BAE Systems in the UK Economy: Public Relations on a Strong Data Base

The report by Oxford Economics on BAE Systems’ contribution to the UK economy issued in January is clearly a public relations document leavened with multiple pictures and stories about individuals’ experiences. However, this should not disguise the fact that it also addresses multiple important matters, offers a mass of auditable numbers and covers a very wide agenda. As the firm which leads the delivery of the UK’s combat aircraft, warships and submarines, BAE Systems is clearly of central importance to the government’s aspiration to present the UK as an independent and significant military actor, but the focus of this report is its impact on the economy and indeed UK society.

Since 2015, the Ministry of Defence (MoD) has been required to contribute to the prosperity agenda, and from 2021 all government procurement competitions have had to allocate at least 10% of the marks available to the five themes of social value: Promoting the Management of and Recovery from Covid; Tackling Economic Inequality; Fighting Climate Change; Equal Opportunity; and Well-being including Community Integration. This document addresses all these issues, and other companies might consider the generation of their own versions, not least to help with the preparation of future bids.

The report shows the company’s capacity to tick multiple boxes on the government’s agenda, including diversity, levelling up and climate change, but not to be overlooked is how much of this activity relates directly to the firm’s own needs. Its support for numerous educational initiatives and for bringing more women into the business, not least in technical and managerial roles, must be seen in the light of its need for a top-class, skilled and developing workforce. Defence projects are long-term affairs for development, production and support, which means providing companies with multi-year contracts. This justifies – indeed demands – investment in staff training and the recruitment of apprentices. In 2022, the company plans to recruit 900 apprentices and 450 graduates. For young people, these are major opportunities to earn a secure and well-paid living over a sustained period. BAE Systems is not alone in its commitment to apprenticeships, as visits to the websites of Rolls Royce, MBDA, Babcock and other major defence suppliers underline.

Of macroeconomic significance, the company’s main manufacturing facilities are in significantly deprived areas where the situation could be expected to deteriorate still further were the company’s sites to disappear. Warship and submarine facilities in particular are located in very specific geographic areas that provide sheltered access to deep water, features that are not in themselves attractive for most economic enterprises. Barrow is only now recovering in terms of employment and social deprivation from the gap in submarine development and manufacturing after the Vanguard class was completed, and today 26% of all employed people in Barrow work for the company. Overall, 40% of all BAE Systems employees work in locations that fall into the bottom fifth of areas listed in the government’s Indices of Deprivation. Defence spending with BAE Systems cannot eliminate high levels of unemployment, drug abuse, poor health and falling levels of educational achievement, but it certainly helps the fight.

In the financial rather than the economic domain, there is the issue of how much ministry money going to BAE Systems goes back to the Treasury. Given the 2012 RUSI report – contentious in its time – on the amount of tax revenue that went back to government as a result of a defence contract with a UK firm, it is not surprising to read that BAE Systems and its suppliers, with their workforces, paid almost £1.6 billion in direct tax in 2020. It is estimated by Oxford Economics that the workers involved, through their spending, generated more than £1.0 billion more in tax revenues. BAE Systems has government business with more than just the MoD, and had exports of £4.5 billion in 2020, but even £1.6 billion looks like a significant return to the government for the MoD’s £3.8 billion in payments to the company in 2019/20.

A positive feature of the Oxford Economics report is its revelation that the company knows a lot about its huge and complex UK chain of over 5,000 suppliers, and seeks to mentor many of the firms within it. Appendix A of the report may be of most interest to quite a few MPs, since it lists the top constituencies where the company spends its money, giving the number of suppliers there and the procurement spend involved. The collection and distribution of this sort of information is of course standard practice in the US, where legislature support is needed for individual projects.

Overall, even on big issues, the company appears to have collected more information than the UK government. In particular, the government claims not to know how much defence equipment the UK imports, but BAE Systems reveals that its imports accounted for a quarter (£1.3 billion) of its spending with its supply chains. But there is increasing information about defence in the economy and society, and in the near future, the BAE Systems analysis will sit alongside the government’s effort to assess the contribution of defence to the UK economy through the JEDHub report being generated at the Defence Solutions Centre.

Some will seize on the revelation that the company spent only £100 million of its own money on research and development, relying predominantly on government funding for that category of activity. A challenge for the future, taken on in part already by Team Tempest, will be to shape the overall acquisition system to assure shareholders that research money is being well spent at a tolerable risk. Currently, it is hard to justify spending private money on anything that has just one key customer, who may not take up what is on offer.

BAE Systems, along with other major defence businesses in the country, must simultaneously ride two horses: as commercial enterprises they must raise capital and deliver returns to their shareholders, and as state agents they are expected to contribute significantly to the delivery of government objectives and priorities. The report discussed here is a snapshot of much of what the company feels it has been doing so far.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.

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