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The arms industry is governed by a different set of rules than the rest of the UK economy. The industry — defined here as the major arms producing companies and providers of military services operating in the UK — is exempt from several trade treaties, including the World Trade Organisation (WTO) agreement on public procurement.^[1] The industry is also the recipient of significant state intervention that reduces risk for investors: not only is the Ministry of Defence (MOD) its primary client, but research and development costs for arms companies are predominantly paid for by the state and by export customers as a component of procurement contracts. Indeed, between 1987 and 2009, defence production on average received 35 per cent of the UK’s public research and development funding.^[2] Despite this privileged position, the industry forms a smaller part of the UK economy overall than the scale of its state support would imply, adding less in value to the economy and employing fewer people than automotive manufacturing — an industry that is currently struggling for public investment to safeguard its future.^[3]

The extent of this state support, the industry’s legal privilege and, as detailed below, the flow of money from public subsidy to investor returns, raise several urgent questions. First, who are the primary beneficiaries of the industry? Second, what are the economic consequences of arms production in the UK? Third, how can some of the significant industrial capacity and public investment currently concentrated within the arms sector best be redeployed to address urgent societal challenges and needs? 

In this report, we seek to answer the first two questions with new analysis of the ownership structures of arms companies operating in the UK, examining the nature of private ownership in the industry and the degree to which public subsidy and procurement expenditure flow to investment firm returns. As the academic literature makes clear, these returns are further underpinned by export relationships — the most prominent and lucrative of which is with Saudi Arabia — that help enable the violent repression of civilians in countries around the world with the support and involvement of the UK government.^[4] State support for export production indicates the degree to which investment in the arms industry is grounded in the maintenance of geopolitical relationships, from which private investors continue to benefit. 

Like most of the world economy, the UK arms industry forms part of the portfolio of global asset managers and investment firms.^[5] The top three investors in the arms industry — BlackRock, Vanguard and State Street — together hold an average 16 per cent of shares of major arms companies operating in the UK. While this is comparable to the combined stake of these firms in other sectors of the UK economy, what makes these investments distinct within the asset manager arsenal is the consistent return on invested capital backstopped by both the MOD and the UK’s arms export customers.^[6] Our analysis shows that the UK arms industry averaged 12.5 per cent returns on invested capital between 2013 and 2020 compared to a FTSE 100 median of 11.7 per cent.^[7]

Moreover, analysis of three of the MOD’s prime suppliers — QinetiQ, BAE Systems and Babcock International — demonstrates the same pattern of returns on investment in companies that generate over 20 per cent of their global revenue from the MOD.^[8] Export customers provide another source of revenue for the industry, although export contracts delivered by private companies are secured with financial and institutional support from the UK government in order to safeguard geopolitical relationships.^[9] Given the increasing concentration of the UK’s arms export base — in 2022, 45 per cent of the value of Standard Individual Export Licenses (SIELs) for arms went to Qatar and Saudi Arabia — the arms export industry serves in part to maintain relationships with a few close military allies.^[10]

The political economic configuration of arms production in the UK contributes to three economic challenges that, following detailed analysis of ownership structures in the arms industry, are explored in this report. First, arms production is subject to significant cost pressure, in part due to the consolidation of the industry; the pattern of corruption within the arms trade further compounds the cost of production.^[11] Second, the arms industry is highly carbon intensive both in production and in end use, with necessary emissions reductions likely to incur costs to the public. Third, in the long term, many jobs in arms production are insecure because of the industry’s dependence on procurement agreements, the growth of arms imports to meet domestic demand, and the disproportionate role of multinational firms in the UK. This creates instability for workers but not for large firms that are able to move operations as procurement contracts fluctuate over time. These challenges raise the question — which our future research will address — of how the government can best repurpose some of the significant industrial capacity that it currently supports within the arms industry to meet existential threats such as climate crisis. 

Understanding the nature of ownership in the arms industry is critical to developing future industrial strategies for UK manufacturing — allowing us to learn from the possibilities offered by the level of public investment and coordination of production currently unique to the arms industry and the risks of public subsidy without public equity and strategic control. These lessons inform future questions about the potential to redirect public investment and capacity towards collective challenges. This initial analysis provides the foundation for research over the next two years, in collaboration with workers in the arms industry, to reflect on the future of the sector and to ask how some of the productive capacity within the sector might be repurposed. 

Key Findings

• State guarantees — including institutional support for exports, state investment in research and development and public procurement — appear to support strong average returns for the UK arms industry and its investors. Between 2013 and 2020, average returns on invested capital in the UK arms industry were 12.5 per cent compared to the FTSE100 median of 11.7 per cent. Returns on invested capital at BAE Systems, QinetiQ and Babcock International all outstripped the FTSE median: BAE Systems averaged 13.8 per cent returns, QinetiQ 24.2 per cent and Babcock 12.3 per cent. 
• The major companies that form the UK arms industry are controlled by investment firms and asset managers. These investors, and the clients and beneficiaries whose assets they use to invest, benefit from state support. Ownership of the UK’s arms industry is concentrated, with just three investment firms (BlackRock, Vanguard and State Street) holding a combined average of 16.3 per cent of shares listed in the major arms companies operating in the UK. 
• Just two investment firms — BlackRock and Capital Group — together control more than a quarter of the MOD’s prime supplier, BAE Systems (successor to the publicly owned company British Aerospace). 
• The UK’s arms export base has grown more concentrated since the Cold War, increasing the UK’s economic ties to a limited pool of export partners and its dependence on political relationships with Gulf monarchies — 47 per cent of the value of Standard Individual Export Licenses (SIELs) for arms went to Gulf Cooperation Council (GCC) countries in 2022.

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Common Wealth would like to thank Anna Stavrianakis and David Wearing for their generous peer review of this report. Thanks also to Adrienne Buller, Amelia Horgan, Chris Hayes, Mathew Lawrence, Melanie Brusseler, Sophie Flinders and Sophie Monk for their comments and support with the report and wider project.