APPENDIX 5
Memorandum from the Society of British
Aerospace Companies (SBAC)
Thank you for the opportunity to make observations
on the secondary legislation of the Export Control Act on behalf
of the UK Aerospace Industry.
As you are aware, Industry is in the middle
of preparing its formal responses to the Government's consultation
programme, which concludes at the end of April. Although industry
is in agreement on the broad thrust of our concerns about the
consultation document, nonetheless we are in ongoing industry
and Government discussions and this document is therefore an overview
of the main concerns. Industry remains confident of its process
of constructive dialogue with Government.
UK Aerospace
It is worth bearing in mind that over 75% of
all UK defence exports are aerospace related, and that 46% of
the aerospace industry is defence. UK Aerospace is therefore especially
interested in ensuring this legislation is workable as well as
a success in targeting illicit activity.
Industry welcomes better legislation
Firstly, the SBAC has always fully supported
the Government in its attempts to use legislation to tackle illegitimate
trafficking and brokering. Since the Export Controls Act's inception
in 1998, the aerospace and defence community has worked closely
with Government to achieve a workable and effective piece of legislation.
At the same time industry has in particular welcomed the attempts
by Government, mainly through open licensing, to address the often
lamentable delays and bureaucratic burden in the current system,
long a headache for legitimate business.
Industry and Government need clear legislation
Industry has always known that the devil would
be in the detail of the secondary legislation. Even though we
are still in the middle of the consultation programme, it is already
clear that the document requires significant clarification in
order for it to become workable. The legislation is phrased too
loosely, and industry would be relying on a pragmatic and common-sense
interpretation of the legislation by Government, a situation which
is not bankable in business terms and which would seriously undermine
the competitiveness of the UK defence community.
One of the key determinants of success for any
piece of legislation, both in its design and in its enforcement,
is the principle of certainty. The consultation paper does not
provide certainty in terms of its impact on business or the resources
required to police it, by Government or industry.
Essentially, industry needs to know at what
point and in what circumstances are licenses required, and how
one is obtained and used. At what point in routine marketing activity
is a license required, bearing in mind that it is not always clear
at what point marketing starts. In relation to trafficking and
brokering, identifying the "trigger point" between normal
marketing and promotion, which is not licensable, and deal facilitation,
which is licensable, is not clear from the document. (paragraphs
4.1-4.3)
In such respects the document requires significant
clarification if it is to become workable.
Achieving balance: effective controls and a successful
export industry
Industry is mindful of the Government's onerous
task of balancing conflicting demands. in this respect, the need
to introduce effective measures and the need to support one of
the UK's most successful export industries. However we believe
there is no contradiction in these twin aims, which are not mutually
incompatible. Tightly expressed controls need have no detrimental
impact on legitimate business, and in many ways would be helpful
by providing clear parameters within which to operate.
Multilateral coordination
There is also risk that some of the requirements
within the proposed controls will hamper current Government to
Government initiatives to facilitate defence industrial collaboration,
such as the Declaration or Principles and Letter of Intent.
On 11 March 2003, the European Commission published
a communication on European defence equipment policy.
"The Commission is all too aware that intra-Community
transfers of defence equipment are time-consuming and involve
a lot of red tape because of the number of national procedures.
The Commission has therefore tried, working with national experts
to identify possible ways of simplifying intra-Community transfers
of defence related goods."
The UK Government should ensure that the secondary
legislation does not limit the flexibility of the UK working within
Europe to achieve common procedures.
Impact Assessment: how long is a piece of string
The Government has already conceded that their
Regulatory Impact Assessment is incomplete. It is clear that the
potential scale of intangible activity and the associated record
keeping in particular, has been vastly underestimated. An accurate
assessment is vitally important. Final discussions must not be
made until industry has been able to make the best estimate it
can of the impact of the new legislation.
The threat of further delays
We also fear that the volume of work will produce
more delays in a system which has already been strongly criticised
for delays. Industry is particularly concerned about the impact
on the workload of the Compliance Unit in managing the increased
demands placed on it. It will be difficult to carry out meaningful
audits of the significantly increased volume of recordable transactions,
particularly in relation to intangible transfers.
Intangible Transfers of Technology
Within the document itself, industry has two
main concerns: Intangible Transfer of Technology, and the trade
controls, otherwise known as "Trafficking and Brokering".
With regards to intangible transfers, the legislation
covers all electronic transfers of technology. This includes phone
calls, faxes, e-mails, access to UK-based servers from overseas,
and secure data environments. All such communications involving
or related to certain technologies will require a licence and
may need to be recorded. This is an ambitious objective, to say
the least, and breaks new ground in terms of the reach of Government.
While other UK legislation has dealt with the rights of Government
agencies to look at private e-mails, none has attempted the comprehensive
policing and licensing of electronic communications per se. Here
there is a clear burden of awareness and training on industry
which is difficult to scope. It is also important that the legislation
does not negate many of the advances in communication which have
taken place since the 1939 Act, with the consequential distortion
in trade which would be detrimental to UK industry and the attractiveness
of the UK as an international partner. The UK's status as a high-tech
centre of e-business is important to our competitiveness as a
nation and we must ensure this status is safeguarded.
Industry's primary concern regarding intangible
transfers is one of resources. The proposals effectively require
that a significant proportion of the defence industry, including
engineers, and marketing and purchasing staff, with access to
a PC, fax or phone will need to be fully cognisant of the legislation's
requirements. In reality, many thousands will need to be trained
to be able to interpret when a proposed transfer of information
will be covered, and will need to become familiar with the Military
List.
Furthermore, bearing in mind an average staff
turnover in the UK economy of 27% a year, this training cost would
be a significant annual cost for industry in the UK, as well as
staff in related industries in companies abroad.
For larger companies, training is primarily
a cost issue. However for smaller companies it is also one of
workability. SMEs simply do not have the resources or staff to
train all employees, and to fund the logging and electronic filtering
of all e-mails, faxes and phone calls.
Additionally, of course, policing such a far-reaching
scheme would undoubtedly prove beyond the means of any Government
department.
Policing electronic communications is ambitious,
and Industry appreciates the difficulties in setting up a workable
scheme. Industry welcomes the principle of enforcement, as electronic
business can clearly pose a loophole for illicit activity. However,
the Government needs to work with industry to arrive at an effective
and practicable method of policing electronic business. Government
also needs to assess fully the impact of enforcing any revised
proposals, both for industry and Government, as the impact of
the current suggestions has clearly not been scoped.
Government's current requirements for the record-keeping
of all potentially relevant electronic communications including
phone calls are also unworkable in both cost and enforcement,
and requires revisiting.
The current record-keeping requirements were
designed to regulate tangible activity. The world of electronic
business is fundamentally different. One document can undergo
minute changes over numerous emails which in a face-to-face meeting
could have been dealt with in one sitting. And , the volume of
electronic business involved is substantially greater. The current
proposals would require each transaction to be recorded. The volume
of "recordable events" in intangible transfers will
therefore be several orders of magnitude higher than previously.
Government is keen not to increase the overall
volume of licence applications. However, bearing in mind the greater
potential burden of record-keeping, particularly in relation to
intangible transfers, the volume of administration involved will
be dramatically greater. It is this burden and not just the volume
of licences that is the truer indication of the workability of
the legislation.
Industry is committed to working with Government
to achieve a workable system of record-keeping in relation to
electronic communications.
Trafficking and Brokering
As in other parts of the document, industry
is concerned that the Government's welcome proposals to control
trafficking and brokering could fail to discriminate between illicit
and legitimate business activities and thus swamp the system with
the burden of policing the majority.
For instance, a foreign national visiting the
UK from an overseas company, even one with no UK presence, who
e-mailed or telephoned his company from his hotel and authorized
the shipment of military goods from his home country to a third
country, would be taking part in a licensable activity. Is it
really expected by HMG that all such visitors will register for
the use of the relevant licences? If not, doesn't the very real
unenforceability of the provision render it liable to ridicule?
The global nature of the defence business means
that individual exports are usually part of a wider deal, and
will involve numerous companies and countries. Industry understands
that the legislation may require UK companies to provide a detailed
map of the overall deal. In multinational procurement chains,
where goods are being supplied from many countries and between
many destinations, the UK company involved in the chain would
require UK licensing cover if it knew that a contract placed on
a supplier in another country involved the movement of military
goods or technology from a third country.
Farnborough Air Show
As the organiser of Farnborough International
Air Show, the SBAC is particularly sensitive to the potentially
unintended impact of the legislation on trade shows. Farnborough
Air Show brings over £16 million into the local economy,
and attracts over 150,000 trade visitors.
The proposals for trade shows, in particular
at paragraph 4.43 relating to record keeping, create a potentially
absurd situation whereby a company planning to attend an event
such as Farnborough could, under options B or C, quite legitimately
remove the record keeping burden by having an overseas entity
book and staff the stand. Surely, this cannot be the intention.
Similarly, if, for example, the chief executive
of Boeing signs an agreement at Farnborough to supply goods to
a country excluded from the proposed Open General Trade Licence,
such as Israel, then he could be indicted as a trafficker if a
licence is not sought in advance. Naturally, these unintended
consequences, if not addressed, would lead business to find other
foreign trade shows to announce their deals, and would undermine
Farnborough and many other UK trade shows without any net benefit.
The SBAC would recommend a fresh look at the practical aspects
of the proposals governing trade shows.
Impact on the UK's Armed Forces
Industry's current understanding of the legislation
is that it would also cover all equipment and technology operated
by, but not owned by the Crown, as Crown exemption only covers
owned equipment. Crown exemption is increasingly a source for
concern for industry and Government, given the ever increasing
use of PFI/PPP in Government as a whole, and the use of leased
equipment and services by the MOD in particular, such as its leased
C-17 military transport aircraft.
Without clarification, our Armed Forces could
be left in the untenable position of breaking the law by ordering
a spare part while in the field, or even requesting advice. A
company employee giving advice to a MOD technician in the field
of combat could be breaking the law. Either the firm breaks the
law and risks liability, or it applies for the appropriate clearance
while forces are in combat and risks the lives of UK combatants.
Crown exemption needs to be clarified and extended
to take into account the way in which the defence industry is
evolving, and should cover all equipment and technology used by
the UK Armed Forces to ensure that the effectiveness of our Armed
Forces is not compromised.
A realistic interim period
Many aspects of the legislation are entirely
new and will be a challenge for both Industry and Government to
achieve in the three months interim period the Government has
proposed. Ideally, Industry would prefer a pilot scheme as the
best means of undertaking the required impact assessment and troubleshooting
its more undefined aspects.
However, in the absence of such a realistic
possibility, Industry suggests 12 months is a modest estimate
given the requirements to introduce new IT hardware to filter
and log all electronic communications and the training burden
involved. Obtaining DSSO reaccreditation can also take at least
12 months.
Conclusion
Given the open-ended and ill-defined scope of
many aspects of the draft legislation, it is currently not possible
to provide an accurate estimate of the cost to industry of complying
with the scheme—let alone the cost to Government. However
it is fair to say that as the legislation is currently conceived,
the costs would be wholly disproportionate to the benefits of
attempting to administer a sweeping and unenforceable piece of
legislation. Industry would question the effectiveness and accuracy
of the current impact assessment that the Government is required
to conduct for all new legislation. Without significant revision,
the legislation could seriously damage the competitiveness of
one of the UK's most successful industries.
Industry also questions the legislation's actual
impact on those activities it was originally designed to combat.
Instead, without fundamental modifications, the legislation could
become a bureaucratic burden that will fall entirely on the shoulders
of legitimate business and the Government, ironically further
hampering Government's ability to devote resources to target illicit
trafficking. This burden will most likely also result in further
delays in licence application and processing, further damaging
UK industry's competitiveness.
Industry is committed to working with Government
to arrive at a workable piece of legislation. However the need
for clarification is urgent.
These represent some of the concerns of Industry
during the consultation. We should stress that this consultation
involves ongoing and constructive discussions with Government,
which we hope will address these concerns.
11 March 2003
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