Examination of Witnesses (Questions 80
- 99)
WEDNESDAY 25 APRIL 2001
MAJOR GENERAL
ALAN SHARMAN,
MR BRINLEY
SALZMANN, MR
FAROUK SAEED
AND MR
MIKE MCLAUGHLIN
Mr Berry
80. I think four or five years ago the DMA advocated
controls on brokering. I think it was in evidence to the Trade
and Industry Select Committee, following the Mil-Tech Rwanda scandal,
which was about that time. Given that you have argued for controls
on brokering and trafficking and there are now proposals in the
consultation document, can you advise the Committee how you feel
about the Government's specific proposals? (Major General
Sharman) The initial reaction is that we simply do not know
enough about what they propose. Our great concern, and I do not
think the evidence from the NGOs clarified this for you particularly,
is how practical effect could be given to this without criminalising
or making impossible the perfectly legitimate business of companies.
My worst scenario, on a purely personal basis, is that someone
rings me from overseas and asks if I can recommend a UK contractor
to supply a particular piece of equipment, and I know there is
not one and so I recommend one in, say, Germany. Am I a broker?
So, in the end, it will depend hugely on how it is defined. It
is also very common practice—in fact, essential in some
countries—to employ agents. If the definition is not carefully
defined then agents could then be brokers, and the consequence
of this could be enormous. The great challenge is to catch the
baddies. We all think we know who they are, and we have no difference
of opinion with the NGOs at all on what it is we believe they
are trying to achieve. But how can that be done in an enforceable
and effective way, which will not simply make UK industry uncompetitive
and put individuals into impossible positions, is not clear.
81. Presumably the defence industry and legitimate
brokers would have nothing to fear from such an arrangement. Indeed,
your association argued for this. I can understand the concerns
that led you to argue this. Is your problem with the proposal
there essentially one of definition of "broker"? (Major
General Sharman) Yes. (Mr Salzmann) Definition
of brokering and goods covered. (Major General Sharman)
And the goods to be covered. I think, none of us would have the
slightest difficulty with it being quite clear that brokering
to embargoed destinations—particularly subject to EU and
UN embargoes—would fall into that category. If it is extended
to non-embargoed destinations, and depending on the scope of the
goods that are covered and the definition of "broker",
it could be very difficult.
82. If agreement could be reached there then
problems such as administrative burdens, etc, etc would be secondary
to the problems you have just identified? (Mr Salzmann)
If clear definitions are provided, yes. (Mr Saeed)
Just endorsing what Alan has said, definition is of the utmost
importance because in a company like ours which is a multinational
company, where we have offices in the UK and in France and there
are marketing people, UK nationals, French nationals, what we
are seeking is that we legitimately be allowed to conduct our
business. Therefore, the definition is of the utmost importance.
Chairman
83. Do you use agents? (Mr Saeed)
Yes, we do use agents.
84. Do you see them as brokers? Can you create
a definition that excludes agents but includes brokers? (Mr
Saeed) We use legitimate agents and they, in turn, deal with
people in country. I do not know if that answers your question.
Chairman: I am trying to think of how
the clause can be drafted to incorporate that.
Dr Starkey: What does a broker do?
Chairman
85. What does a broker do that an agent does
not, or vice-versa? (Major General Sharman) Of course,
where the export is from this country there is no issue; it will
have a licence and as long as the definition does not include
the work that goes on before the application or even the granting
of licence in order to try to secure the deal (after all, you
do not apply for a licence before the deal is secured) then that
would suffice. We all know that what we are trying to stop is
the unscrupulous trader who will buy Kalashnikovs or even old
British equipment from a foreign country and send it to an embargoed
country. That is quite clear and that would be, perhaps, a trafficker.
So I think an awful lot will depend on the definition. What we
also know from our research is that in countries that have attempted
legislation—and Germany is a good example here—it
has not made any difference. (Mr Salzmann) It catches
the good guys and the bad guys have moved to Cyprus. (Mr
Saeed) If I can give a specific example. For example, the
Brazilians do their buying from the Brazilian Naval Commission
in Europe and, of course, from our point of view they are the
agent. We declare this information to the DTI when applying for
the export licence. So perhaps that is where the agent definition
comes in.
86. In fact, what we need to do is to ask the
question whether they would be called brokers? (Mr Saeed)
They act for the Brazilian Armed Forces, so they could be buying
ships or equipment for the Air Force. (Major General Sharman)
Another issue, I think, is that again because of the very multinational
nature of the business, companies will often have imbedded foreign
equipment. For example, in relation to Challenger II 40 per cent
of it is procured offshore. Clearly, if Vickers have sold Challenger
II to Oman and, if there is a country next door to Oman that happens
to make a component that is on Challenger II, which is probably
imbedded in the ones the British Army have as well, it would be
nonsense for Vickers to have to ship a spare component all the
way to the UK in order to get a licence to send it back. Yet,
will they be guilty of brokering if, rather, on a common-sense
basis they arrange to ship simply from the state next door? Again,
I doubt if the intention of those who are pushing hard for these
controls for human rights purposes would be wishing to catch that,
but it complicates the definition even further.
Mr Berry
87. Given that the Government has been listening
to people's views on this issue for a number of years now, was
the association consulted in advance of the preparation of this? (Major
General Sharman) Yes, we have had, on this particular issue,
yes, substantial opportunity.
Chairman
88. How does draft Clause 5 grab you, then,
having had this consultation? (Major General Sharman)
I think the point about the whole Bill as it stands is it gives
the Secretary of State the most sweeping powers in theory, and
until we see the orders and the—
89. So we need a further consultation period
on the whole secondary legislation? (Major General Sharman)
Yes. (Mr McLaughlin) Undoubtedly, because that is where,
as always, the devil will be in the detail. The other point, particularly
on brokering, that I would highlight, if I may, is that of the
scope of the issue; whether it is just the categories proposed
in the draft legislation or whether it will be, as is implied
as an option, the whole of the Military List. The scale of company
effort required to administer and police that would be quite different
at those two extremes. (Major General Sharman) Scott
said that he considered the Government had, for years, under the
old laws, been enacting powers way beyond its legal remit. It
seems the Bill is quite clever in enacting something which will,
basically, allow it to do whatever it likes. We wait to see.
Mr Worthington
90. The consultation document makes proposals
for controls on licensed production overseas but is really quite
fluid in what it suggests. It says either through additional end-use
conditions on licences granted or through an obligatory contract
clause on re-export of goods produced. What are the views of your
members on this? (Major General Sharman) Licensed production
is particularly difficult, and interestingly it is one of those
things that has, perhaps, changed by nature of the way the industry
has changed significantly in the last five years. If I could mention
"offset"? It is almost impossible nowadays to sell any
equipment, not just defence equipment, to foreign countries without
them demanding—as indeed we do ourselves—substantial
offset. Invariably that involves licensed production. You simply
will not win the business unless you offer a licensed production
arrangement, so licensed production is here to stay if the Government
wishes the industry to be able to continue to export in any meaningful
way. The trick will be to find how to manage this. Licensed production
already requires export licenses for the technology transfer and
the supply of equipment to carry out the licensed operations.
So we found the statement as it is here not really clear enough
for us to form a judgment. Quite clearly, again, things to do
with the selling on to embargoed countries we have no difficulty
with, and controlling dual-use goods, particularly for the creation
of weapons of mass destruction—they are all straightforward.
It will be the impact of the definition and the additional bureaucracy
and delay that it might add to what has become a very routine
part of business. It is not a matter of a company licensing someone
else abroad to have them make stuff that is undesirable to send
somewhere else. That is not the issue. The fact is if Vickers
sell Challenger II to Greece the tank will be made in Greece,
just as we are making the Apache helicopter here in the UK.
Chairman
91. That is not going to be re-exported. (Major
General Sharman) No, but, of course, part of the licensed
production will not simply be the assembly of the tanks. There
would be Greek companies being invited, perhaps, to make, for
argument's sake, starter motors. They might then go into a whole
range of Vickers future equipment, including equipment they make
in, say, the South African company they now own. It will be quite
hard to envisage a practical way and even a respectable way in
which you could start to control that activity. Again, it would
depend on the definition and scope of what is included.
Mr Worthington
92. You will have heard the assertion earlier,
sitting listening, by the NGOs that as the UK tightens up its
regime and the EU does and other people tighten their regime,
that unscrupulous exporters are locating production on arms outside
the UK and the EU. Do you have evidence of that? (Major
General Sharman) No. Interestingly, the example that they
give always on these occasions is the case of Heckler and Koch
in Turkey. Heckler and Koch, of course, have to have export licences
from Germany, and anyway Heckler and Koch were exporting and had
entered into a licence arrangement with Turkey long before they
were bought by Royal Ordnance. So I think these things are not
at all straightforward. So, no, we have no evidence. We do have
evidence of companies that, in frustration at the UK licensing
laws, have gone elsewhere, but not in order to break rules. I
can give an example: one of our companies, Aardvark, make a mine
clearing piece of equipment and they even had difficulty getting
licences in order to sell Aardvarks to the Canadians to clear
mines in Kosovo, and were told they had to be shipped via Canada
before they could have a licence. The company seriously considered
moving its production line to Finland where the Finns make a comparable
piece of equipment which is classified as agricultural machinery.
The end of that situation was that the British Government saw
sense and derated the equipment so that it no longer needed a
licence. I have no examples of companies that have gone offshore
in order to make weapons to sell to countries we would not not
want them to be sold to.
93. If we are talking about not using napalm
on our cattle, the definition of "agricultural equipment"
is getting broader and broader. (Major General Sharman)
Yes, and most casualties in Rwanda were caused by machetes, which
could have been brought under the 1939 Act.
Mr Worthington: So you are broadly satisfied
with what is proposed but you need more detail. What representations
will you be making about licensed production overseas?
Chairman
94. If I can just supplement Mr Worthington,
paragraph 77 on page 20 offers two options. What is your view
on that paragraph? (Mr Salzmann) Based on the initial
responses from industry they are totally opposed to Option A.
Option B is only marginally more acceptable, but certainly the
options which the industry have come up with are that it should
be down to the Government to negotiate, government-to-government,
a memorandum of understanding with overseas administrations to
allow British companies to retain control of certain key items
of technology for licensed production arrangements which might
be entered into. By that means, if that was done, then the Government
would retain control of exports from those licensed production
facilities because the British company which retains the control
of these key technologies would still have to apply for export
licences and then use undertakings to supply those goods to the
licensed production facilities. (Mr McLaughlin) Option
A also has a competitive implication if it is introduced unilaterally
by the UK—ie, not in conjunction with other EU members—because,
other things being equal, if at the front end of any commercial
negotiation we are being asked to tie up the person we are trying
to do business with with downstream restrictions then my judgment
would be that he would go somewhere where he will not have those
downstream restrictions to contend with. So I think there is a
competitiveness issue in any unilateral introduction of this particular
point.
95. In the case of Rolls-Royce, for example,
your major competitor in this field is the United States, who
have very much stronger controls— (Mr McLaughlin)
Or the French. They are another competitor.
96. They have stronger controls. This is not
unchartered territory. The United States, for example, have very
powerful controls over licensed production and re-export. Have
they not? (Mr McLaughlin) Yes, they have.
97. What is being suggested is something comparable.
Why could you not live with that? (Mr McLaughlin) Because
if it was not EU-wide at the time of its introduction—and
I stress my point is only valid if it is a unilateral UK imposition
of this particular legislation—then, say, our French competitor,
should he so decide would have a competitive advantage, because
he is not trying to tie up the licensee with whom he is trying
to do business with downstream restrictions, which Option A would
require us in the UK to do, he would hold an advantage. (Major
General Sharman) The footnote to that is that our greatest
competitor now, besides the Americans, who are in a different
league altogether, is not the French but the Russians.
98. In licensed production? (Mr Salzmann)
And in exports in general.
99. Mr Saeed, has your company any experience
of licensed production? (Mr Saeed) I cannot recall
one, but in the previous company before the acquisition we licensed
some goods to be built in India, and the specification offered
was of a much lower quality than you would otherwise have sold. (Mr
McLaughlin) May I stress that I am not arguing against licensed
production per se, what I am saying is that if it is not part
of an international agreement I think there are competitive issues
that are wrapped up within the proposed legislation.
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