APPENDIX 4
Memorandum submitted by the Society of
British Aerospace Companies (January 2002)
INTRODUCTION
The Society of British Aerospace Companies (SBAC)
represents the interests of the aerospace companies doing business
in the UK at all levels of the supply chain. It is also one of
four trade associations that supports the Defence Industries Council
(DIC), which acts as a focus for interaction with the Government
on defence industrial matters, including the break up of the former
Defence Evaluation and Research Agency (DERA) and the privatisation
of QinetiQ. In this context, SBAC has sought to present the views
of its members and welcomes this opportunity to address those
issues to the House of Commons Defence Committee in preparation
for their oral hearings with MoD and QinetiQ.
Our Members consider that QinetiQ ought to be
seen as a major national asset that should deliver benefit to
the UK economy as a whole by developing close links with UK Industry
to help tackle global markets. The alternative vision of considering
QinetiQ solely as a commercial entity on exactly the same terms
as other defence companies seems inappropriate while MoD remains
a major shareholder in QinetiQ and its main function is to support
MoD. SBAC therefore believes that a collaborative approach between
QinetiQ and the rest of industry is the right course but perceives
HMG to be primarily motivated by the value of its shareholding,
which may drive QinetiQ on a different course. At this stage the
main problem is uncertainty over the direction of QinetiQ and
over where it will be in defence and civil markets in the future.
It is very difficult to understand what kind of business QinetiQ
will be in five to 10 years time. Industry foresees an awkward
few years in its relations with QinetiQ while a number of important
issues still have to be satisfactorily resolved, particularly
problems associated with the potential leakage of sensitive technology,
clearly defining QinetiQ's role as a private sector company and
ensuring that MoD does not provide QinetiQ with an unfair competitive
advantage, to the detriment of SBAC Members interests.
The following statements describe SBAC's understanding
of the current position and the questions SBAC members would like
answered.
Questions from the SBAC
1. In order to succeed and prosper QinetiQ
must grow its commercial business and this is only likely to be
successful in partnership with the rest of defence industrial
base. SBAC has therefore suggested that one of the Directors that
HMG appoints to the QinetiQ Board should be nominated by the DTI,
encouraging the development of QinetiQ's relations with the rest
of industry and acting as an honest broker with HMG and industry
where problems arise. SBAC does not see such an appointment as
inconsistent with the normal duties of a Director, indeed it should
be of considerable benefit to QinetiQ in providing a safety valve
for some of the other concerns mentioned below. SBAC would envisage
such an appointment being maintained only during the transitional
phase while MoD has a significant stake in QinetiQ.
What is the vision of QinetiQ Board for the
company in five years time?
What is MoD's vision of QinetiQ's place in
UK defence research and technology in five year's time?
Has MoD accepted SBAC's proposal for a Director
nominated by the DTI?
2. HMG, in particular MoD and DTI, have
recently launched initiatives on defence industrial policy, innovation
and defence technology. It would seem appropriate that QinetiQ,
with it special links to MoD and DTI, should have a role to play
in the improvement of the UK defence industrial base and the development
of UK strengths in innovation and technology. But at the same
time MoD seems to be encouraging QinetiQ to operate with complete
commercial freedom, and QinetiQ has come under the management
control of US interests.
Does MoD accept that QinetiQ still has a
special role in supporting innovation in UK defence technology?
If so, how can this be reconciled with commercial
freedom and US management control?
3. Industry was promised that MoD research
contracts would be competed at a far greater level than has been
the case in the past. This is an issue of great importance to
industry and a major factor in QinetiQ being perceived as a commercial
company, treated like any other. In practice competition is being
introduced at a very slow pace and anecdotal evidence suggests
that QinetiQ is being allowed to "cherry pick " key
MoD research work on a non-competitive basis. MoD is naturally
motivated to increase QinetiQ share value.
Has MoD made any commitments to QinetiQ on
allowing the company to retain non-competitive work?
Will MoD publish a firm timetable for the
introduction of competition to its R&T programmes?
4. At the outset industry was assured that
QinetiQ would not undertake "the manufacture and supply of
equipment, products or systems whose principle use is intended
to be for a military, defence or security application". In
practise QinetiQ is naturally anxious to expand the range of "technical
solutions" that it can provide MoD across the whole spectrum
of project life cycles and has the unfettered right to design
and manufacture items destined for the civil marketplace and for
foreign military customers. More and more companies are coming
to regard QinetiQ both as a possible partner and as a potential
competitor. QinetiQ will no doubt partner with many overseas interests.
This is the usual situation for a defence company but with its
close links to MoD, QinetiQ will not be, for the foreseeable future,
a "normal" defence company. QinetiQ could therefore
have an unfair competitive advantage when it comes to obtaining
business both at home and overseas.
How will MoD ensure a "level playing
field" between QinetiQ (and its industrial partners) and
the rest of industry?
Will the normal UK and European competition
rules apply to QinetiQ's activities?
5. The Carlyle Group now leads commercial
management of the company. Carlyle has strong financial links
with US Industry eg Vought Aircraft, United Defense etc. UK companies
investing in US Defence Manufacturers have, by US law, to ensure
that there is a strict set of rules in place to ensure that there
is no leakage of inappropriate technology information.
What is to prevent QinetiQ exporting its
technology (gained as DERA in its special relationship with MoD
and with UK Industry) to the US?
What are the implications for UK relations
on defence technology with Europe and other parts of the world?
Should the UK not have protections against
leakage of technology in the case of QinetiQ?
6. MOD have gone to great lengths to ensure
the impartiality of QinetiQ technical advice when it comes to
their procurement, by means of an extensive Compliance Regime
it has imposed on QinetiQ. However, when it comes to industrial
concerns over leakage and possible distortions of competition,
the MoD has suggested either that somehow that Regime may help
in ways that are unclear, and/or told industry that their fears
are exaggerated. Meanwhile industry has only had sight of the
broad outline of the Regime.
Will MoD publish its Compliance Regime for
QinetiQ?
Can MoD still act in the national interest
in competitions involving QinetiQ when it also has the interest
of being a major shareholder in one of the bidders—should
an independent authority be involved in such cases?
7. As MoD's in house "technical authority",
QinetiQ's predecessor DERA was granted unique access to reports,
drawings, specifications, computer programmes and other data generated
under international collaborative arrangements and by industry.
Protection of this sensitive proprietary information is a major
concern of SBAC members. Industry welcomed the Records, Audit,
Segregation Project (RASP) which MoD put in place to identify
and locate all such third party records held by QinetiQ. MoD assured
industry that QinetiQ would only be allowed to retain sensitive
proprietary records belonging to other companies where they were
required "in conjunction with a continuing MoD contract and
where MoD had the legal right to allow QinetiQ such access".
The information subsequently divulged to industry after the completion
of RASP, however, has been very general and made it very difficult
for most companies to assess whether these assurances have been
honoured. However, some instances that have been explored in detail
reveal that although RASP may have enabled a physical separation
of third party and international collaboration data, there are
clearly occasions where records were sanctioned for retention
for which MoD did not have the necessary legal rights, or had
no certain way of knowing what rights apply, and/or were retained
for reasons well outside those agreed. Some cases have already
emerged; others are likely to be found. Industry wants to be sure
that the data of its origin held by QinetiQ is only being used
for the purposes for which it was originally supplied, and not
as a means of improving QinetiQ own competitiveness to the detriment
of the originator?
How confident is MoD that it has not sanctioned
the retention by QinetiQ of a large amount of material outside
the terms of its own guidelines for RASP?
Where material has been sanctioned for retention
incorrectly will the responsibility rest with MoD or QinetiQ?
If responsibility rests with MoD, will MoD
compensate companies who can demonstrate they have suffered a
commercial loss as a result of incorrect allocation?
8. MoD have stated they still will be looking
to QinetiQ for impartial technical advice, to carry out a range
of testing, clearing urgent operational requirements, supervising
and introducing significant upgrades to equipments, and through
its Integrated Project Teams that run procurements, to be involved
closely in the introduction and in service support of all MoD's
major weapon systems and programmes. Some of these roles, in industry's
view, are incompatible with QinetiQ's new status as a private
sector company, unless strong legal safeguards are put in place.
There are a number of legal and ethical problems here that SBAC
understands MoD considers its existing procurement regulations
cover. In industry's view, where MoD decides to use QinetiQ as
its primary technical advisor or to act as an "authority
on its behalf" this role must be on terms that are demonstrably
fair to all the stakeholders involved, not only to the MoD customer.
How will MoD ensure that QinetiQ's advice
is really impartial?
Will MoD's procedures be backed up adequate
legal safeguards?
Will MoD consult the other stakeholders in
programmes on the use of QinetiQ in an advisory or similar capacity
to ensure there are no perceived conflicts of interest?
9. Traditionally DERA played a leading role
as the MoD technical advisers in setting up and organising international
collaborative agreements, not just in the area of research. As
a private sector company QinetiQ is now seen by other collaborating
nations as an industrial contributor. This could act to the detriment
of UK interests, including other UK private sector companies wishing
to contribute. This seems to be an inevitable consequence of the
transitional nature of QinetiQ, which seems to have special access
to technology programmes while also having commercial freedom.
In the light of the changing attitude of
foreign partners towards QinetiQ, how will MoD ensure adequate
UK industrial participation in international agreements in future?
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