projects are chronically delayed and grow in cost.

Despite this record of failure, the MoD’s top five suppliers paid their shareholders £15bn between 2012 and 2022. Delivering projects and providing secure manufacturing jobs are evidently lower priorities for arms companies than shareholder payouts: over the same period, our research at Common Wealth shows, the MoD’s top ten suppliers paid shareholders a far greater share of their profits than the average FTSE-listed firm. Like other firms listed in the UK and US, arms companies seek to reward their shareholders above all but they are aided in doing so with government subsidy and support.

State subsidies and contracts help yield the huge dividends that flow through the investment firms which are the leading shareholders in the defence sector: BlackRock, Vanguard and State Street hold a combined average of 16% of shares listed in major arms companies operating in the UK. These firms invest on behalf of their clients, who see the ultimate returns, charging a fee for the service. Despite common misconceptions, cash flowing through these global investment firms is not a boon for UK pensioners. UK pension funds have limited exposure to equities in general, especially UK-listed companies. A rough estimate suggests that UK pension funds have negligible (0.16%) exposure to BAE Systems.

The future may be bright for now in the boardrooms of arms companies, but it is less so for civilians in Yemen that have faced years of conflict supplied with UK-produced weapons. Neither does the UK’s industrial strategy support security for high-skilled manufacturing workers in the long term. While military spending is tied to geopolitical fate, maximising shareholder value holds firm as the governing logic of multinational arms companies.

The end of the Cold War had disastrous consequences for workers in the global arms industry that illustrate the insecurity of military-focused industrial strategy: General Dynamics (a leading US supplier currently responsible for two scandal ridden MoD contracts worth £8.7bn) sacked 64% of its employees between 1991 and 1993. Over the same period, it rewarded executives with record bonuses and paid $4.6bn to shareholders, according to 2001 research by Rachel Weber. Allocating public investment towards arms companies is a fragile approach to keeping good jobs in the UK: the history of worker-led projects that aimed to convert defence production at viable sites towards sectors such as offshore renewables and to anchor jobs through democratic ownership offers a compelling alternative.