House of Commons - Defence

Select Committee on Defence First Report

8 EFFECTS ON BUSINESS AND ECONOMIC CONSEQUENCES OF THE LEGISLATION

273. When the legislation was prepared, in line with policy, the Government prepared a Regulatory Impact Assessment (RIA) which analysed the likely impact of the proposed legislation on the private sector.[365] We asked the Government how accurate were the predictions made in the RIA of an additional 1,000 Standard Individual Export Licences (SIELs) per year (for electronic transfers and goods/technology with a weapons of mass destruction (WMD end-use)[366] and an additional 1,500 Standard Individual Trade Control Licences (SITCLs)[367] and that companies would incur training costs on average of between £100,000 and £460,000.[368] The Government replied:

369

274. We note that the Government's predictions about the effect of the legislation overestimated the number of licences likely to be sought by exporters. We conclude this was in part a product of industry's apprehensive approach to the legislation and the greater than anticipated use of open licences.

Economic consequences

275. During the debates on the primary and secondary legislation a number concerns were expressed about the economic consequences. For example, BAE Systems expressed the "hope that the Bill will not have the effect of adversely affecting either the competitiveness of UK companies or their ability to collaborate effectively with EU and/or US partners".[370]

276. We sought evidence to establish whether the licensing regime has had any effects on the UK's defence industries and on their competitiveness. EGAD responded:

371

277. We note the concerns of EGAD, most of which seem directed to the future, but we have received no detailed evidence that the export controls introduced under the Export Control Act 2002 have systematically undermined the competitiveness of the UK's defence industries. We conclude that the implementation of the Export Control Act 2002 has not undermined the competitiveness of the UK's defence industries.

Burdens on business

278. When the secondary legislation was in draft, the defence manufacturers expressed "grave concerns" about the burden it would place on business. More specifically their concerns and the Government's response at the time were as follows:

a) the proposals lacked clarity and were too loosely worded; The Government said it would issue guidance and work with industry.[372]

b) the burden of record keeping, particularly for intangible transfer and brokering; The Government's premise was that the records companies kept for their own purposes would also fit the requirements of the licensing regime.[373]

c) the need for adequate transitional arrangements;[374] and

d) need for a revised regulatory impact assessment agreed with industry.[375]

279. In its evidence to our inquiry EGAD said that much of the RIA had been "based on inputs provided by industry and […] thanks to the constructive approach adopted in the implementation of the new regulations by the ECO, many of industry's worst fears and predictions of what might happen did not come to pass". EGAD said that "the guidance produced by [the Government], with industry input, addressed many of the issues of clarity for companies about what they needed to do to comply with the new regulations". EGAD was appreciative of the "functional approach" which the Government adopted to implementation of the legislation[376] and by the use of open licences.[377]

280. We suggested to EGAD that is predictions had been wide of the mark. EGAD replied that they "were looking at the possible worse scenario and […] they then warned government they had to talk very seriously with industry to find solutions, as they always have done in the past".[378]

281. The chemical, biological, radiological and nuclear (CBRN) sector of industry, however, reported higher than estimated costs. Costs associated with export licensing had been a frequent complaint of members of NBC UK,[379] which reported:

380

282. We consider the concerns of the CBRN sector from paragraph 286 below. Taking the defence manufacturing sector as a whole we reach two conclusions about the implementation of the export control legislation. First, the cooperation and involvement of industry in drawing up guidance assisted the smooth implementation of the export control secondary legislation. Second, while we acknowledge the constructive approach taken by EGAD, we had concerns about the tone and inaccuracy of some of industry's representations about the implementation of the legislation.

283. With an eye to the future EGAD suggested that regulatory impact assessments "should be reviewed not just in terms of what it has cost legitimate industry in order to comply with the new regulations, but also, perhaps more importantly, what effective, practical benefit there has been in counter-proliferation terms from their introduction". While not ruling out further extensions and tightening of the regulations EGAD wanted "to be totally convinced of the real, practical (and not just theoretical) benefits which would result from the adoption of such new measures in terms of effective count-proliferation".[381] EGAD put forward no mechanism for measuring the practical benefit. Whilst we accept that it is reasonable to assess the benefit in terms of counter-proliferation of any extension of export controls, we conclude that a detailed objective test may not be practicable and its absence should not preclude changes to the system of export controls consistent with a precautionary approach.

IMPLEMENTATION OF THE CONTROLS ON INTANGIBLE TRANSFERS OF TECHNOLOGY

284. On record-keeping for intangible transfers of technology, EGAD was "extremely gratified by the ECO's adoption of a 'functional record-keeping' approach".[382] While noting that there had been some uncertainty EGAD said that two and a half years' worth of practical experience, and the highly welcome publication earlier this year by the ECO of its "Compliance visits explained" manual should assist enormously in clarifying exactly what records need to be kept by exporters.[383] We note that the "functional record-keeping" approach adopted by the Government met with the approbation of industry.

TRANSITIONAL ARRANGEMENTS

285. Whilst defence manufacturers would have liked to have had a longer implementation period in which to "bed down" the new regulations, EGAD said that for the most part companies coped with the six months that they were given.[384] We conclude that transitional arrangements lasting six months were adequate for the full introduction of the new export controls.

Unforeseen consequences

286. We asked respondents to identify any unforeseen consequences that the legislation has had. EGAD responded:

Companies in those areas where the broadest possible level of control has been sought (eg the CBRN sector, and dealing with "restricted goods" under the trade controls) have encountered compliance issues which we do not believe had been foreseen or intended. We are certain that the need for companies such as Jane's Information Group to have to apply for trade control licences for the production of its publications, where they are carrying advertising for "restricted goods", or for companies to have export control compliance coverage in place for submitting CBRN-related technical information to our own Armed Forces (and blue light services) here in the UK, prior to contract signature, cannot have been foreseen or identified as having been amongst those proliferation threats which needed to be brought under control, as aspirations for the new legislation by [the Government].[

385

287. NBC UK explained that Blue Light Services (police, fire and rescue services) were increasingly expected to advise and operate overseas when their help was requested either planning for, or responding to, an incident or event such as the Athens Olympics. Companies, therefore, had to get export licences to discuss these issues with the UK's Blue Light Services, who, themselves, were, according to the Department of Trade and Industry (DTI), not covered by "Crown Exemption" and would in turn need export licences to deploy goods, technology and technical assistance overseas.[386]

288. NBC UK explained that in drafting a "catch all clause" to prevent proliferation the authorities failed to take into account the impact it would have on the industry involved in defence against the threat. In its view the "Relevant Use" clause in the legislation seemed to be at the heart of the problem because it applied "for use in connection with the development, production handling, operation, maintenance, storage, detection, identification or dissemination of chemical, biological or nuclear weapons".[387] NBC UK said that its warnings had not been heeded and the result had been "confusion, bureaucratic issues and unnecessary additional work"[388] with the consequence that "more and more business is turned away or going elsewhere".[389] NBC UK said that "CBRN is important because it encompasses substances not traditionally thought of as warfare agents in NBC terms. The UK is arguably the World's leading nation at providing an integrated CBRN response."[390] NBC UK put forward a number of proposals to revise the secondary legislation and administrative arrangements or, if these changes were not possible, suggested that "an OGEL for the Blue Light Services and users perceived to be under threat should be brought into operation".[391]

289. The Government said that it was "open minded" about the Jane's case and that "we will continue to work with stakeholders to identify possible solutions and will look very carefully at the evidence that is brought before us as a result of the forthcoming public consultation".[392] On the CBRN equipment, the Government said that in recent months the ECO had been working closely with EGAD to review the current coverage of OGELs. A number of alterations to OGEL coverage had been agreed in principle, and the necessary drafting work was now being undertaken with a view to releasing a package of OGEL changes within the next two months.[393] The Government explained that part of the package would be an extension to the Government and NATO End-Use OGEL, to allow that OGEL to be used for supplies of the listed goods and technology where they were for detection and identification purposes. In this way, OGEL coverage for supplies by the CBRN equipment industry—which whilst related to WMD are by definition, not of concern—would become available. The Government believed that this would in large part deal with the concerns raised.[394]

Conclusions

290. EGAD cited two instances where it considered that the reach of the legislation had gone further than expected. On the first case, on the basis of the limited information supplied we cannot conclude that the application of the Export Control Act 2002 to advertisements for restricted goods is either unintended or unjustified. The second case—a requirement on the chemical, biological, radiological and nuclear sector to obtain export licences before submitting technical information to UK Armed Forces and blue light services prior to contract signature—appears prima facie excessive. We recommend that the Government work with industry to produce an Open General Export Licence as soon as possible to address the concerns of the chemical, biological, radiological and nuclear sector about the need to obtain export licences before submitting technical information to UK Armed Forces and blue light services prior to contract signature.

365 Cabinet Office, Better Policy Making: A Guide to Regulatory Impact Assessment, Overview, at http://www.cabinetoffice.gov.uk/regulation/ria/ria_guidance/ Back

366 RIA, para 7.1 Back

367 Ibid. Back

368 Ibid. Back

369 Ev 100, para 11 See also 2007 Consultation Document, para 1.1.3. Back

370 HC Deb, 8 November 2001, col 464 Back

371 Ev 57 Back

372 Cm 5988, para 12; RIA, paras 14.1-14.2 Back

373 HC (2002-03) 620, paras 87-88; Cm 5988, paras 17-18; RIA, para 8 Back

374 HC 620 (2002-03), para 103; Cm 5988, para 23 Back