Select Committee on Foreign Affairs First Report


APPENDIX 29

Memorandum submitted by the Defence Manufacturers Association (DMA)

THE DMA

  1. The DMA is a non-profit making Trade Association representing the UK Defence Industry. It has 370 members ranging from the largest (BAe, GEC, GKN, Alvis, Vickers, Vosper Thornycroft) to many small companies including manufacturers, service providers and Defence executive agencies supplying to land, sea and air environments. Through a subsidiary (the Association of Police and Public Security Suppliers) it also represents companies (including Defence contractors) supplying to the Police, Prison Service, Customs and Excise etc. Total membership of both Associations exceeds 450.

THE UK DEFENCE INDUSTRY

  2. The UK Defence Industry is a key element of the UK's Defence capability and a major creator of wealth in the economy. It has a long and successful history of providing the equipment required for the UK's Armed Forces. It offers a full product range from complete platforms (aircraft, warships and armoured fighting vehicles), through major sub-systems (communications, radar, propulsion systems, munitions) and support services (repair, spare parts, training, catering), to basic equipment (clothing, footwear, tentage, etc.).

  3. The Industry, particularly in the electronics sector, enjoys a world-wide reputation for technical excellence. Consequently, as well as winning major platform orders, many of its contracts are for sub-systems and components. There are few, important Western high technology Defence programmes that do not have some level of UK sub-contractor participation. The UK has also pioneered many recent innovations, including the development of thermal imagers, simulators, and command, control and communications equipment. It is also a world leader in the development of nuclear, biological and chemical protection equipment. Much of this technology has dual-use application in the civilian sector.

INDUSTRY STATISTICS

  4. The Industry, wholly privately owned, comprises a large number of companies involved partly or wholly in the Defence business and employing some 415,000 people. This represents around 10 per cent of the UK's total industrial manufacturing workforce and Industry accounts for about 11 per cent of the country's industrial manufacturing output. Most of the companies involved are small to medium enterprises but some are amongst Europe's largest. Ten companies were listed in the 1995 list of the "Top 100 World-wide Defence Firms", of which two were in the top 10.

  5. Influenced by major cuts in national Defence spending, and the adoption by the previous Government of a policy of meeting its' equipment needs through tough, international, competitive procurement, the Defence Industry has donwnsized and become highly competitive. In the last decade it has completed a major restructuring, with the loss of over 300,000 jobs since 1980 (160,000 of these since 1988). It has also compensated by increasing, significantly, its share of the world export market.

  6. Current MoD business to the Industry is about £8 billion per annum, with a further £1 billion given to overseas competitors.

  7. Although Defence spending has reduced significantly as a proportion of GDP (down from 5.1 per cent to 3.0 per cent in 10 years), the importance of the sector for the Government cannot be overstated. The Government is its' only domestic customer. With the exception of roads, Defence procurement expenditure (at £9 billion per annum) is the only area of major capital spending left to Government large enough to impact upon the UK economy for better or worse.

EXPORTS

  8. The present Government has pledged to maintain a strong and capable Defence Industry. Defence exports are crucial to this undertaking. Defence Exports:

    (a)  Reduce the cost of equipment procured for our own Armed Forces by amortising development costs across increased production quantities. The MoD also exacts a commercial exploitation levy on exports of equipment developed at the UK taxpayer's expense.

    (b)  Contribute significantly to the UK balance of trade.

    (c)  Account for almost 40 per cent of Defence Industry business and are, therefore, now critical to its survival, and are likely to be increasingly so in the future.

    (d)  Provide employment for over 140,000 people in the UK. The remaining 275,000 Defence industry jobs not dependent directly on exports would be at risk were exports to be seriously curtailed.

    (e)  Are an important instrument of Foreign policy for the Government in supporting allies, influencing other nations, helping to maintain regional stability etc.

    (f)  Help to improve the prospects of achieving non-defence export sales to recipient countries

  9. The UK Government, mainly through the Defence Export Services Organisation (DESO), provides strong support for exports by identifying target markets, supporting the marketing effort, establishing essential Government to Government links and liaising with senior civil and military representatives of foreign nations' Defence establishments. DESO was established 25 years ago by Denis Healey under a previous Labour Government. The DTI also provides support, in a similar way to that provided for non-defence exports, by means of subsidies to inward and outward trade delegations and the Trade Fairs Support Scheme. They also identify priority target markets for Defence exports, interestingly not always the same as those identified by the DESO.

  10. Industry's general position, therefore, is that Defence exporting is legitimate and important business, strongly encouraged by Government and complementary to its highest priority role of supplying equipment to the UK Armed Forces. It is a national, strategic asset. That said, it fully recognises the need for control of Defence exports by Government to ensure they comply with current foreign and Defence policy aspirations, including the protection of human rights. It equally recognises that the decision to allow or refuse exports is sometimes a difficult one, needing the balance of complex factors such as treaty obligations, local external threats, regional stability, the importance of influence, the likelihood of conflict between the UK and the state concerned, relationships with third party states, intelligence advice, the nature of the recipient states Government, economic considerations, etc.

  11. Industry considers that it is not sufficiently well informed or qualified to make judgments on all these issues and whether particular exports would or would not serve the UK national interest. It, therefore, accepts the need for a system of licensing of Defence exports, whilst having reservations about the efficiency, effectiveness and fairness of the current system.

  12. Defence exports are controlled under legislation enacted in 1939 to prevent the sale of arms to Nazi Germany. Four departments of State are involved in the processing of licences. Initial application is made to the DTI, the responsible Department. Reference is then made by the DTI, at their discretion, to the FCO, MOD and the DFID. Over 1,000 licenses a month are submitted by industry and take many weeks, often months, to process. Very few are actually refused, reflecting Industry's highly responsible adherence to the issued guidelines by not making controversial applications. However, much business is lost to our competitors as a result of the uncertainties and delays inherent in the system. This has been severely exacerbated in the last year by delays consequent upon the Government's review of ethical guidelines.

  13. It is often difficult for companies to track progress on their applications. Some officials are secretive and difficult to approach, especially in the FCO, and there is sometime ignorance amongst them about the nature of the equipment involved and its intended role. Recent examples of delays or refusals include the sale of spares for British built flail vehicles used by the Canadians for clearing mines in Bosnia and the sale of helmets for use by UN Observers in Afghanistan. It is particularly frustrating that in these, and other cases, business is sometimes lost to competitors (including from EU countries) who do not have to seek a licence at all because their governments do not categorise such equipment as military.

  14. Industry's greatest concern in the export market is its competitiveness. Competition is tough and winning business requires protracted effort and investment. It is frustrating, after being encouraged by Government to secure a sale, to lose a contract to competitors through licence refusal or, worse, bureaucratic delay. Nations, even those ruled by questionable regimes, will secure Defence equipment elsewhere if we refuse to sell. Further, it is not merely a matter of the loss of individual contracts. A Defence order normally leads to long term involvement in training, spares support and maintenance. Even if regimes change, the Navies, Armies and Air Forces of a country are committed to the systems they have procured. A good example of this is perhaps that of Spain. In the mid 1960s the UK Government refused to sell naval ships to Franco. Spain went elsewhere and bought what it needed then, and ever since, from the USA and France. Today, many years after Spain achieved democracy, there is little UK equipment in the Spanish naval inventory.

  15. Industry notes the failure of even international embargoes to control the spread of arms. The consequence of the embargo on apartheid South Africa was for that country to develop its own, indigenous, Defence industry. It is particularly ironic that democratic South Africa, under Nelson Mandela, is now one of our most effective competitors in the world market.

  16. Finally it is worth repeating that, above all, Industry seeks fairness, clarity and efficiency in the export licensing process. It believes new, primary legislation is needed, and welcomes the publication of the 1 July 1998 White Paper on Strategic Export Controls upon which it will be commenting, in detail, to the DTI in due course.

Afternote

  It is appropriate, because of its topicality, to comment on the Sandline affair. Sandline are not members of the DMA and Industry notes that had Sandline, or their advisors, chosen to recommend British equipment a licence would have had to be applied for and, almost certainly, been refused!

July 1998



 
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Prepared 21 December 1998