House of Commons - Trade and Industry

Select Committee on Trade and Industry Tenth Report

IV. THE UK SPACE INDUSTRY

19. The UK is a net exporter of space services and has a strong capability in niche areas such as small satellites and software.[61] The UK space industry involves around 400 companies, employs around 6,300 people and is dominated by the space prime contractor sector, until recently Matra Marconi Space, now Astrium, following the merger with the space division of DaimlerChrysler Aerospace of Germany in May 2000.[62] Even prior to the merger, UK interests in Matra Marconi Space were perceived to be subservient to French interests. The merger may further decrease UK influence. ASTOS fear that "within a decade or so, as the global space market becomes dominated by a handful of massive consortia, British interests will be entirely subservient to those of the then dominant space countries; USA, France, Germany, Italy, Japan, India".[63] There is a general trend towards global patterns of ownership structure, reflected in space activities as well as in the aerospace and defence industries overall. DERA thought that "there is clearly a need for further consolidation of the European space industry if it is to remain competitive with the USA, and it is essential that the UK retains a key position in this consolidated industry".[64] They went on to say that " a major threat to and potential opportunity for the space community derives from the evolution of US industry, in particular the merging of its capability into larger units and its desire to compete within the European market threatens the existence of a European space industry".[65] Nonetheless, globally the space sector is still largely under the influence and supervision of governments. This is particularly true in the US, where industry benefits from substantial government support through oriented technology programmes.[66] National funding arrangements are therefore of crucial importance for the space industry.

UK funding arrangements

20. The Federation of the Electronics Industry believed that the UK Government's insistence on a 50:50 funding arrangement with the private sector often puts UK companies at a "serious disadvantage to those in mainland Europe whose government contributions are invariably at a much more generous level".[67]

BARSC gave the example of radar work as an area where the UK have proved their competence but one where UK companies cannot bid into ESA projects or, if they can, they will only get 50% Government funding as opposed to 100% funding provided by other countries' governments.[68]

UKISC gave the example of the EGNOS programme (see paragraph 42 of this Report) as one where "the insistence by HMG on a 50:50 funding mechanism can cause real problems at the early stages when a credible revenue stream is difficult to identify", particularly when other ESA nations are 100% funded.[69] They explained that although firm government funding commitments to EGNOS were made by all other participating countries during 1997, the UK "dithered about the need for industry 50% funding".[70] As a consequence, companies from other countries were able to obtain most of the leading roles in the European consortium, led by Alcatel Space Industries of France, while UK companies were offered lower-level roles. During 1997 and 1998 the UK gradually increased the level of its funding commitment to reach the current _40M figure, but this "drip feed" approach resulted in key EGNOS roles going to industry from other countries.[71] UK small and medium enterprises (SMEs) were particularly affected. BNSC told us that EGNOS was originally to be fully funded by ESA Member States, creating a problem for the UK's policy of matching public investment with private capital. Furthermore, due to budgetary constraints, neither DETR nor BNSC were in a position to announce their combined total subscription at the beginning of the programme and it was necessary to phase subscriptions over several years.[72]

21. Whilst we appreciate that the Government is pursuing a policy of public private partnerships, we were concerned to discover that such decisions taken unilaterally in an international project had been to the detriment of UK companies. We hope that the lessons of funding the EGNOS project have now been learnt and that the Government and BNSC will ensure that common ground rules for participation in such projects are agreed amongst all participating countries at the earliest stage, and implemented in the UK.

'Juste retour'

22. ESA largely (and historically) operates on the principle of 'juste retour': the principle that the proportion of contracts under a particular programme awarded to firms from a given country is in proportion to the funding that country has contributed to the programme. Over the past few years, the UK has received a higher than average return on its investment or "overall return coefficient". ESA determine that the return to countries should be 0.98; in 1998 the UK's return was 1.05. [73] Subsequent payments by the UK (and Germany) into SMART programmes have, however, worked to redress the balance.[74]

23. The UK has long argued against the policy of 'juste retour'. A National Audit Office report of 1993 concluded that whilst the UK had one of the highest returns under 'juste retour' of all Member States, "competition should enhance value for money and that the Centre should therefore continue to press for the maximum level of competition".[75] Lord Sainsbury told us "we have always argued, as a country, strongly against it, because we think that these things should be settled on the basis of who is the best person to do the work, rather than trying endlessly to balance exactly the amount coming back in work versus how much you put in".[76] UKISC told us "as far as UK industry is concerned, if we could obtain a position where everything was competed without 'juste retour' we would be more than happy to compete on that basis". They fear, however, that a move toward full competition would mean that "the smaller nations would take the ball away and that would destroy what ESA stands for".[77] Mr Ward of UKISC went on to point out that the downside of 'juste retour' was that because the UK Government does not support the Ariane V programme to any significant degree, UK industry is losing business.[78]

24. Some concern was expressed over a possible move away from 'juste retour'. ASTOS stated that UK industry cannot always take advantage of ESA programmes, partly because of the 'juste retour' policy of ESA, but also because "the levels of national funding of particular programmes within ESA do not always allow for participation in all relevant contracts".[79] They went on to tell us that recent changes in ESA to allow work performed for a national agency by a foreign company to be offset against both countries' ESA returns may prevent UK SMEs from participating in other countries' programmes.[80] The recent merger of Matra Marconi Space (MMS) with DaimerChrysler Aerospace to form Astrium has also raised the question of how sub-contractor work arising from Astrium ESA contracts will be attributed. Fears have been expressed that the UK may lose out in favour of France or Germany in the growth of new technologies and that UK SMEs may be particularly adversely affected. DERA noted that the nature of MMS had already changed to reflect its strength as a systems integrator, with less space technology work consequently now being performed in the UK.[81] We detect a degree of hesitancy on the part of the Government in its policy of opposing 'juste retour', possibly based on the absence of any independent authoritative study. We recommend an independent study to ascertain the effects of ESA moving away from 'juste retour', particularly on UK SMEs.

Export controls

25. Export controls are having a perceptible impact on the UK space industry. The operation of UK export controls on satellite technology gave rise to several complaints, including from Matra Marconi Space in relation to satellite systems which it wishes to export to China. We raised this in evidence with the Minister, who told us "it is a difficult case, it comes exactly in this whole category of technology which has defence implications and to the extent which one is prepared to make that available to other countries".[82] ASTOS gave us the example of the Pakistan experimental satellite BADR-B. Space Innovations Ltd were providing feasibility studies and spacecraft systems for BADR-B under contract to the Space and Upper Atmosphere Research Commission (SUPARCO). SUPARCO had intended to send the satellite to the UK for testing but decided they could not take the risk that the satellite would be prevented from being re-exported. A number of potential orders for replacement and new subsystems were never placed for fear that export restrictions would prevent them from being exported, or that the length of time required to obtain clearance would cause delays.[83]

26. The operation of US export controls on satellites presents a further problem, following the decision last year by Congress to move satellites and related technologies from the relatively permissive dual-use list system managed by the Department of Commerce to the stricter Munitions List control system operated by the State Department. While in one respect this may hinder US exports, and so offer UK and other companies opportunities not otherwise available,[84] the effect of this shift has also been to hinder the transfer of technical information from the US necessary for a sub-contractor overseas. In the view of International Space Brokers Ltd, the imposition of more rigorous restrictions has made it difficult for insurers to gain access to the technical information that they require.[85] US firms are discouraged by the delays and bureaucracy in getting licences for such transfers.

27. UKISC expressed concern over the US system of licensing satellite services and told us that "there are at least two examples of European/British based satellite operators who provided services worldwide..[but] have not been allowed to offer services inside the United States".[86]

28. New Frontiers makes no reference to export controls and BNSC's export strategy merely mentions the fact that exporters may require a licence from the DTI.[87] However, they are evidently an issue of some significance. Given that DTI is responsible for the operation of the UK system of export controls, we expect joined-up Government within as well as between departments to ensure a smoother passage for space exports requiring licensing, and that Ministers will convey to their US counterparts concerns at the unintended consequences of recent changes in the administration of US export licensing.

Space education

29. Successful industry requires access to the appropriate skills base. According to ASTOS, "it has been noticeable over the past five years or so that the quality of engineers graduating at BSc level has declined".[88] They went on in oral evidence to say that "in interview, people are not able to perform and do not display the same basic understanding that they would have displayed five to ten years ago at the same apparent level from the same institution".[89] The Institute of Professionals, Managers and Specialists stated that "failure to attract, and to keep, the highest calibre graduates to SET [science, engineering, and technology] careers is a major and longstanding problem requiring sustained action by Government, employers and the education sector".[90] This is not just a UK problem. The Space Education Council told us that "in the developed world, applications for science and technology degree courses are falling and the quality of the graduates emerging from them is, on average, declining".[91] They went on to say that "space employers, both industrial and non-industrial , are becoming concerned that they will not be able to recruit the number and calibre of graduates they will require in the future".[92] Whilst the current round of consolidation in the space industry may have temporarily reduced demand for new jobs, the time will shortly come when fresh blood is required. BNSC's Information Unit is responsible for actively encouraging young people to take and maintain an interest in space and to pursue further study of SET. Any decline in the number and calibre of science and technology graduates raises problems far beyond those of the space industry alone. A small industry such as space is however particularly vulnerable. The next UK space strategy must explicitly address the question of the supply of appropriately qualified graduates, so that the space industry can be sustained in the years ahead.

30. The fascination of space and its many practical uses inspire young people to technical and scientific studies in school, at university, and for some, in long term careers. Space and related scientific issues such as astronomy and relativity have been identified as the major attractors of students to science courses at university level. University space projects in small satellite development, space science and Earth observation are fertile training grounds for staff and attract graduates of the highest calibre. As general standards of technical education have drifted downwards it is through such training processes that the small cadre of the highest quality technologists can be formed. We would hope that in the review of the next UK space strategy, due weight is given to the support of higher space education, both to promote space to future students and to ensure the maintenance of centres of excellence.

61 New Frontiers, para 18 Back

62 Astrium was formally launched on 17 May 2000. It is owned by Aerospatiale Matra of France, DaimlerChrysler Aerospace of Germany and BAE Systems of the UK Back

63 Ev, p18 Back

64 Ev, p144 Back

65 Ev, p144 Back

66 Towards a Coherent European Approach for Space, SEC (99) 789 final, 7 June 1999, p7 Back

67 Ev, p129 Back

68 Q125 Back

69 Ev, p5 para 15 Back

70 Ev, p169 Back

71 Ibid Back

72 Ev, p93, para 7 Back