Blunt truth behind BAE's spin

Defence firm BAE Systems is back in the spotlight after the High Court dramatically ruled that the Serious Fraud Office acted unlawfully when it suspended a corruption inquiry into £43 billion Saudi arms deal. BAE Systems points out it had nothing to do with that SFO decision, which was made on "national security" grounds in 2006 on the advice of the Attorney-General. But the shadow of the so-called Al-Yamamah deal still hangs over BAE.

Yet few underestimate the controversial arms supplier. Just days before yesterday's court ruling, a newly published tome - entitled The Economic Contribution of BAE Systems to the UK in 2006 - began thudding onto desks in Whitehall. The report, by Oxford Economics, cost BAE £50,000.

So can BAE maintain its famed lobbying power in the future? The company's grip over successive governments has repeatedly delivered financial and political support for export sales to oppressive regimes, as well as the chance to keep winning lucrative Ministry of Defence contracts - despite Al-Yamamah and repeated delays and overspends on projects such as the Astute submarine, Eurofighter Typhoon aircraft and Type 45 Destroyer.

Of course, BAE Systems is also heir to some great British engineering successes. And other companies envy its achievement in breaking into the US market, making itself one of the top 10 suppliers to the Pentagon. However, that means BAE is now, to a large degree, a US and international company.

The Oxford Economics report casts BAE's "smaller UK footprint than in the past" in a positive light. But at a time when BAE's UK workforce has fallen by 40% since 2000 to 35,000, less than half of its worldwide total, the company's claims to be a vital part of the UK economy, deserving of special treatment by government, are diminishing.

Exports by the UK business are more than a third less than they were in 2000. The £4.1 billion they contributed in 2006 was less than 2% of total UK goods exports in that year. The £96 million in corporation tax that BAE contributed in 2006 is roughly 1% of that contributed by Britain's top 100 companies.

As the 29th largest company in the UK on the Forbes rankings, BAE's 35,000 people here compare, for example, with the 270,000 employed by Tesco, and the 100,000 claimed by Britain's curry houses. Certainly many of the BAE jobs pay more than does shelf-stacking, and the company makes much of its contribution to the "knowledge intensive economy". But again this needs to be put in context. The report cites areas of R&D (research and development) spending which may one day have an application for consumers, such as a super-strong "glue".

Yet without wishing to disparage BAE boffins, before anyone gets carried away with hopes for miracle technologies, they should remember things have changed since the Cold War. Consumer industries have much larger markets and therefore more research spending than defence companies, so the big leaps forward tend to come from Microsoft and Nokia and their suppliers rather than military laboratories. Defence-related knowhow does not necessarily make for wider applications.

Where BAE undoubtedly does have a big economic impact is in areas such as Glasgow, Barrow-in-Furness, Fylde and the Ribble Valley. This gives the potential to play a role in expanding know-ledge-intensive jobs outside London and the South-East, a worthwhile objective. But all this should not create an impression that BAE is a pillar of the national economy, which deserves protection at all costs.

Those costs can be too high. Ruthless lobbying in 2003 over jobs at Brough, in east Yorkshire, kept the Hawk trainer aircraft contract with BAE despite what could have been a much cheaper Italian alternative. According to Douglas Car-swell, a Conservative MP who has stud-ied the 2006 purchase of Future Lynx helicopters, a similar choice of a £14 million UK option than the immediately available £6 million US-made Sikorsky Seahawk may have dire consequences for UK troops in Afghanistan.

Politicians with large defence suppliers or shipyards in their constituencies will always find it convenient to believe defence manufacturing is vital to the wider economy - and good to keep here in order to ensure security of supply. But this is not always true. Britain does not and cannot manufacture all its defence requirements at home. It has always relied on suppliers from allied nations. We just need to work out what needs to be made here to maintain essential knowhow, and encourage competition for the rest in order to get the best value for the armed forces.

As the economist Sir Samuel Brittan has put it: "The arms industry is the last stronghold of the discredited 'indus-trial strategies' of the 1970s - in other words simply protection by the back door."

When defence procurement minister Lord Drayson suddenly resigned in November, the much-needed effort to revise the Defence Industrial Strategy, due to reach its second stage of publication in December, was postponed indefinitely. With acute pressure on the public finances, and the defence budget under particular strain, BAE naturally wants to be heard. But readers of this report should realise the economic contribution revealed is limited.

And in any case, the MoD should start by asking not what BAE contributes but how to get the armed forces - and the taxpayer - the best value for money.