Quadripartite Select Committee Written Evidence

Further memorandum from the UK Working Group on Arms



    —    Ensure the Government does not privatise the ECO or any of its functions.

    —    Staffing levels and resources should be set at the levels needed to maintain the integrity of the export control system in an effective and efficient manner, not on the basis of arbitrary and externally-driven staff-reduction targets.

    —    Any changes to working practices already instituted as a consequence not of improving performance but of externally-imposed job cuts should be reversed.

    —    Ensure any future discussions of the role or shape of the ECO are fully transparent and open to public consultation involving Parliament, industry and civil society.


  1.  Much has been done in recent years to improve the performance of the Export Control Organisation (ECO). The JEWEL project (Joined-Up and more Efficient Working on Export Licensing)—completed at the end of 2003 and tasked with delivering a more efficient export control service consistent with achieving the Government's policy aims—ushered in a number of changes which appear to have improved the quality of the service provided.

  2.  However, as part of cross-Whitehall staffing reductions announced in 2004, the ECO was instructed to make significant, and arbitrary, cut-backs in staffing levels—from an average of 166 staff during 2003-04 to 109 by 31 March 2006. This, despite an increased licensing load due to the additional responsibilities created by the introduction of the Export Control Act 2002.

  3.  Apparently as a consequence of the staff cuts, in 2004 a decision was taken in the DTI to examine whether the functions of the ECO could be better performed by the private sector. In December 2004, ASE Consulting produced a report for the DTI looking at the feasibility of privatising the ECO. [31]

  4.  In July 2005, the Government announced it had abandoned privatisation plans, because of "doubts about whether outsourcing the licensing function would achieve sufficient benefits".[32] However, not only would privatisation not "achieve sufficient benefits", there are very real risks associated with such a move, including inter alia:

    —    confused lines of accountability;

    —    institutional and commercial conflicts of interest (real and perceived);

    —    setting a bad example to states with problematic export control systems;

    —    undermining UK export control outreach programmes;

    —    reluctance by other states to share relevant export licensing information with the UK;

    —    harm to defence trade and technology-sharing relationships with the US. [33]

  5.  In its most recent report, the Quadripartite Committee made clear its antipathy to the privatisation option. [34]However the nature of the Government's July 2005 statement would suggest that complete or partial privatisation remains a possibility for the future. For the reasons listed above and expanded upon in Appendix 1, it is critical that the ECO remains fully under Government control.

  6.  The ASE report notes that once the staff cuts have been put in place, ECO "will always be operating close to the limit of its capacity", with the consequence of "a significant risk of failure to provide the necessary minimum level of service".[35] The report goes on to suggest "a capacity for complete overload in the processing of ELAs [export licence applications] from which no recovery would be possible without additional resource being provided." [36]Unfortunately, the staff cuts are to go ahead as planned, raising the prospect of ECO meltdown.

  7.  The Government is taking steps to try to maintain ECOs level of service at lower staffing levels. For example, there are plans to improve efficiencies through the use of information technologies. Such benefits will, however, take time to flow through. In fact the introduction of new systems could increase workloads during transition phases, as staff have the additional task of transferring data from one format to another to ensure comprehensive coverage under a single system.

  8.  The ECO is also looking to reorganise the relationship between the use of standard individual export licences (SIELs) and open licences, by encouraging exporters and traders to make further use of open licences as opposed to SIELs. [37]This might involve, for example, an exporter who has applied for a SIEL being directed to check very carefully whether the export might fit within the terms of an open general export licence (OGEL), in which case no individual licence need be applied for and thus saving staff time. While in theory this might appear as nothing more than common sense, given the fears of "complete overload", there must be significant concern that in practice such an approach will lead to a less rigorous control regime.

  9.  A further tactic to reduce workload has been to extend the period of validity of certain open individual export licences (OIELs). Until recently, OIELs have been issued with a period of validity of two or three years. But from November 2004 "the ECO has, on a case by case basis . . . been able to issue some OIELs for five years, and in certain circumstances, for longer periods." [38]The original decision to set the two-year (for military list goods) and three-year (for other items) validity limits was presumably based on an understanding that longer periods were untenable in a fast-changing world. There is little evidence to suggest the pace of change is slackening, indeed a more prudent approach would be to shorten the length of licence validity. No figures are yet available on the number of OIELs affected, however changes of this nature should never be made as a labour-saving device.

  10.  There is little doubt that the ECO, like any organisation, could be made more efficient through improvements in working practices. However, staffing levels and resources should be set at the levels needed to maintain the integrity of the export control system in an effective and efficient manner, not in response to arbitrary and externally-driven staff-reduction targets. Furthermore, any changes to working practices already instituted as a consequence not of improving performance, but of externally-imposed job cuts, should be reversed.

  11.  In light of the ASE report, the fact that the job cuts are to proceed as planned raises the prospect of further changes to the ECO in future. Furthermore, the ambiguous nature of the Government announcement that the ECO will not be privatised (see paragraph 4 above) would appear to leave open the possibility that privatisation could be considered again in future. The Government demonstrated a worrying lack of commitment to transparency and consultation when considering the privatisation option in late 2004-early 2005. For example, when giving evidence to the Quadripartite Committee in January 2005 (one month after the ASE report was produced), despite extensive questioning on the issue of ECO staff cuts, the Foreign Secretary, Jack Straw, made no reference to the ASE report or to the fact that privatisation was being considered. [39]The functioning of the ECO is too important a matter to be determined behind closed doors. Any future discussions about changes to the role or shape of the ECO must be fully transparent and open to public consultation involving Parliament, industry and civil society.



  There are many reasons why privatisation of the ECO would be ill-advised, including:


  As long as the whole export control process remains located within the Government, accountability is clear. Civil servants are responsible to their ministers, who are in turn responsible to Parliament. However, if part or all of that process is privatised, lines of accountability risk becoming confused, with responsibilities to shareholders as well as Government. Locating the administration in the hands of a private company may also provide an additional reason for keeping export licensing information outside the public domain, as it would introduce an additional layer of the commercial confidentiality argument. With an issue as sensitive as the sale of arms, it is critical the lines of accountability remain clear and that bars on transparency are removed, not imposed.


  There are many organisations that might have an interest in taking on export licensing functions. These include defence equipment manufacturers, organisations that act as consultants to defence equipment manufacturers or are otherwise connected to them, organisations with connections to other governments and certain non-governmental organisations. However export control is an area where there must be no conflict of interest or indeed no perception of conflict of interest. In addition, the Government would have to consider how to respond to the prospect of the future owner of the ECO subsequently selling the "business" to another party, or different functions of the ECO to a variety of buyers.

  Beyond the potential for conflicts of interest due to external relationships, there is a clear potential for conflicts of interest with regard to the competing obligations to the UK Government and to shareholders. One of the key measures by which performance would be likely to be measured after privatisation is the speed of processing licence applications. If payment is contingent on speed, there are clear risks that an organisation with obligations to shareholders will be under pressure to be less than thorough if and when it has difficulty meeting those targets.


  The UK is seen internationally as having one of the most sophisticated export control systems in the world. It is to be congratulated for its leadership role in providing active export control outreach support, especially in non-EU Europe but also further afield. Other states look to the UK to provide a lead in this area. Much has been achieved in improving export control regimes in a number of states in Eastern and South Eastern Europe, including in terms of persuading the various national governments of the need to de-link the arms-export decision-making process from the defence industry. However, much more work is required and privatising the ECO would send exactly the wrong sort of signal to these states.

  It is indeed ironic that privatisation is being considered at the same time as the UK Government has emerged as a leading advocate of a legally-binding international Arms Trade Treaty, when implicit in the call for such a treaty is the recognition of the need for governmental control at all stages of the arms transfer process.


  The Government's obligations to share information on export controls with other states through regional and international agreements such as the EU Code of Conduct on Arms Exports may be compromised through privatisation. It is not clear that other states would respond positively to a new arrangement whereby that information would be made available to a privately-owned entity.


  For several years the US has been considering whether to apply an International Traffic in Arms Regulations[40] (ITAR) waiver to the UK. Such a waiver would mean that for certain unclassified military exports from the US to the UK no export licence would be required, and would thereby expedite the process of transferring defence goods and technology from the US to the UK. The US Congress has consistently blocked the ITAR waiver due to the UK's weaker export control system, fearing that it is not rigorous enough. The recent discussions in Europe over lifting the EU arms embargo on China have concentrated minds and reinforced this concern in Washington. The most recent media reports suggest that the US Administration is now resigned to the fact that Congress will not be won over, and "US and UK officials say they are now trying to come up with ways to strengthen military technology co-operation without having to change the US export law".[41] In this context, privatising even part of the UK export control system is likely to further strengthen the resolve and position of those in the US arguing against closer defence trade relations with the UK.


  As the first port of call for defence manufacturers or traders seeking an export licence, or advice on whether a licence is required or what type of licence, the ECO operates as a gatekeeper to the system. There are several reasons why this gatekeeper role is best kept in government hands.

Types of licence

  It is clear that the use of open licensing is increasing—allowing for a lower level of scrutiny and transparency than SIELs, while lowering the overall workload—with the ECO already encouraging companies to apply for less restrictive licences where possible. Were the task of advising on types of licences to be in private hands, we anticipate that efficiency pressures would increase the drive toward the over-use of open licences.

Smart Front End

  As a result of the JEWEL review, the ECO now administers the Smart Front End (SFE), a process involving officials from the ECO, FCO and MoD for fast-tracking less contentious export licence applications. Approximately 45% of applications (20 a day) are dealt with through the SFE. Given that the purpose of the SFE is to concentrate resources on those applications likely to be more "difficult", having a private company as gatekeeper to the SFE again raises the prospect that commercial pressures will encourage greater use of the fast-track approach.


  At the other end of the process, the ECO is also responsible for ensuring post-facto that defence manufacturers and traders are in compliance with their obligations under the Export Control Act, not least that they are exporting under open licences appropriately. To this end, the ECO makes compliance visits to industry, where inter alia export records are examined and remedial measures are put in place as the ECO deems necessary. Privatisation could have implications for the rigour with which compliance procedures are undertaken, as it would be in the interests of a privately-owned entity, with responsibilities to shareholders, to downplay instances of non-compliance. Negative reports on compliance would cast doubt on the original decision of the privatised body to award open licences, while the downstream resource implications of negative reports (there would be a need for greater engagement with the non-compliant company or individual to address problems) might harm efficiency of performance.


  Any decision to privatise the ECO must also take into account the risk of and how to respond to unsatisfactory performance. The ECO is now generally considered to be functioning relatively effectively, at a cost of only approximately 0.14% of the value of defence exports. The risk of failure at the micro-level would consist of either an increase in delays, with possible negative impacts on legitimate defence exports from the UK, or inappropriate export licensing decisions with potentially disastrous consequences at the point of destination. Were there to be failure at the macro-level, an entity with an ultimate commitment to the bottom-line may decide that the least-worst option would be to close down its operation. A forced re-nationalisation or resale of the privatised ECO functions would likely prove time-consuming and costly, and would potentially be extremely damaging to UK defence and industrial interests.

January 2006

31   Review of XNP Services, ASE Consulting Project, December 2004, http://www.dti.gov.uk/export.control/publications/xnpservicesreview2005.pdf. Back

32   Hansard, 21 July 2005, Column 1928W, http://www.dti.gov.uk/export.control/policy/ecooutsourcingdecision.htm. Back

33   Appendix 1 contains further details on the risks associated with privatisation of the ECO. Back

34   Strategic Export Controls-HMG's Annual Report for 2003, Licensing Policy and Parliamentary Scrutiny, Quadripartite Committee, 24 March 2005, para 76, http://www.publications.parliament.uk/pa/cm200405/cmselect/cmfaff/145/14507.htm£note91. Back

35   Review of XNP Services, para 10. Back

36   IbidBack

37   SIELs generally allow shipments of specified items to a specified consignee up to the quantity or value specified by the licence. Open licences are specific to an individual exporter and cover multiple shipments of specified items to specified destinations and/or in some cases, specified consignees. Back

38   UK Strategic Export Controls Annual Report 2004, Cm 6646, July 2005, p 10, http://www.fco.gov.uk/Files/kfile/Annual%20Report%20on%20Strategic%20Export%20Controls%202004.pdf. Back

39   The ASE report was ultimately published only in a delayed response to a request under the Freedom of Information Act. Following on from the decision by the Government to publish new guidance on export licence applications for the supply of military equipment for incorporation only after the first licensing decisions had been taken under that guidance (Hansard, Parliamentary Questions, col 650W, 8 July 2002), the UKWG is concerned that this may signal a general reluctance on the part of the Government to consult on issues of significant import to the export licensing process. Back

40   The US International Traffic in Arms Regulations set out the rules and regulations governing the export and trading of controlled goods and technologies from the US. Back

41   Peter Spiegel, "UK denied waiver on US arms technology", Financial Times, 22 November 2005, http://news.ft.com/cms/s/881df2c4-5b7f-11da-b221-0000779e2340,ft_acl=,s01=1.html. Back

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