The Asset
Manager Arsenal
An Interactive Story
Khem Rogaly
Sophie Monk
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The Asset Manager Arsenal — An Interactive Story


What Makes the Political Economy of the Arms Industry Distinct?

Compared to other sectors of the UK economy, the arms industry receives disproportionate state subsidy. The industry is also exempted from major trade treaties, including the World Trade Organisation agreement on public procurement. Perhaps most important to investors in the industry, however, is the support arms production receives for research and development (R&D) costs and the use of public procurement to backstop demand. Despite its privileged role in the UK economy, the arms industry is smaller than this level of subsidy would imply, adding less in value to the economy and employing fewer people than automotive manufacturing, which struggles to access state support. In fact, in 2022 the defence sector only added £1.8 billion more to the UK economy than the chemicals industry in the North West of England alone.

Defence Received an Outsized Average Percentage of Public R&D Funding
Mean share of total public R&D funding, 1987-2009
Source: OECD, analysis from Enrico Moretti, Claudia Steinwender and John Van Reenen, “The intellectual spoils of war? Defense R&D, productivity and international spillovers”, National Bureau of Economic Research Working Paper, 2019. Available here.

Though they are privately owned, arms companies are considerable beneficiaries of state subsidy in the UK. In 2022, more than half of R&D costs were met by customers — either the UK Ministry of Defence (MOD) or other governments — for three of the four leading MOD suppliers where data was available, as illustrated by the chart below.

What Percentage of Company R&D Investment Did MOD Suppliers Fund Themselves in 2022?
Percentage of R&D investment internally funded at four of the MOD's top ten suppliers in 2022
Source: Company annual reports and SIPRI 2022 Arms Industry database.
Note: Equivalent data is not available for the remaining six of the top ten suppliers. The chart excludes additional direct public funding for academic research and research institutes that support research and development.  Leonardo is an outlier as the Italian state has a significant minority shareholding. Of the rest of the MOD’s top ten suppliers, Airbus, Babcock and Thales state in their annual reports that they charge a significant proportion of R&D costs to their customers but do not provide figures. Airbus notes that a significant proportion of R&D costs are funded by military customers specifically. Ferrovial is one of the MOD’s top suppliers but does not meet the criteria for an arms company used in our analysis. See the methodological annex to Common Wealth’s full report — “The Asset Manager Arsenal: Who Owns the UK Arms Industry?” — for more detail on the definition of arms companies used in this research.

Arms companies also benefit from state procurement and demand with the MOD set to spend £242 billion on equipment procurement and support over the next ten years. As the chart below shows, MOD spending is concentrated among a few key suppliers which draw significant revenue from domestic production.

What Percentage of MOD Expenditure was Allocated to the Top Ten Suppliers in 2022?
Percentage share of 2022 MOD expenditure by company (all industries)
Source: Ministry of Defence.
Note: Ferrovial does not meet the definition of an arms company used in our analysis. See the methodological annex to Common Wealth’s full report for more detail.

On the one hand, the distinct political economic architecture of the UK arms industry demonstrates that an active industrial strategy and public coordination can shape production, with implications for other sectors key to decarbonisation. On the other hand, it raises a set of important questions:

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Who benefits from the outsized subsidy given to the arms industry?

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What are the economic consequences of the state prioritising arms production?

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Can some of the productive potential of the arms industry be repurposed to meet urgent social challenges and deliver more secure long term manufacturing jobs? If so, how?


How Does Money Flow Through the Arms Industry?

The two key beneficiaries from the state’s prioritisation of arms production are investors in arms companies and the UK’s geopolitical allies.

State guarantees afforded to arms companies lead to strong average returns on capital invested in the sector, above the FTSE100 average. These benefits ultimately flow to internationally distributed shareholders.

Average Returns on Invested Capital in the UK Arms Industry Were Higher Than the FTSE100 (2013-2020)
Average percentage returns on invested capital for the UK arms industry, FTSE100 and three of the MOD’s top ten suppliers, 2013-2020
Source: Common Wealth analysis of the Refinitiv database.
Note: BAE Systems, QinetiQ and Babcock are included here as three of the MOD’s prime suppliers headquartered in the UK that are analysed in detail as case studies in the report that accompanies this data story.

The industry further provides a source of military and political power for the UK’s arms export customers. Both MOD procurement decisions and institutional support underpin export production: while domestic procurement decisions help facilitate export deals, the Department for Business and Trade employs at least 127 civil servants in the in-house organisation UK Defence and Security Exports that helps firms secure export contracts. Export relationships have become more concentrated since the Cold War with nearly half of the value of arms exports through Standard Individual Export Licenses last year flowing to Gulf Cooperation Council countries. Data on the value of Open General Export Licenses is not available although these represent the majority of arms sales to Saudi Arabia.

Arms Export Licenses in 2022 Were Concentrated Among a Few Leading Customers
Military and dual-use export licenses by value (£bn, SIELs only)
Source: Department for Business and Trade.
Note: This is based on the Standard Individual Export License data. This does not account for open licenses (values are not available) or arms donations to Ukraine which operate separately from exports as they come from existing MOD stockpiles. In 2022, transfers to Ukraine were valued at £2.3 billion.

Who Owns the UK Arms Industry?

Global Asset Management Firms Top the List of Shareholders in Major UK Arms Companies
Average percentage shareholding across the UK arms industry, top ten investors
Source: Common Wealth analysis of the Refinitiv database.
Note: The governments of Norway and France have outsized average holdings in arms companies with UK operations as a result of the ownership structures of a few companies within the industry. Norway has majority shares in Kongsberg Gruppen and France has significant minority stakes in Thales, Safran and Airbus.

The layers of state support for both export and domestic production safeguard strong returns for arms company shareholders. But who owns the arms industry? As in most sectors of the global economy, the leading shareholders in major arms companies operating in the UK, including the MOD’s prime suppliers, are investment firms and asset managers. However, this part of the asset manager arsenal offers particularly strong returns backed by state procurement, research and development funding and institutional support. Returns do not flow to asset management firms themselves but instead to wealthy individuals and pension funds that pay a fee for investment firms to manage their assets.

Within this globally distributed share ownership structure, UK pension funds have particularly limited exposure. If we assume that pension funds allocate roughly in keeping with the relative size of companies in an index or a market then, to take three indicative examples, based on the relative positions of BAE Systems, QinetiQ and Rolls Royce in the FTSE All Share (the index of all companies listed on the London Stock Exchange), UK pension funds’ exposure to these firms would be approximately 0.16 per cent, 0.01 per cent and 0.07 per cent of their aggregate portfolios, respectively, for a combined allocation of less than 0.25 per cent.

Less Than 15 per cent of UK Defined Benefit and Defined Contribution Pension Funds Are Allocated to UK Equities
UK combined DB and DC pension fund allocation, 2022
Source: Common Wealth analysis based on Thinking Ahead Institute Global Pension Assets Study 2023.

QinetiQ, BAE Systems and Babcock International are three of the MOD’s prime suppliers. All three derived over 20 per cent of their global revenue from the MOD in 2021/2022. QinetiQ was part of the MOD — the Defence Evaluation and Research Agency — until 2001 while the predecessor to BAE Systems was under public ownership until 1981. Now, their collective industrial and technological capacity is under the share ownership of investment firms.

Global investment firms dominate the lists of top shareholders at all three companies. However, Klear Kite LLC, the largest shareholder of QinetiQ, is an outlier that illustrates the close political connections held by arms companies. In November 2022, Christopher Harborne, the sole member of Klear Kite, made the largest donation to a Member of Parliament’s office in history — £1 million to Boris Johnson.

The Top Ten Shareholders in QinetiQ
Percentage shareholding in QinetiQ, top ten investors
Source: Common Wealth analysis of the Refinitiv database.
The Top Ten Shareholders in BAE Systems
Percentage shareholding in BAE Systems, top ten investors
Source: Common Wealth analysis of the Refinitiv database.
The Top Ten Shareholders in Babcock International
Percentage shareholding in Babcock International, top ten investors
Source: Common Wealth analysis of the Refinitiv database.

What are the Economic Consequences of Arms Production?

In addition to state guarantees that help underpin shareholder returns and relationships with Gulf monarchies, arms production helps produce a set of challenging economic dynamics.

The costs of arms production are rising. Since the Cold War, the consolidation of the arms industry has allowed suppliers to set higher prices for contracts. Arms projects frequently overrun and grow in cost: the National Audit Office suggests that the MOD’s procurement plan for the next ten years could cost £5.2 billion more than stated. Corruption and the use of “commission payments” within arms exports creates a further cost pressure for arms companies.
The military industry is a significant global emissions source that is exempt from the Kyoto protocol and military emissions are optional disclosures within the Paris agreement. In 2018, the UK military spending produced an estimated 11 million tonnes of CO2 equivalent — more than a quarter of the entire aviation sector. The decarbonisation of military production and use is challenging with no alternative fuels for fighter jets or naval propulsion yet available.
The arms industry's reliance on domestic and export contracts creates long-term insecurity for workers. This is exacerbated by the disproportionate role of multinational companies in the UK’s arms sector compared to other European countries, the growing role of arms imports in MOD procurement and the concentration of exports among a few customers. Between 2017-2021, the UK’s share of global arms imports grew by 74 per cent compared to 2012-2016. When production sites move due to procurement decisions, workers and local communities face far greater consequences than multinational firms.
These challenges, and the flow of state support for the industry to private beneficiaries and export customers, raise the question of whether some existing industrial capacity in the sector can be repurposed to meet social needs. Arms companies have shown this capacity in the past: hybrid buses developed by Lockheed Martin in the 1990s and produced by BAE Systems have been used across the world. Public coordination, ownership and investment would need to play a greater role, however, to answer the question of how best to use existing industrial capacity in the face of climate crisis.

Cover image licensed to QinetiQ Group under creative commons (CC BY-NC-ND 2.0)