THE FINANCIAL IMPLICATIONS OF DEFENCE
EXPORTS
9. The MoD argue that defence exports bring savings
and other benefits to the MoD,[19]
but it should be acknowledged that they also involve costs. The
net cost of DESO's export support operations was £14.4 million
in 1997-98, although there were other MoD revenues from sales
of surplus equipment by the Disposal Sales Agency and Commercial
Exploitation Levies, [20]
which together amounted to some £130m (Figure 1). The MoD
argues that the benefits of increased export sales to the Department
also include lower overheads attributable to its procurement costs,
as a result of spreading these over a larger number of unit sales.
The MoD estimates the savings which arise from this factor at
£350m a year.[21]
This is the fundamental justification for public support for the
promotion of defence exports by the MoD.
Figure 1: Expenditure and Receipts, 1997-98
|
|
Expenditure
|
Receipts
|
Government-to-government 'project offices'
|
£34.6m
|
£34.6m
|
Other DESO activities
|
£21.2m
|
£6.8m
|
TOTAL |
£55.8m
|
£41.4m
|
Net DESO costs
|
£14.4m
|
|
Commercial Exploitation Levy receipts
|
|
£53.9m
|
Sale of surplus MoD equipment
|
|
£77.5m
|
|
|
£131.4m
|
10. Beyond the direct impact on the MoD itself, defence
export orders of some £5.5 billion a year also bring wider
advantages to the UK economy as a whole in terms of balance-of-payments
benefits[22]
and employment. In the MoD's reckoning they currently contribute
to the support of around 150,000 of the 420,000 UK jobs in the
defence industry.[23]
There are also other significant but often unquantifiable benefits
from defence exports. They may be decisive in supporting strategic
defence manufacturing capabilities within the UK, and it is argued
that they help open up overseas markets for civil exporters. They
are also seen to help in cementing military alliances and in bringing
political influence where it might not otherwise exist. Along
with such more qualitative benefits, however, there are also costs
that are not always clearly visible. The University of York has
estimated that overall, in the narrower terms of direct financial
implications for government, there may be a net cost from
defence exports. In research published[24]
very recently they estimate this at an average of around £230m
a year, based on data for the last 10 years; equivalent to nearly
£2,000 for each of an estimated average of 120,000 defence
jobs which were dependent on such exports over the last 10 years.
Their calculations are set out in Annex 1.
11. The York analysis is based on some contentious
assumptions and estimates, and in using data for the last 10 years
it does not necessarily indicate the level of costs and benefits
in the future. A case in point is the estimated £239m cost
of ECGD support for defence exports—the most significant
cost element in the York analysis, and also arguably one of the
most significant factor in industry's ability win export orders.
The authors of the study recognise that ECGD costs for defence
exports have been much lower recently, perhaps suggesting a cost
of only £34m a year, although they also point out that the
current Asian financial and oil-price crises may well feed through
into significantly higher ECGD losses in the years ahead. The
assertion that procurement decisions have sometimes involved the
MoD contracting more expensive equipment in order to bolster exports
cannot be tested or quantified, and the confusion over trade-for-aid
involving defence export contracts was illustrated by the Pergau
Dam affair. However, we might hope that these arrangements are
now a thing of the past rather than a feature of current practices.
There are gaps and approximations in the York analysis, and several
of the assumptions on which it is based are certainly debatable
and some border on the tendentious. Nevertheless we accept that
it is quite appropriate to question the costs and benefits of
the MoD's approach to procurement and export support. Even if
the assumptions on which the analysis is made were shown to be
reasonable, it could be argued that the costs identified are a
small price to pay for making the political choice to ensure supplies
by supporting strategically important defence manufacturing capabilities
in the UK, and to harvest the significant industrial, employment,
operational and foreign relations benefits they bring.
12. Neither the evidence of the MoD nor that of the
York study provide a sufficient basis on which to make final judgements
about the balance of costs and benefits which arise in the pursuit
of the government's chosen policy. But the question of whether
continued public support for the defence industry represents a
proper use of public money is one that does deserve regular and
closer re-examination, and should not simply be accepted as an
unchallengeable presumption. The 'military-industrial complex'
is a well-worn cliché, but the causes of its persistence
as a term of abuse should not be left unexamined. The position
of the MoD, through the activities of DESO, in promoting the interests
of UK defence manufacturers is an unusual one. While the DTI (and
probably many other departments) see it as a perfectly proper
part of their role to promote the UK's commercial interests abroad,
they are not in the same close customer/client relationship with
the firms they support as is the MoD with defence manufacturers.
The relationship between the defence industry and the MoD is inevitably
open to suspicion—it is therefore all the more important
to provide transparency and accountability in this relationship,
and to be able to demonstrate that DESO provides an unquestionable
benefit to the national interest. In an era of increasing
internationalisation of the defence manufacturing industry, and
of an increasing acceptance of the need for open markets and value
for money in defence procurement, the precise costs and benefits
of the MoD's relationship with defence manufacturers will be increasingly
difficult to establish. For precisely this reason the MoD must
be able to demonstrate the benefits of this relationship, particularly
at a time of increased focus on the ethics of defence exports.
As a starting point, we invite the MoD to provide a more systematic
and detailed assessment of the full costs and benefits of defence
exports for the UK.
19 Ev p 23 Back
20 Commercial
Exploitation Levies, charged on exports, are intended to recover
MoD contributions to R&D Back
21 MoD
Performance Report, para 602 Back
22 There
are also balance of payments disbenefits when components
for equipment assembled in the UK are imported, and when export
sales involve sub-contracted assembly in the customer country. Back
23 Defence
Statistics 1998; Table 1.11-data for 1996-97 Back
24 The
Subsidy Savings from Reducing UK Arms Exports;
Dr S Martin; Journal of Economic Studies, Vol 26,No. 1, 1999;
pp 15-37 Back
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