Select Committee on International Development Minutes of Evidence


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


 
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