Arms Trade Subsidies Factsheet

Introduction

There is a host of ways in which the UK government assists the arms trade - most obviously through the Defence Export Services Organisation, a government agency dedicated to exporting arms, and most expensively through the funding of military research and development. There are some subsidies that are a matter of record and some that, due to commercial confidentiality, are rendered almost unquantifiable. In addition to the catalogue of subsidies, possible 'savings' are also taken into account.

Because of the lack of official information, a number of the elements of the subsidy are estimates and a couple are essentially guesswork. These have been included in order to acknowledge that these elements of subsidy exist and are, CAAT feels, on the conservative side. CAAT considers that the onus is on the Government to provide information that makes the subsidy calculation more accurate.

Subsidy/saving element Subsidy/
saving £m
DESO 16
Use of armed forces 6
Embassies and Defence Attachés 24
Defence Assistance Fund 6
UK Trade and Investment 1
Official Visits 5
Missile Defence Centre 5
Direct Distortion of MOD Procurement Choices 100
ECGD 180
Research and Development 670
Overheads -125
Total 888

DESO, £16m

The Defence Export Services Organisation (DESO) exists to market and sell UK military equipment and services. It co-ordinates most of the direct government support for arms exports, providing marketing assistance and advice on negotiation and financing arrangements, as well as organising arms exhibitions and promotional tours. It has over 600 civilian and military employees in London and offices overseas. DESO's forecasted net operating cost for 2003-2004 is £16m.1

Use of Armed Forces, £6m

The UK armed forces are used to promote military equipment exports. Export Support Teams dedicated to the sale of weapons cost £2m in 2000/1 2 (this appears to be the most recent figure that includes all the Support Teams). In addition to this, account needs to be taken of support from the wider armed forces including an element of training for overseas armed forces and the dispatch of equipment (including airships and warships) to directly or indirectly promote UK equipment. These additional costs are likely to be far in excess of the cost of the Support Teams, though in the absence of official figures CAAT makes a conservative estimate of twice that cost, i.e. £4m.

Embassies and Defence Attachés, £24m

UK embassies have an explicit export promotion role. The mainstay of the military aspect of this is the defence attaché, a member of the armed forces. However, the government-to-government nature of arms deals, the strategic implications of military exports and the extras that can be offered (such as military training) mean that other embassy staff contribute, particularly where the host country is a major arms customer.

A 1989 National Audit Office survey estimated that forty percent of a defence attaché's time was spend promoting military exports. As post Cold War oversupply in the arms market has led to a buyers' market, and because the number of markets has increased, it seems highly unlikely that this element of the defence attaché's role has decreased. The cost of defence attachés for 2002-2003 has been given as £37.1m 3 giving an export subsidy of £15m.

There is far less relevant information available for embassies as a whole. It has been reported that the former UK Ambassador to Iran in the 1970s spent the 'vast majority' of his time trying to sell weapons to the Shah.4 While that may have been a one-off situation, it seems likely that a significant proportion of the effort of embassies in, say, Saudi Arabia and Oman is spent promoting UK equipment. The situation will be different for different countries, but an average of a token 1% is used to represent the role of embassies. FCO diplomatic spending plans for 2003-4 are £869m.5 Hence, CAAT allocates a subsidy of £9m.

Defence Assistance Fund, £6m

The Defence Assistance Fund has a number of roles including 'to defray costs of support for defence exports, and DESO has drawn on the Fund to cover costs of training linked to export sales, visits to the UK by representatives of customer governments, and visits abroad by UK Service personnel to discuss operational or support issues for the equipment concerned.'6 The most recent figure available for the element of the DAF used to promote exports is £5.6m for 1999-2000.7

UK Trade and Investment (previously British Trade International), £1m

UK Trade and Investment's 2002-3 accounts indicated that £72m was spent on 'trade development and promotion'. It is impossible to say how much of this is military-related, and there is supposed to be none/little as DESO is allocated the military role, but it is clear some support is given. An indication of this support is provided by the activities of Prince Andrew, who took up a Special Representative role with UK Trade & Investment on leaving the Royal Navy in 2001. One of his recent tasks was to open a BAE Systems office in Bahrain. In the absence of further information, £1m-worth of UK Trade and Investment's activities are attributed to military export support.

Official Visits, £5m

For the same reasons that arms deals receive the significant involvement of embassy staff, there are high-level arms-promoting visits by UK ministers and civil servants. Part of this promotion has been highlighted in a memorandum from the FCO to the Quadripartite Committee8 which detailed 29 occasions in 2002 & 2003 when FCO and MoD ministers promoted specific military sales, and a further 13 occasions where details have been kept confidential. In addition, the memorandum states that, 'Ministers regularly have meetings during which they, as a main topic or as a secondary matter, promote British exports, including defence equipment. The Government does not keep a central record of these meetings.'

Ministerial visits can cost anything from a few hundred pounds to over a hundred thousand pounds. An estimated total of £5m for official visits is made to cover: the identified ministerial promotional activity above; the wider, unrecorded promotional activity of the FCO and MoD; promotional activity by other departments and the Prime Minister; and other related activity engaged in by civil servants.

Missile Defence Centre, £5m

The UK government is providing £5m per year to the newly established Missile Defence Centre. The dominant purpose of the project is to help UK companies win contracts from the US Ballistic Missile Defense programme. Other recent Government initiatives include the Defence Technology Centres and Towers of Excellence. However, their relevance to export support is still unclear.

Direct Distortion of MoD Procurement Choices, £100m

The desire to promote UK weapons sales can influence the selection of equipment for the UK military. A buyer country is unlikely to look favourably on a product if the home country's military is not willing to purchase it. Hence the UK armed forces are effectively seen as the launch customer. There is little information available as to the proportion of deals where export promotion is an important factor, however a recent, blatant example of such a deal was provided by the MoD purchase of Hawk trainers from BAE Systems. BAE Systems made an unsolicited bid to supply Hawks and demanded that they receive the contract without it being opened up for competition. The Treasury estimated that it would cost the government an extra £1 billion pounds to award the contract uncompetitively to BAE Systems, but in July 2003 BAE Systems duly received the contract.

Clearly, BAE Systems is receiving a potential subsidy of £1 billion though the extent to which exports provide the motivation is difficult to quantify. However, there are plenty of indications that it was important: BAE Systems was reported as saying that if the government did not support the Hawk it would 'ruin the company's chances of selling the aircraft abroad';9 Patricia Hewitt, the industry secretary, highlighted the Hawk's 'significant export potential'10 in her reflection on the decision; and Whitehall sources reported that Mr Hoon 'wrote immediately after the decision to George Fernandes, his Indian opposite number, urging him to buy the Hawks rather than a reportedly cheaper plane.'11 The Indian government responded and, shortly after the MoD award, it announced that it had also chosen the Hawk. This after two decades of attempts by BAE Systems to sell India the aircraft. Geoff Hoon greeted the announcement with delight and as a vindication of the purchase by the MoD.

Given this, it seems fair to allocate much of the £1 billion Treasury calculation to exports. The Advanced Jet Trainer requirement runs over 25years and allocating the full extra cost to exports would lead to a subsidy of £40m per year for quarter of a century. There are clearly tens of major equipment projects running concurrently with a wide range of potential for the above distortion, from zero (Astute submarines) to potentially billions of pounds-worth (Eurofighter Typhoon). Allocating half of the Hawk motivation to exports and assuming that several other projects should be taken into account at any given time, CAAT estimates a subsidy of around £100m.

ECGD, £180m

In the latest figures (2002-3), half of the Export Credits Guarantee Department's guarantees went to supporting military exports, and, since this government came to power in 1997, the proportion supporting military exports has never fallen below 30%. It is now widely accepted, including by Patricia Hewitt,12 that the ECGD subsidises exports. The debate is simply over the method of calculating the level of this support and the level of support. The ECGD, in its latest communication with the Trade and Industry Select Committee, accepted the principle that it would be appropriate to compare its operations with the private finance markets in calculating the appropriate level of capital required to back its guarantees, and the appropriate rate of return. In principle, therefore, there is agreement over the underlying method of calculating the level of support, even if the methods of such calculation are under dispute.

The method used for calculating the ECGD subsidy is that developed and explained previously to the Committee by Mark and Paul Ingram of BASIC. Governments importing UK equipment borrow on the international debt markets, and the rates they pay can easily be found in the bond markets. The ECGD takes the place of the risk premium, measured by comparing the bond rates of the importing country with similar UK bonds. The difference between this market risk premium and that charged by ECGD is the level of subsidy. This is simpler and more direct and accurate than using Value at Risk methods. Following BASIC, the estimated minimum subsidy is £150m (it is a minimum as it does not include elements to account for the valuable contract options in the short term between the offer and the take-up; the contract risk; nor the Bank of England's role as the lender of last resort to the banking system). To this can be added an estimate for Fixed Rate Export Finance support for arms exports, which BASIC guessed to be of the order of £30m a year.

'Fixed' Costs: Research and Development, £670m

That there is a research & development (R&D) subsidy is acknowledged by the Government in that it charges a Commercial Exploitation Levy in an attempt to recoup some of the costs. The CEL brought in £17.5m in 1999-2000 (the most recent figure available, though the CEL was greater than this in most previous years), less than 0.5% of the value of military exports. Attempts by government over past decades to implement a more realistic levy (up to 30% of the selling price) have been watered down to 'what the market will bear', or what the companies will pay.

In order to provide an estimate of R&D subsidy, CAAT simply applies the proportion of UK military equipment that is exported, approximately a third, to R&D spending. In 2001-2, R&D spending was £2,057million13 and so the amount that could be allocated to exports is £686m. This, minus the CEL of £17.5m gives a subsidy of around £670m. (For comparison, £670m is the equivalent of a levy of 16% on the UK's arms exports.)

Overhead Savings, £125m

While the other elements of the subsidy calculation represent the costs to the UK of exporting arms, possible MoD savings due to reduced overheads also need to be considered. These result from longer production runs and, hence, a smaller proportion of overhead costs falling to the MoD's domestic procurement. The MoD estimates that arms exports save it around £300m a year.14 This includes the sale of surplus military equipment and the CEL, and so the MoD's overhead savings figure is around £250m. However, it is debatable as to whether overheads are truly fixed. In a 1999 study,15 Stephen Martin considers that they are not, but also that there would be extra overhead costs to the MoD if exports were stopped. For the want of further available data, Martin chooses the mid-point between the extremes of the two positions. Following this, CAAT takes savings to be 50% of the MoD's overhead estimate, that is, £125m.

Conclusion

There is little doubt that military exports are heavily subsidised. CAAT estimates that UK arms exports receive a subsidy of around £890m per year. Given the 65,000 employees estimated to be working on military exports,16 the subsidy amounts to over £13,000 for each job each year.

Even if the subsidy was smaller (or even negligible), the lack of a significant economic benefit for the UK removes the standard justification for the arms trade. As the subsidy is actually several hundreds of millions of pounds, it provides a positive economic reason to stop the trade and, given the political will, the resources to help that happen.

References

  1. Hansard 2 March 2004, Col. 188/9W
  2. Hansard 1 July 2002, Col. 33W
  3. Hansard 16 October 03, Col. 318W
  4. Ingram, M. and P. Ingram, 'British Economic Colonialism: the use of export credits to support UK arms exports (Working Paper)', paper given to the Seventh Annual Conference on Economics and Security, 2003
  5. www.fco.gov.uk/servlet/Front?pagename=OpenMarket/Xcelerate/ShowPage&c=Page&cid=1007029395222
  6. www.parliament.the-stationery-office.co.uk/pa/cm199899/cmselect/cmdfence/147/14706.htm
  7. DESO, quoted in Chalmers, M., N.V. Davies, K. Hartley and C. Wilkinson, 'The Economic Costs and Benefits of UK Defence Exports', University of York, November 2001
  8. Quadripartite Committee, 'Strategic Export Controls: Annual Report for 2002, Licensing Policy and Parliamentary Scrutiny', First Joint Report of Session 2003-04, The Stationery Office, 18 May 2004
  9. The Times, 26 June 2003
  10. www.raf.mod.uk/news/news_jul03_10.html
  11. The Guardian, 4 September 2003
  12. Hansard 26 March 03, Col. WS
  13. MoD, Defence Statistics 2003
  14. www.deso.mod.uk/policy.htm
  15. Martin, S., 'The subsidy savings from reducing UK arms exports', Journal of Economic Studies, Vol. 26, No.1, 1999
  16. MoD, Defence Statistics 2003
Page created 1 May 2004
 
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