Escaping the Subsidy Trap EMBARGO: 00.01hrs, 22 Sept 2004 Authors Contents Paul Ingram Paul Ingram is Senior Analyst at the British American Security Information Council (BASIC), and has been a Consultant working for Oxford Research Group (ORG) on arms export subsidies since 1998. He was co-author with Ian Davis of The Subsidy Trap: British Government Financial Support for Arms Exports and the Executive summary 3 Defence Industry, published by Oxford Research Group and Saferworld in July 2001. With Mark Ingram he has provided written and oral evidence to the Trade 1: Introduction 5 and Industry Committee on ECGD subsidies earlier this year, as well as advice to a number of government officials in the area. 2: Myths behind UK Government support Roy Isbister for arms exports 8 Roy Isbister is the Head of the Export Controls Team at Saferworld. He completed his Masters in International Relations from the London Centre of International The jobs myth 8 Relations of the University of Kent in 1998. He then worked as a member of the arms export controls team at Saferworld, before spending a year looking at The balance of trade myth 13 humanitarian intervention issues for the International Security Information Service (UK). He returned to Saferworld at the beginning of 2001, as Project Manager, The cheaper defence procurement myth 15 Arms Export Controls. In the last four years he has worked and written extensively on arms export issues, in particular with regard to the UK and the EU. 3: Case study: Hawks to India – A £1bn subsidy? 18 Acknowledgements 4: The Subsidies 22 The Authors would like to thank their support teams and senior staff for additional research, editing and proof reading, especially: Vanessa Haines, Stephen Direct assistance: £31m subsidy 23 Pullinger, James Kemp, Mark Ingram, Joseph Miller, Ian Davis and John Slaboda. We would like to thank our printers, who show extraordinary flexibility with a swift Export credits: £222m subsidy 27 turn around. Responsibility for the reports contents rests entirely with the authors. Distortion of MoD procurement: £200m subsidy 29 Financial Support Development of new systems (R&D): This publication was made possible by the generous support of: Joseph Rowntree up to £483m subsidy 30 Charitable Trust; the Marmott Trust; the Polden Puckham Charitable Foundation; the Ploughshares Fund; and the Oakdale Trust. Unquantifiable elements 33 Price: £5 ISBN: 1-904833-05-5 5: Conclusion and policy recommendations 35 Printed on 100% post-consumer recycled paper using soy-based inks and 100% green energy by Oxford Greenprint, 125 Magdalen Road, Oxford OX4 1RQ; tel: 0845 3451398, email: [email protected]. Appendix: Background to ECGD calculations 38 All three authoring organisations are charities registered in the UK: BASIC: 1001081; Saferworld: 1043843; Oxford Research Group: 299436 1 2 Summary Escaping the Subsidy Trap UK Government support for defence exports is made up of direct Executive Summary subsidies, export credits, distortion of Ministry of Defence (MoD) procurement and a proportion of government spend on development There are few if any economic or employment benefits from the costs. Explicit financial (and political) support of £31m per year is provided considerable government support to arms exports. This report, published through such organisations as the Defence Export Services Organisation by three leading UK security policy think tanks, explodes the myth that (DESO) within MoD. Export credits are provided as insurance to exporters arms exports are of particular value to the British economy and therefore and purchasers of UK equipment at premium rates well below the market deserving of unique support from government. It concludes that rate, an annual subsidy that amounts to £222m. The cost of the distortion government subsidies to arms exporters, worth at least £453m and of MoD procurement to accommodate export promotion is more difficult to possibly up to £936m a year, are based upon false economics. Far from estimate, but if the experience of the Hawk deal is in any way indicative, providing jobs, government support for arms exports diverts investment our estimate of £200m is extremely conservative. away from more effective job-creating economic activity. The only In addition, the report seeks to identify the extent of subsidy to arms significant impact from reducing these exports would be felt by a handful exports that accrues through government contributions to defence R&D. of highly-dependent local economies that would need short-term, targeted The government spends £1.5bn on R&D of weapon systems each year. government assistance to cope with the transition to civil production. On Approximately 40 percent of defence equipment produced in the UK is the other hand, excessive government spending on defence research and exported. Yet last year MoD succeeded in clawing back only £12m of development (R&D) attracts too many skilled workers away from the civil these contributions from the exporting companies. This represents a form sector, thereby exacerbating a shortage in the non-military economy and of subsidy, though there is major disagreement as to how this should be harming prospects for long-term economic growth. calculated, as R&D costs may be partially offset by exports and - some Exports are not an automatic ‘good’: unless they achieve an adequate rate commentators argue - this money would be spent regardless of export of return they are in fact a drain on the economy. Given the level of sales or prospects. If, however, one does assume that 40 percent of R&D subsidy involved and the relatively low profit margins achieved in a spending relates directly to exports (the same percentage of total UK competitive global market it is highly unlikely that arms exports either defence production that is exported), this would give an upper estimate of significantly offset domestic procurement costs or make a positive the R&D subsidy of £483 million. contribution to Britain’s overall economic well-being. In any case, arms We estimate that the subsidies provided to UK companies involved in exports make up only 1.5 percent of the UK’s overall exports, and any defence exports are therefore worth at least £453m and possibly up to reduction in sales is likely to be partially offset by higher civil exports. £936m; in other words, between £7,000 and £14,400 for each job It has been highlighted by recent experience that the desire to promote supported by exports. At a time when public spending is under pressure exports can also have a deleterious influence upon domestic procurement the onus is on the Government to withdraw the subsidies and encourage decisions, thereby weakening value for money and potentially impairing similar withdrawals in other countries. the operational effectiveness of the UK’s armed forces. The recent export of BAE Hawk trainer jets to India and the related decision by the Defence Secretary, Geoff Hoon, to buy Hawk in the face of reported opposition from his own Permanent Secretary and other government departments, clearly demonstrates the erroneous assumptions driving current policy. Internal government estimates reported in the press indicate that export and employment considerations actually added, rather than saved, £1bn to the price tag for the Hawk procurement over the lifetime of the project. 3 4 Introduction Escaping the Subsidy Trap lowest cost, this policy can lead to poor procurement decisions and higher 1. Introduction costs to the taxpayer. The report also concluded that five years after a 50 percent reduction in UK arms exports “overall national income would be substantially the same as it would otherwise have been without the loss of Tony Blair’s Government has a foreign policy that involves the tightening defence exports,”4 and that “the economic cost of reducing defence of controls on arms exports, yet at the same time it promotes UK arms exports are relatively small and largely one off”.5 Yet, UK Government exports around the world, extolling the economic benefits they bring to the ministers have wildly misinterpreted the York Report’s findings, claiming UK. These benefits purportedly include: retention of skilled employment; erroneously that it concluded, “defence exports represented a significant enhanced balance of trade and other spin-offs to the wider British net benefit to the UK economy”.6 economy; and reduced costs for domestic defence procurement (as follow-on exports result in lower average unit costs of production). It should be noted that the Government does provide non-economic Successive governments have deployed these arguments about perceived justifications for supporting arms exports. For example, there is the economic benefits when justifying their export promotion. Some of these argument that a strong indigenous defence industrial base (which, so the exports might otherwise have been refused for their potentially negative argument goes, requires a strong export performance if it is to be impact on human rights, peace and stability and sustainable development sustained over time) is necessary to safeguard the UK’s security of supply - as set out in the Government’s export criteria and its stated international of defence equipment. However, in a written parliamentary answer in June commitments. 1 This economic justification is further influenced by 2004, Defence Minister Lord Bach appeared to restrict the application of ‘constituency politics’ and the fear that job losses in the defence sector are this argument to “a very small number of capabilities which for national likely to have negative electoral consequences. security reasons we place a high priority on retaining within the United Kingdom industrial base”. The examples Lord Bach gave were “in the Successive UK governments, therefore, have provided financial and fields of nuclear technology, defence against biological, chemical and political support for arms exports. In July 2001 the Oxford Research Group 7 2 radiological warfare, and some counter-terrorist capabilities”.