The Bigger Bang

Britain needs its defence industry, but not at any price

IT STARTED as a familiar tale of kickbacks in the murky world of international arms trading. BAE Systems, Britain's largest defence manufacturer, was suspected for years of having slipped handsome “commissions” to those who had helped secure the world's biggest arms deal in 1986: a contract to supply and maintain £43 billion-worth ($85 billion) of aircraft and other bits and pieces to Saudi Arabia. Later, British authorities investigated the Al Yamamah deal, only to call an abrupt halt last December as the gumshoes were circling royal Saudi bank accounts in Switzerland. National security and the fight against terrorism would be imperilled if Britain's valued Middle Eastern ally were annoyed, the official version ran. An extension to the arms deal that could bring Britain as much as £20 billion is believed to be close to signing now.

So far, so predictable, cynics would say. But detailed new allegations in the media have made things look even worse. Payments of more than £1 billion have allegedly been traced to Prince Bandar bin Sultan, a member of the Saudi royal family. Worse still, it seems that the British government (which under Margaret Thatcher signed the agreement) was an integral part of the payments chain.

Both BAE and Prince Bandar deny any wrongdoing. But pressure for a public inquiry has increased—and rightly so. Tony Blair's government has often justified other intrusions of privacy on the basis that the innocent have nothing to fear. That logic should surely apply here; indeed, if they are innocent, both BAE, which is trying to grow fast in America, and Mr Blair, who would like to be remembered for fighting corruption, have a lot to gain from the clouds over their reputations being blown away. BAE has asked a former Lord Chief Justice to mount an independent inquiry of its contract procedures (though he is meant to keep his eyes firmly fixed on the future). Prince Bandar, who used to be the Saudi ambassador to Washington, DC, and is a friend of the Bush family, may not be subject to such democratic concerns; but presumably he would also welcome the opportunity to clear his name.

Judged on the basis of justice, then, the decision to suspend the Serious Fraud Office's investigation in December looks even more pig-headed and plain wrong now than it did then. But what of the extenuating “national interest” circumstances offered by Mr Blair—the idea that further investigation would be bad for the war on terror and bad for defence jobs?

Here a jet, there a jet

Leave aside for the moment Mr Blair's implication, no doubt cruelly unfair, that the Saudis take kickbacks and would be miffed if it were laid in the open. The idea that they would somehow stop being useful allies against terrorism seems tosh. Put simply, the Saudis are even more exposed to al-Qaeda than Britain is; and British intelligence has at least as much to offer in that struggle as its Saudi equivalent does. It is hard to see British national security being obviously worse off; harder still to see Mr Blair falling for that line.

The more interesting extenuating circumstance—and surely the one that weighed most heavily with the prime minister—is the idea that the deal was crucial to Britain's defence industry. It is not just that thousands of British jobs hang on the Saudi contracts; some say such export deals give Britain's defence industry the scale it needs to equip its fighting men reliably in times of war. Yet that prompts two larger, heretical questions: does Britain need a home-grown defence industry nowadays? And what price is it worth paying to have one?

From an economic perspective, the argument for the arms industry deserving special treatment, always weak, looks weaker. The defence sector gets plenty of subsidies from the government: support for research and development, hefty purchases for the British armed forces, an official agency and helpful guarantees to sell its products. It employs only 65,000 people, or 0.23% of all those working in Britain, and accounts for just 2.2% of all exports.


But what of BAE's case for special treatment on security grounds—the argument that Britain cannot rely on even its friends to equip it in time of war and thus needs its own supplier? There is more in this. True, it is hard to imagine Britain fighting another war of any size without America (and its defence industry) at its side, and arms-makers are becoming reassuringly less “national”: France's Thales now owns Britain's Racal; 40% of BAE's sales are in America; any big piece of military kit usually includes components from all over. Yet politics often intervenes. Belgium refused to sell Britain bullets for use in the first Gulf war and there has even been a recent brush with the Americans, who were (wrongly) reluctant to share computer software related to the Joint Strike Fighter jet.

As the industry continues to globalise, the argument about whether a country with Britain's military ambitions needs to retain one big domestic supplier will intensify. The answer for the moment is yes, but not at any price. Later this month Britain will have a new prime minister. Gordon Brown might usefully show that he, unlike his predecessor, understands this by ordering a public review of the Al Yamamah contract.
Jun 14th 2007 From The Economist