Study claims taxpayer is subsidising up to 90% of weapons companies’ research and development budgets…

A Challenger 2 main battle tank (MBT) is pictured during a live firing exercise in Grafenwöhr, Germany.

The UK government is wasting billions of pounds of taxpayers’ money on “corporate welfare” for arms manufacturers that is siphoned into massive shareholder returns, a new report claims.

The study, by thinktank Common Wealth, suggests that long-term purchase orders and direct subsidies, which sometimes paid for more than 90% of private defence firms’ research and development budgets, were allowing leading defence companies to give billions of pounds to their shareholders.

But, despite being “supported by the state in a way no other sector is”, weapons manufacturers had failed to deliver on government work, the report’s authors stressed.

Common Wealth highlighted the case of new Ajax armoured vehicles being developed for the Ministry of Defence. At least £3.2bn of public money has been sunk into the project over the past decade, but the firm hired by the MoD to develop the vehicles, US-based General Dynamics, has been plagued by setbacks.

Ajax has now had the date for it to be fully operational pushed back to 2029, from an original target of 2017, after prototypes shook so violently they were unable to fire while moving, damaged the hearing of troops who tested them and made other personnel sick.

Despite this, General Dynamics has paid $25.6bn (£20bn) to shareholders since it was awarded the contract in 2014. It is one example of what Common Wealth researchers said was a pattern of huge investor returns at such companies, thanks to, it claims, “levels of state support above any comparable manufacturing sector”.

The report found that BAE Systems pays just 14.35% of its own R&D costs, despite boasting £21.25bn in revenue in 2022. QinetiQ, another major private UK arms manufacturer with a £1.58bn annual turnover, pays just 4.5% of its R&D costs.

Meanwhile investors in the two firms have seen massive returns in that time – QinetiQ’s 23.2% return on investor capital was almost twice the FTSE average of 11.7%.

The firm paid £43m to shareholders in 2022-2023, with the dividend per share being worth twice what it was a decade ago. BAE meanwhile paid nearly £1bn in dividends in 2022.

Common Wealth researchers found that three major investment firms (BlackRock, Vanguard and State Street) owned a combined average of 16% of the shares issued by the weapons sector.

The MoD’s approach to contracts was another focus of the report. The ministry has committed to spending £242.3bn on equipment procurement and support over the next 10 years, which the report says is in stark contrast to other manufacturing industries, where “comparative 10-year plans on public procurement are not in place”.

A recent National Audit Office assessment of the MoD’s equipment plan warned that the ministry was “facing increasing risks in delivering equipment projects to budget and schedule” and suggested that parts of the plan could cost £5.2bn more than stated.

“Subsidies, procurement spending and institutional support feed a toxic marriage between the UK military industry, its investors and its primary export customers,” Khem Rogaly, the lead researcher behind the report, told the Observer. “Sometimes, despite a steady flow of taxpayer cash, the goods aren’t delivered at all.”

The report found that 47% of the billions of pounds of weapons exports made in 2022 went to members of the Gulf Cooperation Council – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE.

“Arms companies are officially private companies, but they are supported by the state in a way no other sector is,” said Anna Stavrianakis, a professor of international relations at the University of Sussex, and one of two academics who endorsed the report.

“Asset managers like BlackRock, Vanguard and Capital Group own a significant proportion of the arms industry, meaning that arms production is effectively a system of corporate welfare. The costs are socialised but the profits are privatised,” she added.

BAE Systems said its “focus on operational efficiencies” allowed for “increasing investments in skills, technologies and facilities”.

It added that company-commissioned research suggested that BAE directly and indirectly contributed £11.1bn to the UK economy in 2022 and supported 132,000 UK jobs, while stressing that £1.4bn of self- and government-funded R&D helped “sustain the UK’s valuable engineering and technology sectors”.

The MoD said it was “misleading to draw a line between government spend and profits”, and added that “the defence industry not only often holds the specialist skills required, but also the means of production for world-leading capabilities”.

“They are vital R&D partners and the UK defence industry provides billions of pounds of economic benefit to this country, including tens of thousands of high-skilled jobs.”

It added that the Ajax armoured vehicle contract had a fixed price of £5.5bn, and that the government did not “shy from key decisions to put a project back on track”.

It went on: “More widely, we are investing at least £6.6bn in research and development to ensure defence can sustain operational advantage.”

Source: The Observer

12 Jul 2023 by Andrew Kersley

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