Select Committee on Defence Appendices to the Minutes of Evidence


Memorandum from the Royal Academy of Engineering (20 December 2000)

  I enclose this Academy's memorandum to the Defence Committee's examination of the "Framework Agreement on Measures to Facilitate the Restructuring and Operation of the European Defence Industry". The response is a collation of personal views expressed by a number of Fellows. It cannot therefore be said to represent the views of The Academy as a whole.


  1.1  The Royal Academy of Engineering welcomes the opportunity to submit evidence to the Defence Committee's examination of the "Framework Agreement on Measures to Facilitate the Restructuring and Operation of the European Defence Industry". The response which follows is a collation of personal views expressed by Fellows with direct experience of the defence industry. The views expressed are not necessarily representative of all Fellows of the Academy.

  1.2  Respondents commented that on balance the Framework Agreement (FA) is to be welcomed, as it should be helpful to the much-needed rationalisation of the European defence industry. This rationalisation is essential if the European industry has aspirations of competing directly with the USA. However, respondents also identified a number of concerns, principally that it may be too easy for parties to withdraw from various parts of the Framework Agreement and that the treatment of Intellectual Property Rights (IPR) may be over simplified.

  1.3  Respondents noted that there are a number of European Nations with significant defence industries (eg Belgium, Netherlands) that are not parties to the FA. If the FA is to achieve its full potential, as many European Nations should be encouraged to join as possible. Some respondents also suggested that the FA should be extended to other friendly non-European Nations.


  2.1  The FA accepts that rationalisation is currently prevalent in the Defence Industry and that collaborative projects and the establishment of Transnational Defence Companies (TDCs) are trends that are likely to continue. It also accepts that TDCs must be established on commercial grounds without political interference. There are however, a number of areas where parties can "opt out" of the agreement. Many of these "opt-outs" are there for understandable reasons, but leave the agreement vulnerable to political interference.

  2.2  An area of concern identified by respondents is that of "key strategic activities". Article 7 of the FA recognises that parties may wish to retain certain capabilities on the basis that their security of supply of defence articles may be damaged. It also recognises that TDCs must be free to use their commercial judgement to distribute industrial capabilities according to economic logic. If this produces a conflict, the FA has a consultation process but the time required for such consultations may delay the formation of a TDC.

  2.3  Article 8 allows for the reconstitution of a key strategic activity in exceptional circumstances relating to national security. Respondents welcomed the proposal that this should occur with the full cost to be borne by the Parties and not industry. However, there is concern that it will be too easy for a Party to claim that an activity is of key strategic importance and thus hamper the operation of a TDC. Some respondents noted that in the past this has been complicated by the wishes of a nation to acquire new activities as well as to preserve existing ones (eg development of the Eurofighter control system in Germany).

  2.4  Article 33 states that competition should be the preferred method for letting defence related R&T contracts except where a Party judges that such competition could be detrimental to its critical security interests. Respondents commented that this article is open to abuse as there are no clear circumstances cited in which this might occur, leaving interpretation open to the Parties.


  3.1  It is clear that up to now, restructuring of the defence industry in the UK has veered towards the USA while on the continent it has been concentrated within Europe. The UK is currently involved in a number of high value projects with the Americans and, in a number of cases, UK defence companies own subsidiaries in the USA. A significant number of respondents were concerned that the FA did not take this current situation into account and wondered what the effect might be on UK/USA defence co-operation.

  3.2  The USA has always established collaborative R&T programmes on a bilateral agreement basis with separate allies. It is not clear whether the USA would be prepared to deal with the Parties to the FA as a whole once the agreement is in force and any weakening of the current UK/USA relationship would be to the UK's detriment.

  3.3  The need to rationalise the European defence industry is well recognised and the FA is generally acknowledged as being helpful in this respect. It should be recognised however, that a number of European Nations with significant defence industries (eg Belgium, Netherlands) are not currently Parties to the agreement and to include them in the formation of a TDC may be problematic. For the FA to make the biggest impact it is important that there are as many signatories as possible and this should be pursued even to include non-EU countries. There will be a limit as to how far the FA can be extended without compromising security, but the Parties should seek to do so.


  4.1  Part 6 of the FA deals with the treatment of technical information. Many respondents were concerned that the treatment of intellectual property rights in the FA was over simplistic. In reality, government owns less and less applicable intellectual property and much of that was produced under collaborative programmes. In some areas, the direction of technology spin-off has reversed to become civil to military.

  4.2  The measures to assist in the exchange of classified information are helpful, however, some of this information may also have commercial sensitivity. This is addressed to some extent by the FA but the obligations not to use information other than for the purposes provided are obligations between nations and are not extended to the owners and source of the information where this is a company. Therefore it will be necessary for companies to exercise care in the way they make technical information available and not depend on the intentions of the FA alone.


  5.1  Part 7 of the FA deals with harmonisation of defence requirements and might form the basis of a joint European procurement agency. The majority of respondents believe that harmonisation of defence requirements has significant potential to save money for the Parties through the expected economies of scale to be achieved as a consequence of larger orders. However, it must be emphasised that governments should restrict themselves to defining military requirements and not get involved in defining military equipment as has often been the case in the past (eg political involvement in the definition of Eurofighter's wing area and engine thrust). Harmonising defence requirements will also lead to better interoperability and military effectiveness.

  5.2  Transfer and export procedures are dealt with in Part 3 of the FA. Respondents recognised that export orders for defence articles contribute to economies of scale much in the same way as harmonisation of requirements. The procedures for exports to non-parties were welcomed but many respondents, acknowledging that the export of arms is a controversial area, worried that having to reach a consensus of all Party members may result in a more restrictive list of potential export customers than would be the case otherwise.

  5.3  Article 16 specifically encourages the use of company end-user certificates for exports rather than Government issued certificates. This will place an additional level of responsibility on industry.


  6.1  A number of respondents commented that the Framework Agreement, whilst it does have useful indicators of Government behaviour, is nothing more than an expression of intent between nations carrying none of the obligations of a treaty. Industry is the subject of the FA but is not party to it and probably has no claim to its terms or compensation for their effects. Industry should therefore be cautious of depending on the FA and should assess the risks involved in each case.

  6.2  Article 3 calls on the Parties to establish an Executive Committee but the level and executive powers of this committee seem to be quite modest. The success of the FA would be greatly enhanced by a strong Executive Committee.

  6.3  Many respondents commented that the possible benefits of the FA for UK industry still rely on strong government negotiation with the other Parties. There are a number of critical areas where Parties can avoid parts of the FA citing national security or key strategic activities and unless these are challenged strongly, little will be gained.

  6.4  The style of the FA is inevitably one of an accord between nations. It may be useful to prepare an enterprise-centric version that is more useful in helping industrial executives prepare for the formation of a TDC.


7.1  Benefits

  7.1.1  The FA will bring a number of significant benefits, all of which are clearly definable. Most significant among these is that a combined European defence industry with a co-ordinated approach to defining military requirements will lead to significant economies of scale and potentially lower costs to parties. Allowing TDCs to organise along commercial lines and rationalise resources on a European scale will also lead to cost reductions. The mechanisms to ease the transfer of restricted information and articles between the Parties are to be welcomed and may lead to a strengthening of European R&T.

7.2  Risks

  7.2.1  The risks involved in the FA are not straight forward and for the most part involve doubts as to the lack of enforceability of a framework agreement and the likely reactions of Parties when there is a perceived threat to national capabilities. For example, Article 34 stating that "Parties shall seek a global return rather than juste retour" is welcomed, but respondents doubted if this could be enforced in the face of strong opposition from one Party or another.

  7.2.2  Rationalisation of the European defence industry is desirable and respondents welcomed the fact that the FA states that it should be carried out along commercial lines. Respondents recognised, however, that the UK has one of the most complete sets of capabilities in the field, and therefore has more to lose than some other Parties with less developed defence industries.

  7.2.3  Respondents were concerned as to how the FA would affect the current, beneficial relationship with the USA on defence project collaboration and research. The USA currently carries out collaborative defence programmes on an individual basis with selected allies and respondents wondered if the USA would be willing to deal with Parties as a single entity in the same way.

7.3  Future Development

  7.3.1  Respondents welcome the majority of the FA, save for concerns over the loose drafting that allows Parties flexibility in defining whether and when certain clauses apply. Hence the main recommendation for future development of the FA is that a review should be instigated to learn how the FA works in practice. This review should concentrate on whether the spirit of the FA is adhered to or whether Parties abuse various articles in the name of national security as many respondents fear they might.

  7.3.2  Another clear recommendation is that as many nations as possible should be encouraged to join the FA. Respondents identified Belgium and the Netherlands as obvious choices within Europe. There is a point at which the benefits of expanded membership are outweighed by security considerations and this should be taken into account in any future plans.

  7.3.3  The FA is written as an accord between nations at a governmental level. The preparation of a guidance document concentrating on the position of the defence manufacturing companies involved would be helpful to industry.

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