Examination of Witnesses (Questions 1-19)
THURSDAY 3 APRIL 2003
MR MIKE
MCLAUGHLIN,
MR DAVID
HAYES, MR
TIM OTTER
AND MR
BRINLEY SALZMANN
Chairman: Good morning and welcome to the Committee.
Does any member wish to declare any interests?
Rachel Squire: Yes, Chairman. On the one hand,
I can say that I am a member of Amnesty International; on the
other hand, largely because of strong constituency interests,
I have had a lot of contact with members of the Defence Manufacturers'
Association. I have accepted their hospitality from time to time,
and some years ago I did do the Industry and Parliament Trust
Scheme with British Aerospace.
Chairman
1. Thank you for your written submission. You
make the point in the memorandum that the British defence industry
strongly supports the need for export controls. You refer to the
need to strike a sensible balance in legislation between control
and facilitation of legitimate business. It is pretty obvious
from the first page of your submission that you have some grave
concerns about this proposal. You use the phrases, "great
concerns, disastrous, unworkable, impractical". Would you
care to elaborate on these rather immoderate terms and explain
how you think the Government can more effectively target illegitimate
proliferation without doing damage to our defence industry? (Mr
Salzmann) Certainly when the preliminary legislation came
out, and we gave evidence to the Committee in April 2001, we said
at the time the devil would be in the detail. Now we have seen
the detail, we are concerned about the workability of what is
being proposed. We certainly welcome the publication by the DTI
of its thoughts and, since that has been published, we have had
a number of fruitful discussions with the DTI's officials about
the problems which we have identified within the proposal. We
would be keen to work with the DTI in trying to address all these
to come out, at the end of the day, with a piece of legislation
which actually is effective in curbing the irresponsible proliferation
activities of people out there. Our concerns are entirely practical
on the basis of the workability of what is being proposed. We
are concerned that it will have a minimal impact on the activities
of those people whom we all want to try and control, and we would
agree need to be controlled, whilst having a major impact on legitimate
industry.
2. Could you give me an example? What is the
main concern you have from the point of view of business? What
is it in these proposals that causes you the most grief? (Mr
Salzmann) It is a lack of definition to a major extent. For
instance, to take just one instance, the proposal on trafficking
and brokering; if you look at the annex on page G3, sections 4
(1), 4 (2) and 4 (3), you will see that the Government is proposing
controls on trafficking and brokering arrangements being entered
into. As you go through this from 1 to 3, you are getting further
and further away from the actual deal being done. The problem
is that if you take the business continuum between normal, general
marketing and promotion at one end, which is not export licensable,
and the actual contract signature at the other hand, which is,
there is no clear delineation and definition in the document as
to where along that continuum the trigger point is at which a
licence would be required.
Mr Olner
3. I wondered whether you can give the Committee
any examples as to where it is difficult to distinguish between
the market and the promotional activities and what is licensable
on the other hand? (Mr Hayes) I think the difficulty
lies in the fact that the orders are quite clear to the extent
that normal marketing activity is not subject to control under
the new proposals and that entering into a commitment is. If you
look at 4.1, 4.2 and 4.3 in succession, it appears that the point
at which those provisions take effect is progressively further
in advance of the point at which you enter into a commitment,
whatever a commitment might be. The definition of "commitment"
is itself unclear, and the point at which each of those respective
provisions takes effect in advance of whatever a commitment might
be is also unclear. To give a specific example would be impossible
because we do not know what we are attempting and what is involved. (Mr
McLaughlin) If I may, I might attempt to give an example that
the company that I work for, Rolls Royce, meets not infrequently.
For example, as one is having the discussions with potential customers,
the subject of offsets may well come up. If you agree in principle
to a percentage, or even a fixed number, in terms of values of
an offset agreement, what I do not believe is clear from the consultation
document is whether that has moved us from marketing to trading
and whether therefore a licence is required.
4. Chairman, at this stage I ought to declare
that in a previous existence I was a Rolls Royce employee. I am
a Rolls Royce pensioner at this point in time. (Mr McLaughlin)
I was aware of that. You will understand offsets particularly
well. That was an illustration of the sort of commitment that
the company or companies generally—and it does not just
apply to a single company—may wish to make to a potential
customer. What is not clear to me is whether that is far enough
along the continuum to which my colleague referred to constitute
a licensable activity.
5. Are there any particular areas where technology
gets caught in this trap of perhaps requiring a licence? I think
we all fully understand that if you are an exporter of a fighter
plane, a helicopter or a tanker, you need a licence. Are there
any areas that you think are particularly grave or difficult to
deal with, particularly on the technology side? (Mr Salzmann)
Certainly in the issue of nuclear and biological chemical warfare. (Mr
Otter) The basic technologies that we use and are involved
in for detecting chemical warfare agents, and indeed detecting
biological warfare agents, are standard and available across-the-aboard
technologies that you can acquire off the shelf from a medical
supplier, for instance, and the same equipment is used for environmental
monitoring. You get into all sorts of difficulties about technology
that is actually being used for a very sensible application in
the defence field but which cannot be exported to cover those
other fields[1]
6. Could I perhaps probe a little. The Committee
will determine its own views on this consultation paper. Obviously
you have submitted evidence not only to us but I would imagine
to the Secretary of State as well. Could I ask how these proposals
configure with similar proposals that other EU countries or other
countries globally use? (Mr Hayes) Certainly, the one
which we are most involved in would be the United States controls
under the International Traffic in Arms Regulations (ITAR). Conceptually
the two are completely different in the sense that the American
concept of export control is based on the nationality of the recipient
as distinct from the geographical location of the person at the
time. These controls are based on the geographical location. Therefore,
theoretically, if I were to send an e-mail to a French national
in Britain, that would not be an export. If I were to send the
same e-mail to an Englishman in France, it would be. Conceptually
the two are to that extent incompatible.
7. What I was trying to establish was whether
the British defence manufacturing industry would be under greater
shackles with this legislation than other EU competitors or other
global competitors. I was trying to get a balance of what is happening
in other countries compared to what is contained in here. (Mr
McLaughlin) May I pick up on one point which I think is the
underpinning issue? Your question, if I have interpreted it correctly,
is about competitiveness. The consultation document provisions
regarding intangible transfers certainly I think we collectively
would judge may, depending on their interpretation, which itself
is a question, well impose an unfair balance in terms of cost,
bureaucracy and resource in meeting those recording requirements,
in particular the tangible transfers, compared with other regimes,
obviously the EU regime and the US regime. There are other dimensions
to it but I think the implication of costs on competitiveness
is a major one.
Chairman
8. Let me come back to this distinction between
promotional activity and the commitment to make a deal. Could
we leave the issue of offsets to one side. We will return to that
in a few moments. It seems to me, looking at it from the outside,
that there is a clear distinction between promotional activity
on the one hand and the decision to make a deal. Under present
arrangements, there is no requirement to have a licence for the
former but there is for the latter. In do not quite see how that
distinction cannot continue to be maintained relatively straightforwardly. (Mr
Hayes) I think the problem lies in the fact that the controls
to which Mr Salzmann referred in 4.1, 4.2 and 4.3 of the Trade
Order actually apparently take effect at the various points prior
to the commitment being made. It is unclear at precisely what
point they would actually take effect and at what point the activity
would therefore become licensable.
"I have got them in front of me. Basically,
certainly the provisions of the order are saying that no person
shall do anything to promote, arrange or negotiate a contract,
et cetera. It seems to me that it is activity designed to negotiate
a contract that this is seeking to constrain. Is that not clear? (Mr
McLaughlin) I do not think it is clear, Mr Berry. I think
your question absolutely highlights the issue for industry. We
all want to comply with whatever the regulations will say. I think
our problem, in part anyway, is that they are not clear. If you
were to come along and start a discussion about buying, in my
case aero engines—we use the word offset and I know you
said we would return to it—if there is an agreement in principle,
long before any contract signing were reached, that we will be
prepared to have this discussion involving potential business
underpinned by agreement in principle regarding offsets, I do
not know from the consultation document whether I should have
gone for a licence to have that or not.
Mr O'Neill
10. You are suggesting that the number of licences
which are going to be applied for under the new arrangements is
going to stretch your resources somewhat and that there is a danger
that the civil servants will be swamped. Could you expand on that
because I am a bit unclear as to the scope or the scale of the
problem that you have alluded to, in rather florid language, I
have to say. (Mr Salzmann) Defence companies are also
looking at the Order and trying to get a grasp of what the potential
implications are. In the modern commercial business world, exchange
of information by e-mail and so on between companies involved
in multinational collaborative projects is a regular occurrence.
Engineers love to talk to one another and share information. There
is a vast amount of exchange of information which is taking place
out there, just in terms of the transfer of technology. Similarly,
on the trafficking and brokering side, what is being controlled
is involvement in other people's exports. One of our member companies
gave us a wonderful example of a schematic representation of a
business deal which they had just entered into about three weeks
ago. It is not just supplier and customer; it is suppler, customer
and all these other suppliers in the supply chain that they have
got to do business with who are based all round the world. The
UK company is therefore, as it is at the top of this supply chain,
going to have to try to apply for trade licences for this activity
which is taking place below the surface. We are just very concerned
that what could happen is that the export control authorities
in this country would be so snowed under with applications from
British companies, legitimate and responsible companies, trying
to deal with these new proposals that, in terms of trying to spot
the illicit arms dealers, it is going to be like trying to spot
a snowflake in a blizzard, except that it is even worse because
the snowflake will not be there as they will not be applying for
the licence in the first place; they will still remain outside
the system.
11. How many applications do your members make
in a year? (Mr Otter) What I tried to do, just for
myself, in a two-week travel period was to apply the new regulations
and look at the number of applications I would have to make. In
one four-day period that I was at an exhibition where we were
actually discussing on an exhibition stand trying to enter into
particular deals, and they happened to be to support UK forces
in the Gulf, I think I had 100 telephone calls, 150 e-mails, 35
faxes and 100 conversations. Because our equipment has to be individually
licensed, each one of those would have required a licence. That
was down into our supply chain; that was sideways into other suppliers
whom we were trying to put equipment into so that it could be
delivered to the Gulf; and also back to the UK Government. As
I was overseas, in theory the conversation between me and the
UK Government would have to be licensable.
12. What I am trying to get at here is that
we are talking about the Government intending to use open licensing
for a fair number of— (Mr Otter) Not for weapons
of mass destruction equipment, which requires individual licensing.
13. With respect, weapons of mass destruction
do not constitute the bulk of the arms trade which we are talking
about. Let us get a sense of proportion here. The Government has
said that there will be between 100 and 150 new individual licences
for applications for electronic transfer of military technology
and no more than 100 to 250 new individual licence applications
under the new trade controls. What do they not know that you seem
to know? (Mr Otter) I think it is the fact that, the
way things are drafted at the moment, people will be saying—and
we have had this happen and the DTI have said to us—"Well,
we are only really trying to scope it and we are not actually
trying to define what is going to happen". What the lawyers
would say is: "As it is written at the moment, you must apply
for that, otherwise somebody could get ten years in jail".
14. They have afforded themselves a range of
figures between 100 and 150 for one category and 100 to 250 for
a second category. One would have thought that these sorts of
margins were not unreasonable and that if the scoping exercise
has not been completed, then we are talking at most at the outer
limits of their estimates of about somewhere of the order of 500
additional applications per annum. I am led to believe that it
is something in the area of several thousand export applications
every year. If we were to take it that it was no more than 4,000,
and that is a conservatively low estimate perhaps but even if
it were that, and the addition is 400, which is the maximum the
Government is talking about, then frankly we are only talking
about an increase of 10%. Even then, we do not know what the distribution
is between your members because there may be some of your members
who will be largely unaffected by this and there will be others
who quite correctly may well have a data requirement to openness
and to make these applications. Are you not crying "wolf"
here? (Mr Hayes) I think one of the issues, particularly
in relation to trade, and look at page G1, is that it refers to
"equipment" as a defined term and "equipment"
means "both used and unused goods and does not include software
or technology". Then if we look at "controlled goods",
also on page G1, that means "any equipment specified in Part
1 of Schedule 1" to the Order defined. Effectively that is
anything on the military list, which also includes technology.
In the definition of controlled goods, the word equipment is not
in inverted commas and so you can infer from that that under the
Trade in Controlled Goods Order intangible transfer of technology
is also controlled because that technology would be covered by
Part 1 to Schedule 1 of the Export of Goods Order. The word equipment
in that definition is not contained in inverted commas. That may
be an error; it may be as simple as that.
15. The point I am still making is that the
advice that you are receiving from the Ministry is that there
will be a maximum of 400 more applications. Your document suggests
that there is going to be an inundation of Victoria Street, people
queuing up with lorry loads of applications being brought in every
day, and the whole system being gummed up. Frankly, I think you
are running away from reality here. It is not going to be like
that at all. You may have a case that any requirement for a greater
degree of applications is going to create work, but are you not
over-egging the pudding? (Mr Hayes) We all hope that
it is not going to be like that but at the moment we are in an
area of considerable uncertainty.
16. You are uncertain, therefore you exaggerate
beyond reasonable belief? (Mr Hayes) I disagree with
that. (Mr Otter) I think what people are saying is
that because the definition is uncertain, what happens is that
the legal advisers are saying, "You have got to, otherwise
you will not be in compliance with the law". It is better
to be safe rather than sorry; otherwise, if there is any debate
and it goes to court, someone ends up being sent to prison. It
is not worth taking a risk. You have got to play safe rather than
sorry.
Chairman: There may be some bad drafting here
but that can be sorted out. To some extent, I think we are going
round the same points. Can we move on?
Sir John Stanley
17. As we all know, the timescales imposed in
war are totally and utterly different from those in peacetime.
The lives of our own servicemen depend on getting equipment and
spares et cetera to them in the timescale that they require. You
refer to this in a paragraph in your paper, "Support for
the UK's Own Armed Forces". You say in your paper, and I
will just quote one sentence: "The complete lack of any mention
throughout the draft Secondary Legislation of the complicated
issue of `Crown Exemption' could, if not addressed by the Government,
result in an inability of UK Industry to provide the essential
expeditious support needed by our own Armed Forces in overseas
deployments in the future." The question I want to put to
you is: do you consider that the critical requirement for British
arms exports to be able to meet the procurement requirements of
the Ministry of Defence in the circumstances where our own forces
are in combat situations can be met simply by the clarification
you are seeking as to the ambit of Crown exemption or do you believe
the Government needs to go further and have additional primary
legislation under which it is clear beyond any doubt at all that
the normal inevitably delayed arms export control processes have
been put into a period of suspense in circumstances where there
is an imperative need in a war situation to supply our armed forces
with the equipment they require? (Mr McLaughlin) There
are several questions there. I think there has to be introduced
into the orders some arrangement for Crown exemption allowing
the support of the armed forces. If this consultation document
were already in being, we would not be able to take phone calls
from Basra, which one of us did this morning, on technology questions
and answer with a technical response.
18. Can you explain that. Why would you not
be able to take a call from Basra? (Mr McLaughlin)
Because that is an embargoed destination, because of where it
is.
19. You are back on the Crown exemption point
basically? (Mr McLaughlin) Yes. There has to be some
sort of exemption, and I do not know what the precise details
of that are, for that sort of support in the field. I think at
the front end of your question the answer is that it is much more
complex in terms of Crown exemption and at that stage of deal-making
I was referring specifically a moment ago to support in the field.
I think it is rather more complex when you start to bring it backwards
towards a deal-making and detailed involvement, a Government involvement,
and so on, as to how Crown exemption might or might not apply.
There are lots of detailed issues underpinning that, not least
the issue of ownership, particularly in a modern complex business
environment where the issue of ownership, and therefore does Crown
exemption if it exists apply or not apply, is anything but clear,
frankly.
1 Note by Witness: I am also the Chairman of
NBC UK, the DMA's special Interest Group which represents the
NBC defence sector in UK. Back
|
