Examination of Witnesses (Questions 120
- 139)
WEDNESDAY 21 APRIL 2004
MR DAVID
HAYES, MR
TIM OTTER,
MR DAVID
BALFOUR AND
MRS SUSAN
GRIFFITHS
Q120 Mr Davies: That is a policy
difference. Any other procedural differences?
Mr Otter: The amount of forms
and record keeping that you have to go through. Under the new
regime our record keeping is much more onerous than theirs.
Q121 Mr Davies: Would you be willing
to give us a brief written list of the salient differences between
the two systems and some indication of the cost implications of
that for British industry as against German competitors?
Mr Otter: Yes. The other one is
the training that the new system has already brought into play.
Our estimate as a company is that at a minimum just the initial
training has added 2% to our overheads.
Q122 Mr Davies: When our new system
was being reviewed by the Government last year did you make submissions
suggesting that we adopt the German procedure?
Mr Otter: We made several suggestions
over the whole period of this consultation suggesting a number
of ways in which the implications of what was actually coming
into force could be reduced.
Mr Hayes: I think another point
that is worth adding there in terms of additional burden that
is about to happen to the UK industry is Articles 8 and 9 of the
new Export of Goods, Transfer of Technology and Provision of Technical
Assistance (Control) (Amendment) Order places controls on the
end use, on the transfer of software and technology by any means
if that technology is for any relevant use, which includes NBC
defence, and is intended for use outside the EU. The net result
of that is that in future if someone in the NBC defence field
wishes to talk about the technical aspects of a system with our
own MoD on the basis that presumably our own MoD are not going
to engage in the war within the EU, then they will need an export
licence to talk to our own MoD. Conversely, the controls purport
to apply to the activities of any UK person transferring data
from a place outside the European Union, but if you look at the
definition of transfer within the regulations, transfer applies
to an activity which takes place in the UK. So it looks like we
have missed the intended target and placed a burden on the industry
for no gain.
Q123 Mr O'Neill: Mr Hayes, your company
operates in a lot of countries. We have heard about the German
example. Have you had any experience of the comparative difficulty
there is in dealing with the UK system as of next week as against
any of your other operations in Canada or worldwide where you
might be manufacturing and exporting?
Mr Hayes: Yes. It is difficult
to comment on the practical impact of the new system because we
are not actually living with it yet so a lot of that is expectation.
Everyone accepts that currently probably the most burdensome export
control system in the world is that of the United States and a
US attorney colleague did make the comment that at least now the
ITAR would not be the worst system. That was an American view,
not mine.
Q124 Mr O'Neill: Small consolation!
Mr Otter: We have offices in the
United States and my British colleagues in the United States are
saying, now they have had the training, that the US regulations
are a doddle compared to the UK regulations.
Q125 Mr Evans: Mr Otter, you mentioned
that Germany exports to certain countries that we do not. What
are those countries?
Mr Otter: Certainly Egypt, Israel
and the French and it seems the Germans have a different approach
to the way they classify—and I am specifically talking here
about my own company's detection equipment—the equipment.
If it is green it is military so it goes on the military list
and it gets military licences and all the rest of it. If it is
blue it is for civil defence, it is identical but it is blue,
not requiring a licence.
Q126 Mr Evans: On the red tape that
you talked about, which obviously generates additional expense
for British companies, giving a competitive advantage to Germany
and perhaps some other countries as well, are you able at any
stage to work out exactly what that cost is to British industry?
Are we losing any orders because of the competitive advantage
to other countries?
Mr Otter: I think we have really
got to try and implement the new system first to get a definite
answer to that, but already, as I indicated earlier, just the
training activity up to now has added 2% to our overheads, which
is a huge amount and we strive to shave out 0.1 of a per cent
against our overheads and to suddenly have 2% lumped in is considerable.
We do not know how much activity we are going to have to be involved
in in relation to the record keeping for instance. However, suffice
it to say, my extremely well mannered and very well brought up
lady secretary was heard to curse as fluently as I can when I
came back from a trip to Malaysia, the Czech Republic and Slovakia
last Friday and said, "Here are the visit reports. This is
what you are going to have to do to comply with the recording
requirements". There are something like 57 meeting reports
that have now got to be entered into the system, someone has got
to manage that system and someone has got to look at that database
to make certain that I am complying with the various licences
that are in place. It would be very difficult to quantify immediately,
but my guess is we are already at a serious competitive disadvantage.
Q127 Mr Blunt: Two years ago you
gave evidence to the Committee and you said that "For the
most part companies now appear to be much more relaxed about the
practicality of complying with the new regulations, although on
the roadshow we did occasionally come across some who views differed
from this generally positive line (including one company at the
Exeter briefing who asked: `Does the DTI realise the complete
paralysis of all commercial activity here in the UK that will
result from the imposition of these draconian controls by the
British Government's thought police?')" You then said such
views were in the minority. I get the sense from the evidence
you are giving to us now, having had to come to grips with the
detail that you are now going to have to implement in ten days'
time, that that company would now represent the majority.
Mr Otter: I think somebody once
said a week is a long time in politics. Two years is an eternity!
Q128 Mr Blunt: You had a number of
concerns when you last came before us. Which of your concerns
have been allayed and how much worse is the problem than you actually
anticipated it would be a year ago? You have given us evidence
that a 2% overhead is an extremely serious competitive disadvantage
as is the unknown future burden of record keeping and all the
rest. If we now have the worst system and a more bureaucratic
system than the United States this would appear to be something
of a disaster for an extremely important United Kingdom industry,
would it not?
Mr Otter: It will be. The biggest
shock to us, and it only really came to light in January when
we held an NBC UK meeting and we invited the DTI to come along,
the implementation team briefed us and we had done quite a lot
of homework, is that Article 8.1 does now require us, if we do
not have a contract in place, if we have a new technology, to
acquire a licence from the DTI to talk to our own Ministry of
Defence. I think that was the biggest single body shock. There
are lots more that have come out of the woodwork as well.
Q129 Mr Blunt: You have identified
the absolute absurdity of this if you follow the rules appropriately
and presumably the MoD or the DTI will then say that is obviously
a manifest absurdity and address it, I assume that would be the
reaction of the Government. What I want to understand is just
what the scale of the competitive disadvantage is to an industry
that employs possibly hundreds of thousands of people in the United
Kingdom that we are now imposing on them from 1 May?
Mr Hayes: I think you can divide
the answer to that into two parts. Across the defence industry
generally the impact is one of a need for training and most of
industry has opted for a combination of computer-based training
and classroom training, the classroom training probably lasting
for one full day and for large numbers of employees. We thought
at 1 November when we started to design the training we were designing
against a known specification that the Government had provided
us in the form of the legislation, but that is far from being
the case, the goalposts are moving constantly. The DTI is almost
at individual meetings taking different interpretive lines on
the new legislation. We now think we will need to put large numbers
of employees through possibly up to five days of training so that
they understand their obligations under this new legislation.
That is across the general run of the defence industry. If you
then move into the areas subject to more particular controls such
as the restricted goods and MBDA, on the trade controls or into
the NBC defence world of Mr Otter then the controls are all the
more rigorous, there are more absurdities along the lines of needing
a licence to talk to our own Government and the need is consequently
greater in those areas. So there is that separation, but the burden
is greater than we anticipated across the board because of the
vagueness and the wavering interpretation.
Mr Otter: If you look at the list
that Brinley (Salzmann of the DMA) has provided for the number
of licence applications, it pans out to about 9,000. We reckon
if we apply, just on my own company, the licensing regulations
as they are written and with absolutely no deviation from that
we will need in excess of 100,000 licences. The way that we have
tried to overcome this is to engage with licence unit 3 and Mr
David Whitehouse runs that and he has been extraordinarily helpful
in trying to find a way through, but maybe we have reduced it
from well in excess of 100,000 to about 90,000-odd licences and
those are just figures I pluck from the air, it is of that order
of magnitude. What we are actually saying is that one of the mechanisms
that we thought we were going to be able to apply was to do a
letter licence at the early stage of business negotiations to
allow us to transfer information and technology backed up by the
680 application, but unfortunately close reading of that means
you still need an individual 680 for each of the products, each
of the countries and each of the customers in the country, so
you still have the same number of pieces of paper involved. We
just cannot seem to get that number down to a manageable number.
Q130 Mr Blunt: I am afraid I have
not had five days training so I do not confess to understand the
system you are trying to operate. What views do you have on how
effective this new system will be in helping to curb undesirable
trade in military equipment?
Mr Hayes: I would emphasise the
attempt to impose controls on software which would appear to be
defeated by the definition of transfer in terms of its extraterritoriality.
It is also defeated by the definition of software because software
is designed as being fixed in a tangible medium, therefore whatever
you transfer intangibly by definition is not software. Article
11 of the Order actually introduces exemptions, "for nothing
in Article 3 or 4 shall be taken to prohibit the exportation of
any aircraft which is departing temporarily from the United Kingdom
on trials". There is a similar provision for vessels. I can
assume what the intent is, it is to allow aircraft to depart,
to fly out of the territorial aerospace and to come back, but
that is not what it says. There is not even a restriction on the
parties to the transaction. Therefore, the trade controls, in
theory, can be defeated by a broker who brings platforms, whole
aircraft, whole vessels into the UK and they are subject to trade
controls and then purports to export the same vehicles or vessels
for trial temporarily. There is no definition of temporarily.
There is no restriction on who the trials can be done by. Industry
will, as legitimate industry does, play by the rules, but the
aim of the legislation was to catch those whose intent is not
to play by the rules.
Q131 Mr Blunt: You anticipate that
from 1 May and already from the training you have had to go through
our defence industry will be carrying a significantly competitive
disadvantage compared with similar nations.
Mr Hayes: I would emphatically
agree with that, yes.
Q132 Mr George: I presume the DMA
is collating all of the evidence for transmission to central Government.
Has it sent it yet or is it going to send it?
Mr Hayes: We will be sending it.
Q133 Mr George: May I ask if perhaps
a copy of that could be sent to us because we do not want to wait
until next year before action is taken if it is a twentieth as
bad as he has been talking about, we should be reviewing it very
quickly? Are you able to give us any examples of where the British
Government's interpretation of the EU Code of Conduct and of embargoes
has been stricter or more relaxed than that of other EU Member
States? You have touched upon that. Have you anything further
to add?
Mr Otter: It is difficult to say
whether it is the interpretation of embargoes or whether it is
policy, but it certainly also applies to the issue of people undercutting.
I heard the NGOs talking about undercutting earlier on. I have
member companies who have had licences for equipments in India
and Pakistan turned down and the French have taken that business
virtually by default and in some cases the length of time in granting
the licence required meant that they lost that business. I do
not know whether it is an interpretation of the EU embargoes or
the EU policy or whether it is the British interpretation of that.
There is a similar one with Belgium exporting to Israel. I used
the example of what is licensable and what is not earlier on.
I think virtually the whole of the EU is more liberal in its interpretation
than the UK is. My own company has suffered as a result of refusals
to Egypt and Israel being picked up by French, Finnish and German
companies.
Q134 Mr George: So these are not
hypothetical stories we keep being told about.
Mr Otter: These are real ones
and they hurt.
Q135 Mr George: Has the DMA been
collating information of this kind? Very often those who are not
quite as obsessed about arms exports as others and with the deficiencies
of the system would say, "Oh, well, the French will always
pick up the contract if we do not take it," that is a line
that many people are obliged to argue. There is sufficient evidence
to show that the undercutting is serious, which means that our
system is being enforced more seriously and others should be catching
up with us as opposed to ourselves dropping down to their level.
Mr Otter: Some of these only came
to light yesterday because I actually chaired the meeting of our
association yesterday.
Q136 Mr George: It would be immensely
helpful to receive any evidence there might be. Can you tell us
more about how different countries interpret the Code of Conduct
when granting or denying licence applications? You have touched
upon it. If there is more evidence that would be quite helpful
to us.
Mr Otter: Sure.
Q137 Mr George: What amendments to
the EU Code of Conduct would companies like to see as a result
of the proposed review due to take place in 2005?
Mr Otter: Speaking purely for
the NBC area and the defence industry against weapons of mass
destruction, I would like the definition that includes detection
and identification, equipment and handling equipment of weapons
of mass destruction to be reviewed because you cannot defend against
a weapon of mass destruction if you do not have the equipment
that allows you to handle it or detect and identify it. Those
are serious impositions on industry. The DTI are perfectly open
to the fact that my own company, Smiths Detection, has been hit
harder than any other company as a result of this.
Q138 Mr George: Why should that be
the case? Yours is a purely defensive system, is it not?
Mr Otter: Yes, and we do detection
identification equipment.
Q139 Mr George: Would there be similar
cases in other areas of the DMA of changes that you would like
to see that might be beneficial, Mr Hayes?
Mr Hayes: Overall I think the
Code of Conduct works fairly well. We have discussed the differences
in interpretation. I think anything that could be done to increase
the standardisation of that interpretation would be a benefit
and may lead to the achievement of perhaps a slightly more level
playing field.
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