Examination of Witnesses (Questions 60
- 79)
WEDNESDAY 15 DECEMBER 2004
MR DAVID
HAYES, MR
TIM OTTER,
MR MICHAEL
BELL CB AND
MR BRINLEY
SALZMANN
Q60 Mr Hamilton: Gentlemen, on 22
September this year, as you know, the UK arms embargo on exports
to Libya was lifted. Could you tell us how well placed British
companies are to enter this market? Are you in a better or worse
position than other EU companies?
Mr Salzmann: Certainly British
companies are interested in the Libyan market and they are looking
at what opportunities might arise, but I think it is safe to say
that it is not going to be open house where you can sell anything
you want to the Libyans. All licence applications will still have
to be judged against the EU Code of Conduct and I am perfectly
certain that the British Government will have concerns about particular
types of equipment—weapons systems, riot control equipment,
more sensitive high tech equipment—going to the Libyans
so, as I say, it is not going to be a completely open market where
British companies are going to be able to sell anything they want
there. British companies could be at a slight disadvantage in
that the USA has still maintained its embargo on US munitions
list items to Libya and an awful lot of the British equipment
has American munitions list components systems and sub-systems
contained within it. Therefore, British companies would not be
able to bid those systems. They would have to try to identify
potential alternative sources of supply to replace the American
content before they could bid for anything to the Libyans. At
the moment I do not think anybody has sight of what the Libyans
shopping list is and what exactly it is they are looking for.
As I say, a lot of what they might be looking for the British
Government would not allow British companies to supply in any
case when judged and assessed against the EU Code of Conduct.
Q61 Mr Hamilton: Does anybody else
want to comment?
Mr Otter: At the risk of getting
another good kicking from the Government (but then that is what
being a second row forward is all about—I kick back) I know
for a fact that the Libyans have already got equipment that Smiths
would produce and have had for some years, and it was supplied
by Finland and France, end of story, so we are not even thinking
about going there because it is a done deal.
Q62 Mr Hamilton: How does our export
control licensing system compare with other EU states as far as
Libya is concerned? Does everybody take the same view on what
can and cannot be sold?
Mr Salzmann: I think that would
be open to interpretation. I am sure that would be open to interpretation
between the various governments. The removal of the embargo is
all about interpretation of the Code of Conduct.
Q63 Mr Hamilton: Presumably that
puts British companies at some considerable disadvantage from
what you are saying?
Mr Otter: I would think so. I
cannot make a definitive statement but quite obviously from Smiths
narrow perspective as opposed to NBC UK's general perspective,
our competitor equipment is already there.
Mr Salzmann: Until we have got
a constituency of test cases of which companies are applying for
licences and see what is approved and refused, we cannot tell
at this stage.
Mr Otter: From the NBC and defence
industry's point of view, British companies are just not wasting
their time going about applying for the licences or the 680s.
Q64 Mr Davies: Am I right in thinking
that the burden of the testimony we have just been hearing from
Mr Salzmann and Mr Otter is that the interests of our country
in the defence industry would be enhanced if the responsibility
for administrating and enforcing the EU Code was a single responsibility,
say in the hands of the EU Commission rather than left to the
individual Member States to apply this Code in various ways and
often in ways more favourable to the arms exporters. Is that right?
Is that a reasonable and logical conclusion to draw from what
you have just said?
Mr Bell: No, in the sense that
whatever industry might feel about this, the fact is that the
administration of defence exports is a national responsibility.
Q65 Mr Davies: I know it is at the
moment. I am simply saying is it not a logical conclusion from
what you have said this morning that it would be in our interests
if in fact the administration and enforcement of the Code were
in a single hand?
Mr Otter: I think if there was
an EU embargo on a country then there is at least discussion worth
having about whether the EU administered licences to that country.
Q66 Mr Davies: To avoid the differential
problems of enforcement you have just drawn attention to which
always seem to work against the interests of this country? That
is the testimony we have received from you this morning and I
am drawing what I think is an inescapable and logical conclusion.
Mr Salzmann: Although the British
Government when we raise these points in meetings with them say
that there are other cases when other EU Member States will refuse
licences which the British Government would not.
Q67 Mr Davies: Do you know of such
cases?
Mr Salzmann: Not off the top of
my head, no.
Q68 Mr Davies: Does Mr Otter know
of such cases?
Mr Otter: No.
Mr Davies: I think the point is established.
Q69 Chairman: I think your proposition
would be very difficult to implement from my discussions with
the French.
Mr Bell: I wonder if I could just
make one additional point. We have been rather rude about the
DTI this morning but there are many features of the British system
which are very good, notably the open licensing system, and I
would hesitate to have that scrapped and that baby thrown out
with the bath water, so I think any changes would need to retain
the virtues of the British system, whatever else happened.
Q70 Mr Viggers: I am still not really
sure what your priorities are in the review of the Code of Conduct.
Are we harmonising up or harmonising down? What steps would you
like to see taken?
Mr Salzmann: I think efforts to
try to harmonise up the interpretations to what we regard as being
the high level that the UK has, and trying to harmonise and make
the Code of Conduct stricter. Certainly, as I said earlier on,
we feel that that is going to be necessary before the removal
of the arms embargo in China. To satisfy American concerns, the
EU's Code of Conduct has to be strengthened and also of course
there needs to be harmonisation in terms of reporting and transparency.
We would love to see other EU Member States producing the same
sort of quality of work and reporting that the British Government
does.
Q71 Mr Viggers: Is it the Code of
Conduct which needs to be harmonised up or is it the interpretation
of it by different Member States? I suppose that is another way
of asking the same question.
Mr Hayes: Arguably the Code of
Conduct is harmonised anyway. It is the same Code of Conduct in
all of the countries, therefore almost by definition it has to
be the interpretation of that Code which needs further work.
Q72 Mr Viggers: Are you expecting
that you will have to disclose more information or less after
harmonisation?
Mr Hayes: Given that the reporting
that is already done by the DTI is the most transparent within
the EU, I would not expect the result to be that even more transparency
is required from every Member State. I think it would be more
a case of the other Member States endeavouring to emulate the
reporting transparency of the DTI.
Q73 Mr Viggers: And are the EU regulations
and the harmonisation of them a factor which comes into discussion
with the United States over the ITAR waiver? How do the two inter-relate?
Mr Bell: They have not inter-related
at all. The American authorities have chosen to regard the relationship
as strictly bilateral. They accept that our controls are "comparable"
and, as has been said earlier, the agreements do require acceptance
of American re-export controls, and that I think is about where
matters stand.
Q74 Mr O'Neill: The Export Control
Act came into force on 1 May this year and there have been about
four different Orders as well. When you last gave us evidence
I think our report reflected what you and the NGOs and ourselves
thought that perhaps a fresh look at the administration of export
licences as a whole would be desirable. That was rejected by the
DTI who felt that the new system should be allowed to bed down
but they did bring in road shows and the like. You yourselves
were, I think, quite concerned that at least some of the people
involved in exporting armaments did not really know how the old
system worked and they were not really sure how the new one was
going to work. Have things improved with the road show system
and the various booklets that have been published, are you conscious
of people having a clearer idea of what is going on?
Mr Salzmann: I think things have
improved to a certain extent. Certainly the road shows and the
awareness activities undertaken to try to promote awareness within
the United Kingdom industry of the new regulations helped to galvanise
awareness of the existing regulations where some companies have
slipped through the cracks. There are companies that suddenly
became aware of the fact that they had been doing things for 20
or 30 years without licences and now they have found they need
them. It has helped to a major extent but the feedback we are
getting from a number people, including the export control consultants
who operate in this country—and there are less than half
a dozen of them—is that more is needed because, as one of
them said at a seminar last month, the industry is divided between
three types of people, the good, the bad and the ignorant, and
there is still an awful lot of ignorance out there on the part
of some people so certainly we warmly commend the DTI's efforts
at promoting awareness but more needs to be done, which is why
I made the comment earlier on that maybe the resources which the
DTI now finds are surplus to requirements for licensing could
be more effectively reallocated to missionary work to try to find
these other people.
Q75 Mr O'Neill: One last point, I
think the estimate was made prior to the implementation of the
legislation that it would probably cost a large company about
half a million pounds over and above existing costs. Was that
estimate an exaggeration or has experience shown that it has been
more expensive?
Mr Bell: We did produce a rough
order of magnitude estimate from our company BAE Systems. We estimated
that the extra costs amounted to about £1.8 million in the
six months leading up the implementation of the Orders on 1 May,
so I think the figure of half a million is a substantial under-estimate
for us.[9]
Q76 Mr O'Neill: I think the point
is, with respect, it was not preparing for it, it was that once
it was in place it was going to cost half a million. You could
spread the £1.8 million over several years because hopefully
there will not be that many changes that will be that expensive
in the future. Obviously you are the biggest. A "large"
company may not be the biggest one, so perhaps your argument is
not, with respect, the most relevant. Mr Hayes, you are not quite
the same size but of similar magnitude.
Mr Hayes: In our case we estimated
that the cost of the additional training arising from the legislation
would be in the region of half a million and that has actually
proved to be an accurate estimate.
Q77 Mr O'Neill: You have come in
on budget, which is one of the things that British Aerospace does
not always do, of course!
Mr Otter: That could be like manifesto
promises!
Q78 Sir John Stanley: I think you
were in the room when we had the earlier exchange about trafficking
and brokering. I want to understand better than I do now whether
you have real as opposed to gut reaction objections to our recommendation
that the Government should seek to extend extra-territorial control
to all trafficking and brokering which if conducted in the UK
would not be granted a licence. I absolutely understand where
you come from. As companies in the private sector, you have an
instinctive nervousness about any government proposal to extend
regulation into your area of life. I understand that and I sympathise
with it, but as members of the Defence Manufacturers' Association
you are law-abiding, responsible companies and you have a huge
level of reputational risk, and I find it difficult to believe
that you would want to circumvent arms export licensing controls
by going overseas and engaging in selling your products to countries
where you would not be granted an export licence if they were
sold out of the UK. If I could put the question to you, if you
could dump instinctive nervousness to one side, do you have any
actual, genuine, real live objections to the extension to the
present extra-territoriality of defence export controls generally
on the basis that if they were conducted in the UK they would
not be granted a licence?
Mr Salzmann: We would not know
whether they would be granted a licence or not until we had applied
for a licence and received a refusal, therefore no corporate entity
could make that decision as to whether that would be licensable
by the British Government or not without seeking a licence. That
is a pre-condition as to what deals would need to be licensed
which no companies can actually satisfy.
Q79 Sir John Stanley: Surely you
would be able to establish that from the DTI, would you not?
Mr Salzmann: Not without applying
for a licence because the advisers in the FCO and MoD would want
the full information which is provided in a licence application
in order for them to make a detailed proper and assessment as
to whether that licence should be approved or not.
9 Note by witness: The figure of half a million pounds
(£460,000) was published by the DTI (see Final Regulatory
Impact Assessment, 7.1) as an estimate of initial training costs,
seen by the DTI to be the main costs to Industry of implementing
the new regulations. The BAE Systems' figure of £1.8 million
is comparable with the company's own pre-implementation estimates. Back
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