Examination of Witnesses (Questions 40-59)|
MONDAY 4 FEBRUARY 2002
40. Last year you were concerned that the changes
to the ECGD policy would have an adverse effect on the industry's
competitiveness. The section of the memorandum headed "maintaining
the UK aerospace investment climate" seems to bear that out.
Can you elaborate on the problems you have experienced?
(Mr Marshall) Yes, as you say, we brought it to your
attention a year ago, the issue fundamentally being the government's
plan to put ECGD into a trading fund status, which seemingly has
the benefit of taking the Treasury out of the loop but in doing
so, of course, as we have started to fear, risks making ECGD not
competitive with other export credit agencies from other governments,
hence a part of the competition that we are also in after we have
done research and technology and the development, when we are
trying to win the business, and we may find ourselves uncompetitive.
That was the fear. I think we pointed out something like one third
of ECGD's commitment is to the aerospace industry. If you add
up the civil part and the military, we are probably their single
41. Is that having an effect now?
(Mr Marshall) Yes, it is. I will write to you privately.
Obviously these deals are sensitive and there is no doubt that
there have been times and there are times at the moment when that
position of ECGD does not appear to be allowing companies to compete
against competitors overseas, where their credit agencies are
underwriting the risks. In a way ECGD has taken a harsher position
since September 11 because the risk on some of those airlines
has increased as a result. So, if you like, the problem is worse.
42. That would help. We did do an investigation
and we went to other countries about ECGD as well.
(Mr Marshall) As yet the final position does not seem
to have been settled. There was to have been a statement this
month, I have not yet heard of one planned, on where it is going
to finally settle. We are seeking to try to persuade ministers
that we must not get ourselves in a situation where ECGD cannot
be competitive. We need to establish to everybody's satisfaction
that whatever status they go into they will be competitive with
the US or other competitive countries.
43. Chairman, could I just ask another question
arising from the evidence. It is about the supply chain situation
because you do say in your position paper on investing in the
future, under your heading globalisation, that supply chains operate
increasingly on a worldwide basis and you also talk about the
present situation, where I think it is 82.5 per cent of the total
number of companies United Kingdom based are responsible for 71.1
per cent of the value of contracts allocated in the sample years
of the survey that you did and the Lean Manufacturing guide actually
says that the aim would be to reduce the number of supplierssupply
base reduction. Do you think this is going to have an effect on
the UK supply business to the aerospace industry, particularly
(Mr Wood) Most of the SMEs do not directly
avail themselves of ECGD.
44. This is not connected with ECGD; that is
just a question about the supply chain.
(Mr Wood) Potentially, rationalisation of the supply
chain within the UK certainly does affect UK SMEs. One of the
things we have been working hard at is to become better SMEs,
more effective, more lean, more able to go out into the global
market-place and get opportunities of our own and not be so completely
reliant upon UK buyers, for example. There is evidence of this
happening. They just have to become better and we are becoming
better. There is clear evidence of that through the programme
that the Society has been operating, helped by the DTI. SMEs have
increased their effectiveness in the region of 20 per cent generally.
45. But you do not see the danger that the business
would go outside the country?
(Mr Wood) Ultimately, yes, it will if either political
or market decisions are taken that those organising and running
the contracts will deal with local supply chains.
(Mr Maciver) That is correct. There is a tendencyit
is decreasingto look beyond our own boundaries so that
Europe will become effectively a single market. Whether that would
apply to the United States may take longer. You mention two trends.
There is no question that companies like my own want strong suppliers
at this level who in many cases can bring together products from
other sub-suppliers. You may see a divide. In some parts of the
world we take part in kits where they simply go into our assembly
areas and they are assembled in a very short time indeed. We have
some very, very good examples of this in this country. We have
also seen some of the smaller companies making absolutely every
effort, you are absolutely correct in what you say here, to improve.
The fear I have is that there are some who still do not have sufficient
awareness of this and therefore we will see perhaps fewer companies,
hopefully a stronger base, but there will be some casualties and
those companies which have not addressed productivity will suffer,
particularly at a time like this when there is an overall squeeze
on the industry. The SBAC has an excellent programme aimed at
helping smaller companies on an affordable basis to achieve the
right level of productivity and, indeed, to improve the way the
whole supply chain works. So this is something that concerns all
of us. It is not just the small companies but those that depend
on them which are acutely concerned as well and want to see a
strong supply base, but it will be, I think you will agree, a
(Mr Wood) It certainly will be. It is and has been.
The process of change in small companies is undoubtedly painful,
just like it can be in larger organisations, but it is just tends
to be a bit more personal. These times will be challenging. The
good companies will survive and the bad ones will not.
46. Can I just go back to the ECGD again. Our
credit agency works along OECD rules and, by and large, our investigations
have suggested that we are not maybe the most generous but we
are not necessarily the worst. Could you be a wee bit more explicit?
Is it the time taken to give decisions about underwriting or is
it that they are being scared by the sums involved?
(Mr Marshall) Whatever is causing them to do it, I
think it is the need, first of all, that if they become a trading
fund then they have to make a real rate of return at a level set.
If that rate of return then forces them to take only certain risks
in the market when they are lending on credit, then the portfolio
of credit that they will take on is likely (and it looks to be
turning out to be at the moment) to be less able to take on some
of the risks associated with our industry.
47. Are these risks in the civil sector or in
the defence sector?
(Mr Marshall) I think they are in both, but we are
particularly noticing it in the civil sector post 11 September
because, of course, the risk of some of those customers has gone
48. Has the degree of default increased? How
significant is the default?
(Mr Marshall) I do not think the default is a significant
issue. It is the perception that it is significant that is the
49. The OECD operates on a kind of, you might
say, geographical basis as well in that it chooses certain countries
and allocates amounts of money to them and decides, regardless
of what the industry is, if that figure is exceeded or is near
the top, then the chances are future contracts will not be underwritten
until these matters are resolved. Have you done any analysis of
that character to suggest that perhaps country A has reached its
credit limit, as it were, or that the ECGD is not quick enough
in moving from one country to another?. If a country does not
use up all its credit and it is lying idle, perhaps another country
could benefit from being allocated more credit if it was felt
that they could meet their responsibilities?
(Mr Marshall) The answer, Chairman, is, no, we have
not done this analysis to see whether this is the cause. What
we have done is pick up from the companies that come to us and
say, "Look, I am having this problem and I am attributing
it to the position that the credit agency is now taking and because
I am in competition with the US or some other country, with a
different credit agency, we appear to be disadvantaged because
they are offering . . ."
50. I appreciate you are the messenger but I
think you have, with respect, a somewhat simplistic view of the
nature of the problem because there are a number of criteria which
are employed. To be perfectly frank, as far as the ECGD is concerned,
I do not think it is the sharpest tool in the box, but I do not
think by the same token we can necessarily blame them when they
have a number of responsibilities across the industrial spectrum.
That is a different matter. I wanted to get a feel there. It might
be that you could provide us with additional information and we
could take that up because obviously our ability to trade as a
country is essential.
(Mr Marshall) We are the only people moving our credit
agency into this unusual status where essentially the Government
will not be the lender of last resort.
Chairman: There are a number of arguments about
where we are. There is an awful lot of credit that can be achieved
without going to government agencies at the present moment. It
depends if they can go to one but they have gone to another.
51. On the question of government support, what
sort of support do you feel that you get from the DTI, particularly
in relation to statistical help? Do you feel they do as good a
job as other countries would get?
(Mr Marshall) Statistical help in what sense?
52. Industrial national statistics, in other
words measures of productivity.
(Mr Marshall) I hope I am not saying this wrongly
but I think we probably provide the statistical input to them
on our industry.
53. You will want comparatives, will you not,
it is a two-way flow?
(Mr Marshall) They undertake work themselves. I think
one of the problems we find is that because they work to a different
coding system or a coding system that defines industry sectors
it does not always line up with, if you like, the aerospace industry
as it is now and so we often find comparisons difficult. I think
we have a good understanding between us of what the industry is
and, therefore, that work, if you like, is quite good. The support
there, I do not think, is too bad or something that we would complain
about. In other words, I think what I am saying is they understand
our industry enough statistically not to be arguing with us about
the numbers, it was not an issue on the research and technology
(Mr Maciver) There is a complete common understanding.
In fairness to Mr Marshall and his colleagues a lot of the basis
for that comes from the research work done within the SBAC itself.
There is no disagreement.
54. Given the movement within NATO and the SBAC
towards member countries specialising in different aspects of
defence what effect will this have on the United Kingdom aerospace
(Mr Maciver) I do not think that it has been discussed
in the context of the aerospace industry. It would be quite a
dangerous route to narrow down the basis of the industry, there
would have to be a very high degree of trust entailed in that
and I do not think that is a major issue for the short-term. Clearly
there are some areas where we are stronger than others but in
the broad terms we have a capability across the range. I do not
think the discussions on specialisation which would apply certainly
to some areas would apply to aerospace. The final platform, the
aircraft or the uninhabited aerial vehicle, whatever it is, if
it is a European it will certainly be a collaborative project
and we will seek to participate in as broad a part of that product
55. Is it likely that certain parts of the plane
would tend to be made in a particular country?
(Mr Maciver) That has been an issue in the past. We
would much prefer to see a regime where business was assigned
on merit rather than on a share out because that has been a very
inefficient way of developing the industry in the past, especially
where there are a number of instances where, in effect, we have
taught people how to do things to enable them to participate in
programmes. From a purely commercial point of view that is not
desirable nor does it result in a strong industry long term. We
would much prefer to see a commercial environment in which to
56. Could I take you on to the possible fiscal
incentives that might be of interest. In Annex D of your evidence
you referred to the R&D tax credit scheme, which you say is
a positive step forward but you have some criticisms of it. In
relation to that R&D or to other things what are the kind
of fiscal measures that you are looking at to maintain the right
climate for investment in the United Kingdom, both for yourselves
as an industry but more generally to encourage and boost investment
in the country?
(Mr Marshall) The one that we particularly latched
on to was the announcement at the time of the last Budget when
the government wanted to consider extending R&D tax credits
to industry as a whole, not just limited to SMEs. We then undertook
a consultation process, we were very energetic with other parts
of industry and out of that came a clear message from the industry
that the so-called volume scheme of judging our tax credits, where
it is basically the total amount of R&D you spend, not an
incremental amount from one year to the next, was what the industry
felt was important. There are also very important issues about
the definition of what is R&D, and that is important to us
as well. From that consultation they announced most recently that
they would now want to look at a volume scheme and have consulted
on the nature of the volume scheme. We have put in evidence a
submission that we wish for the most simple option they provided,
we think a simple scheme is very important. We think one that
gives wide coverage is very important because development, as
well as technology, is hugely expensive in our industry and needs
to be encouraged. Of course it needs to be a scheme that provides
an adequate amount of funding. We do not know how much the Treasury
are going to put aside for this but we hope that they follow that
advice. We shall see when the Chancellor announces. That would
probably be the most important incentive this year as opposed
to business as a whole.
57. If I can just press you a bit more on the
issue of a volumetric scheme. I can understand that given the
scale of investment required for your industry that makes sense
to you, nevertheless the idea of the R&D tax credit, as I
understand it, is that it is an incentive to get levels of investment
up across the piece and, therefore, it would seem to me that something
that is based on the incremental approach, boosting it from one
year to the next or one period to the next, would feel like that
is more related to increasing investment rather than providing
subsidy for investment that would happen anyway. Am I wrong about
(Mr Marshall) We felt you were in our submission.
(Mr Marshall) I suppose crucially what we do is to
benefit the industry in this country. We do not want it to make
that investment somewhere else. For example, a company like Rolls-
Royce, which is in Canada as well as here, where there is a volumemetric
R&D scheme if it starts to make comparisons, which is inevitably
the case, between one regime and another a scheme that is less
advantageous in our industry and will obviously worsen its position.
I think that while, as has been pointed out, we are congratulated
on being an industry, with a few others, at a world level of spend
in R&D it is because the industry itself is prepared to spend
as much as it does and because, at the other end of the scale,
we know the government spends the least. This, in a sense, might
be a way by which some of this is redressed. Its importance is
in covering the whole R&D spectrum, not the research and technology
59. Just to clarify, the support for a volume
based scheme is entirely based on the issue of international competition
and mobility, it is nothing to do with incentive?
(Mr Marshall) We think it would be an incentive to
have a volume scheme.
Richard Burden: Because of the internationals!
Mr Berry: I notice in your submission you refer
in very glowing terms to the Canadian situation, indeed you basically
say that the government's decision to invest through R&D tax
credits has enabled the industry to make substantial gains, etc,
and that is what you identify as the driving force behind the
progress made in Canada. Are you able to tell us how much the
Canadian R&D tax credit scheme costs their Treasury?
Chairman: You can send us a note on that.