Further memorandum from the UK Working
Group on Arms
THE FUTURE
OF THE
EXPORT CONTROL
ORGANISATION
A. RECOMMENDATIONS
— 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.
B. BACKGROUND
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.
APPENDIX 1
ARGUMENTS AGAINST PRIVATISATION OF THE EXPORT
CONTROL ORGANISATION (ECO)
There are many reasons why privatisation of
the ECO would be ill-advised, including:
TRANSPARENCY AND
POLITICAL ACCOUNTABILITY
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.
RESTRICTIONS ON
OWNERSHIP; CONFLICTS
OF INTEREST
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.
DEMONSTRATION EFFECT
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.
INFORMATION- AND
INTELLIGENCE- SHARING
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.
RELATIONSHIP WITH
THE US
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.
PRIVATE COMPANY
AS "GATEKEEPER"
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.
AUDITING ARRANGEMENTS
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.
DEALING WITH
FAILURE
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
Ibid. Back
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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