House of COMMONS









Wednesday 21 November 2007



Evidence heard in Public Questions 1 - 166





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Oral Evidence

Taken before the Defence Committee

on Wednesday 21 November 2007

Members present

Mr James Arbuthnot, in the Chair

Mr Bernard Jenkin

Mr Kevan Jones

Mr Mike Hancock

Mr Dai Havard

Mr Adam Holloway

Willie Rennie


Memoranda submitted by Defence Industries Council, Export Group for Aerospace and Defence, Northrop Grumman UK and BAE Systems

Examination of Witnesses

Witnesses: Mr Ian Godden, Secretary of the Defence Industries Council and Chief Executive Officer of the Society of British Aerospace Companies (SBAC); Mr David Hayes, Chairman of Export Group for Aerospace and Defence (EGAD) and Director of Export Controls; Mr Jerry McGinn, US Aerospace Industries Association (AIA) and Northrop Grumman; Dr Sandy Wilson, President and Managing Director of General Dynamics UK; and Ms Alison Wood, Group Strategic Development Director, BAE Systems, gave evidence.

Q1 Chairman: Welcome to this session on the US/UK Defence Co-operation Treaty. We are extremely grateful to all of you representatives from industry for coming to give us evidence about it. Dr McGinn, you have come from a long way away and we are particularly grateful to you, but we are grateful to all of you, as I say. We hope to produce a Report following this evidence session before the Treaty is ratified by the Government. At 10.30 we will be having the Minister and officials in and we have got a lot of stuff to get through. We have got lots of questions to ask you, so please do not feel that you need to answer every question that comes up because if you do we will only get through about two questions and we have got something like 12, each of them with sub-questions. The topics we are going to cover are: first, what are the current problems industry face; second, what the Treaty is and how it is going to help; third, what the implementing arrangements are and whether you know enough about them; fourth, stuff about the British "approved" community; then foreign-owned companies; dependency on the US and the impact on European collaboration; what the power of the US is over UK exports; enforcement reciprocity; prospects for ratification in the United States; and then on a completely separate issue we will ask a question or two about DESO and its abolition. Can I ask you first please to introduce yourselves.

Dr Wilson: Sandy Wilson, Managing Director of General Dynamics UK.

Dr McGinn: Jerry McGinn, I am Corporate Director for US/UK ITAR policy for Northrop Grumman Corporation in Washington DC but I am here also as the Chair of the US/UK Defence Treaty Working Group for the US Aerospace Industries Association which is our trade association in the US.

Mr Hayes: David Hayes, I am an export control consultant and I am Chairman of the Export Group for Aerospace in Defence.

Mr Godden: Ian Godden, Chief Executive of the SBAC and Secretary to the Defence Industrial Council.

Ms Wood: Alison Wood, Group Strategic Development Director for BAE Systems plc.

Q2 Chairman: Thank you very much. Can I ask you to summarise the sorts of problems that British defence manufacturers face in working with the US defence industry in obtaining goods and technology from the US giving concrete examples. Alison Wood, can we start with you perhaps.

Ms Wood: Yes. I think the area that we would highlight is the level of difficulty in the process if you are working on collaborative programmes. A programme that obviously comes to mind is the Joint Strike Fighter programme where you have to go through some very bureaucratic and often challenging processes to work collaboratively with parts of your own company as well as other colleagues in the industry, so you get the agreements in place that allow you to have shared technology. We have to go through several levels of clearance in order to be able to get what is put in place - technology assistance agreements - that then become the basis on which we can share data and technology. The problems are really threefold. One is the timescales that it takes to put these in place, which can go over years. Then there is the fact that they are very restrictive in the sense that they are very narrowly focused. When you do get TAAs in place or restrictions to shared technology they are about very specific topics, and that sometimes can constrain the innovation you need to put in place as a company, particularly if you are working for example on an urgent operational requirement for the Armed Forces, and you have to be very focused about then, if you build that technology into your product or into your programme, how you then subsequently take that product or programme through into the export market. There is obviously the whole separate set of UK rules and regulations around it, but you then get a similar set of filters that you have to apply for the US. The example I would best give on the Joint Striker Fighter programme is the years it has now taken us to try and establish just the basic technology assistance agreements to work with Lockheed Martin and our partners Northrop. One of the reasons that we feel it is important that we get this new regime is place is that when the UK procures weapons systems and military platforms from the US we need to make sure that we have the industrial capability, whether it be in BAE Systems, Lockheed Martin UK, Northrop UK or GD UK, to actually do the through-life support of those aircraft and weapons in this country, and to do that you need to have transferred the technology so that the skills and the individuals and the resources are here to then support the Armed Services. That requires a different way of trying to tackle the technology transfer regime and that is why over the last few years we have been putting considerable effort in through the BIC and the SBAC to support this initiative.

Mr Godden: Just to summarise, the combination of requiring significant company resource - a slow process - and then the result being 99.9 per cent approval, in an industry that prides itself on compliance this feels long and slow for the results that come out, and in that sense it is an attempt in the compliance industry to shorten the whole process on behalf of company resource and also for the Governments. In summary that is the benefit.

Q3 Chairman: We are not getting on to the benefit of the Treaty, we are still on the problems of the current arrangements.

Mr Godden: The current arrangement is slow and difficult. It ties up huge amounts of resource every time an application is made, it can be multiple applications in sequence for a single set of activities, and therefore there is no way of bypassing a sequential 30 to 45 delay each time to get permission to do a set of tasks which combined together would be much shorter.

Q4 Chairman: To what extent is that a function of the rules and to what extent is it a function of the number of personnel in the United States applied to the licensing system? Would any of you like to comment on that?

Mr Hayes: The number of personnel in the United States applied to the licensing system is a matter for the State Department, but I think fundamentally it is a function of the rules rather than the number of people applied to the licensing system. There does not appear to be any risk assessment approach to the licensing process. I would contrast the UK system which is essentially a risk-assessed, open system. In most cases, exports of either goods or technology to the United States would go under open licensing. In cases where they did not then the licences would be processed very quickly, typically within a week or so, by our Government, with almost total reliance then on the export control system of the United States for onward control. The US system is the antithesis of that. There is no risk assessment. Despite the fact there is a 99 per cent plus approval rate every application goes through this lengthy process. Even after the licence has gone through the process the licence is very, very narrow and prescriptive. If you want to step outside of those bounds you have to go through the whole process again, and the United States still retains control over the goods or technology even after they arrive in the UK.

Q5 Willie Rennie: Has Britain not received priority status in recent years and has that not improved the situation dramatically?

Mr Hayes: Yes and no, respectively.

Q6 Willie Rennie: Could you explain a bit more?

Mr Hayes: Yes, after the previous negotiations Britain did receive what was referred to as expedited licensing but "expedited" is a relative term. The export licensing process in the United States is still nowhere near as rapid as the export licensing process in the UK, and even if you get the licences faster that does not remove the problem of them being too prescriptive when you do get them.

Ms Wood: That is the point. We have seen some improvement in the rate at which TAAs, the licences, are being approved but, again, it is relative. I think one of the key constraints is the fact that the licences are so narrow, for reasons we understand, and if you are looking at what we have to do now to be able to provide the innovation and the research and development that is actually going to get better products and better services out to the Armed Forces, you are actually restricting our ability to provide that support because often when you start a programme you cannot really think and know that it is just that specific piece of technology. Often you want to be able to move and look at other areas within the space and then bring that to bear on the problem, so it is that restriction because then you would have to go back and apply for the next licence, and that is really what we are trying to unpack here.

Q7 Chairman: Sandy Wilson, can you give any concrete examples of the sorts of problems that are created here?

Dr Wilson: Yes indeed. I think a particular case in point is the UORs that have been going on in the UK over the past year or so. They are very short programmes, sometimes four months, sometimes nine months, and that is almost outwith the timescale for getting TAA approval for new people to come on to an existing TAA. That has manifested itself several times, for example on the Beaumont programme where we have seen new platforms appear and they need to put Beaumont on it, and in order to get the person delivering that platform in the UK on to the TAA there is a rather long rigmarole in order to get that. We adopted a very proactive approach to that, if I might just explain how we tried to go round it, by going with the MoD to the State Department and trying to get a waiver on that particular programme, and that was pretty successful, and so we managed to cut the time down substantially so that we could service UORs, but that was a long effort and is a one-off and the next time a programme appears with the same kind of timescales that process will not apply to the next programme.

Q8 Chairman: Okay, thank you. Dr McGinn, would you like to make your own comment on this? Could you also comment on how it affects United States industry and, if possible, therefore United States Forces, although I recognise that is beyond your brief.

Dr McGinn: Right, I have to say I am not going to speak for the US State Department but we have worked very closely with the State Department in the licensing arena over the past two years. As was alluded to, the United Kingdom has priority for licences within the State Department as well as those programmes that are in support of the war fighters in Afghanistan and Iraq. Those kinds of programmes have the highest support but, as was evidenced by the Treaty that was signed between our two countries, this was not enough to meet the operational demands for our soldiers abroad. That is the stated intent of the Governments and the reason for the Treaty. Industry is very much in support of that effort because the collaboration that we have had with the US Government has been focused on trying to make the system more transparent and predictable and prompt to meet the needs of the war fighter. The frustrations that we have had on the US side are similar to those in the UK industry in that trying to meet the operational demands for the war fighter to combat things like improvised explosive devices and, speaking for my company, we do directed infrared counter-measures with the United Kingdom, we have had challenges of getting those systems' TAAs or licences through fast enough to meet the needs of UK forces in the field. Thus the intent of this is to help improve inter-operability and get the equipment needed to war fighters faster in the field.

Mr Holloway: Have any of you got any experience of a UOR being turned down by this rather long-winded system?

Chairman: Apparently not? It becomes less urgent presumably?

Q9 Mr Hancock: Why is there a long-winded system? I am interested to know if we are such close allies and we have got troops on the line who need equipment which is being tried and tested in both countries being put together, and yet there is a difficulty and there is a time delay, why is that? Who is the blocking force in the United States that prevents this happening quickly? That is the bottom line here. We keep being told there is a blockage; I want to know why.

Mr Hayes: I do not necessarily think it is a "who"; I think it is a "what". The current licensing system has grown up over time. It is an awkward mixture of legislation and what I would call regulatory practice. The regulatory practice is variable and sometimes not particularly well communicated to industry. Changes happen that people are not aware of. As set out at the moment it is a very, very long-winded process, as we have already heard, but that is the process which exists, and it is because of the existence of that process that we actually need something else. The existing process is not capable of responding in the time required by modern business and modern defence requirements.

Chairman: Moving on to the "something else"; Kevan Jones on the Treaty.

Q10 Mr Jones: I think the Treaty has been welcomed both from this side of the Atlantic and also from the United States. Dr McGinn, could you say something about US industry's approach to the Treaty because I understand it has changed certainly since I have been going to the United States over the last couple of years in terms of welcoming this type of Treaty approach? Is the Treaty the answer to all your problems or are there problems that it does not actually cover?

Dr McGinn: I think industry very much welcomes the Treaty. This was first and foremost an initiative by our Governments for national security reasons and that was to get the operational systems and services to the war fighters more expeditiously by getting rid of some of the regulatory burdens that had grown up over time. In that sense for industry it just allows us to better support our mutual national interests and so we are very much in support of it. As an industry we have taken an approach that this is not an industry initiative, this is not about supporting US or UK industry; it is about supporting our mutual forces on the ground. We want to help in any way that we can. We see tremendous benefits for this as industry. As Ms Wood mentioned, this will allow US companies to work with our UK branches to do collaborative research and development for both US and UK forces and likewise for UK companies and their US subsidiaries, so the collaboration potentials from this are really substantial.

Mr Godden: Can I add that obviously the Treaty does not take any step backwards so it is a forward step. However, the extent to which it is a forward step is a function of the way in which the Treaty is implemented.

Q11 Chairman: We will come on to that, Mr Godden.

Mr Godden: In that sense is it a step forward? Yes, it is a definite step forward but the restraints to that could be in the process of the exclusions and the approved lists etc. and therefore the benefits to that will come out in that process itself.

Q12 Mr Jones: So the problems will not actually be recognised until we have got the Treaty in place; is that what you are saying?

Mr Godden: How much of a benefit will not come out until the Treaty is in place. In that sense it is only speculation, but the aim of course in our opinion is absolutely fundamental.

Q13 Mr Havard: Can I ask you a basic question because when I visited the States and talked to people about this, people in industry in the States were complaining about how smart the operation in the States is in dealing with it, basic things like the number of people involved in actually dealing with these issues. Are these mechanical problems or are they political problems in the sense that people do not want to do these things for reasons other than inefficiency in processing the paper and doing the work?

Mr Godden: My feeling is that it is a mechanical problem, as David alluded to, which is structural, but behind it somewhere there is a realisation of the benefit of speeding up the process of collaboration with companies that are elsewhere and that is in a sense ---

Mr Havard: The scales have fallen from one or two eyes. I got the name of a donkey a boy fell off at one point!

Chairman: I do not think that was a question! Bernard Jenkin?

Mr Jenkin: In your view does this Treaty actually treat the two parties equally, is it a strictly reciprocal Treaty? Or am I asking that question too early?

Chairman: We will come on to that later. I would like to take this in sequence if you do not mind. Implementing arrangements; Mike Hancock?

Q14 Mr Hancock: Can I just ask one question, from what you have said it would appear that this Treaty affords us the opportunity of unlocking certain stumbling blocks that there have been up to now but it also might be a more effective blocking mechanism because the Treaty, as you said, will say this can happen but it will also be a far more effective block because America will simply say, "No, that was not part of the Treaty." Are you happy that this Treaty embraces enough of the problems that have been highlighted time and time again over the last ten years to the effect that it will not be seen as a very effective blocking mechanism?

Mr Hayes: The Treaty is not an either/or vis--vis the existing licensing system. Where items are excluded from the Treaty then the existing licensing system will continue to apply, so nothing will be blocked by the Treaty in an absolute sense. If it is not allowable by the Treaty we can revert to the old system and apply for a technical assistance agreement or a licence.

Q15 Mr Hancock: So that is still available?

Mr Godden: That is what we mean by it is not a step back, there is nothing ---

Q16 Mr Hancock: It is "as well as"?

Mr Godden: As well as.

Q17 Mr Hancock: The Government claimed that through the Defence Industries Council they would consult pretty thoroughly on this and they would take on board issues raised by industry. Are you all satisfied that they did deliver on that commitment that this Treaty would be something that they would take to industry and then work with industry in putting the British side of it effectively into place, recognising all of the issues that you have raised with them? Is there anything they have not taken on board?

Mr Godden: My observation is that in as much as they can share - and obviously these Treaties have to be negotiated in secret and this is a government-to-government issue - they have shared with industry and consulted. I am certainly satisfied from what I hear from our 260 members that they feel consulted and they feel they understand what is going on, but clearly they have not seen sight of implementation issues and paragraphs.

Q18 Chairman: Ms Wood, you are nodding.

Ms Wood: I would endorse that. Within the restrictions obviously of the confidentiality of the government-to-government process, I think we have had a good and constructive dialogue and it has been a two-way dialogue in terms of understanding what would be needed to come out of the Treaty that would enable more effectiveness of the whole of British industry in the supply chain to be able to engage and get the improvements out of the Treaty, so from a company perspective we have been very content with that dialogue.

Q19 Mr Hancock: But that would depend on the outcome of the negotiations going on about the implementation arrangements. Are you happy from the UK's side there is a very positive view that those things need to be properly sorted before the Treaty is signed and that the implementation arrangements are clearly known to industry before the Secretary of State ratifies this?

Mr Godden: It is very positive but I do not know to what extent it can be shared before that process. They have consulted as much as they can, I believe.

Q20 Mr Hancock: Have they told you much about the implementation negotiations?

Mr Godden: There have been informal discussions about what the issues are on the implementation but obviously they have not ---

Q21 Mr Hancock: But from your point of view, from what you have been told, do you have reservations that they are not going far enough or they are hitting a brick wall on some of the possible problems that would arise through implementation?

Mr Godden: That is not the impression they have given. The impression they have given is that there may be more issues in Washington than there are here.

Q22 Chairman: Sandy Wilson, is that your view as well?

Dr Wilson: I think we have a broad outline of what will happen. It does come down to who will be on the list of approved companies and the like. I guess if that is not terribly restrictive then this will be a very, very effective mechanism. A question I have in my mind is whether we will get a large number of SMEs onto that list, and I think that is something that should be encouraged because otherwise the supply chain will suddenly stop at the top level and the TAAs will apply to the top level but in reality for implementation they have to apply right down through the supply chain to the SME level. I have no knowledge as to where people think that is going to stop but I would encourage it to go right the way down to the real shop floor deliverers of capability.

Q23 Mr Hancock: And that is very important for the UK. Have the Government been receptive to that point when you have made it?

Dr Wilson: Yes, absolutely.

Ms Wood: Yes.

Mr Godden: They have been making it as much as we have.

Ms Wood: We obviously do not have visibility yet on the implementing arrangements. This has been a process going on for a long while. There has always been a dialogue and they are very clear about where industry sees some of the issues on the implementing arrangements, particularly when you get into potential exclusion areas, and whilst we may not get visibility of the implementing arrangements before the Treaty is ratified, we have been very clear from our company's perspective that the MoD have understood exactly where our issues are. We have also been very clear in sharing some of the challenges we have had under the current arrangements and how that has impacted things like main programme delivery and urgent operational requirements, so I think they know what it is we are trying to tackle here. I would endorse Dr Wilson's point about the need for it to go through at the supply chain level.

Chairman: Moving on to the approved community issue; Adam Holloway?

Q24 Mr Holloway: What do you think about the criteria for people going on to the list and do you think everybody will want to join? If they do not, why not?

Mr Godden: The existing mechanism, namely List X, is well-known and understood. The ambition clearly in the UK is for that to be as inclusive a list as possible. Therefore as a minimum, because it is an existing process and existing mechanism for approval, we are satisfied that again it is not a step backwards in any way. On the question of whether it is a step forward the proof is in the pudding.

Q25 Mr Holloway: It is in the what, sorry?

Mr Godden: The proof is in the implementation itself. In terms of the actual criteria themselves we are satisfied that these are good criteria and will not be a step back in any way and will be a step forward in our view, with the right attitude.

Q26 Mr Holloway: Might there be some people who would not wish to join and, if so, why?

Mr Godden: Yes, they might not wish to join in the sense that they still might feel that it is another process to go through. It is difficult to imagine why they would think that but they may.

Q27 Mr Holloway: Moving it on then, is there a concern that perhaps smaller companies might not want to do it because it was too onerous or whatever? Is there any sense in which they would lose out?

Mr Hayes: There are overheads to becoming a List X company in the current circumstances and in relation to the approved community, and it will be a commercial decision for each company as to whether or not the benefits of becoming a member of the approved community are sufficient to justify those overheads. In the current context, there are SME companies who are members of List X which have clearly decided that it is of benefit to them. Equally there are others who will decide that the benefit is insufficient, but that has to be a matter for the companies concerned.

Q28 Mr Havard: What is the nature of these overheads? Is it just that it is difficult to do and therefore you have to put a lot of time and effort into it? There is not a standard fee, is there? The overhead is the pain and suffering of getting in the process, presumably, is it?

Mr Hayes: And meeting the necessary physical and personal security requirements and having the on-going ability to satisfy those requirements.

Q29 Mr Havard: The individuals?

Mr Godden: IT, security and management costs are the three big things.

Q30 Mr Havard: And the individual bodies.

Mr Godden: Yes.

Ms Wood: If you are an SME, to get to List X, IT standards would be the biggest issue. It is a scale issue. Again, that is something which we as prime contractors would need to work with the SMEs to help enable them to achieve that status.

Mr Havard: Thank you.

Q31 Willie Rennie: Are these not standards that we would hope to strive to achieve in the defence industry in the UK anyway?

Mr Godden: Yes.

Q32 Willie Rennie: So what is the problem?

Mr Godden: I do not think we are saying there is a problem except that it is the normal inertia of companies making commercial decisions about overheads and equipment.

Q33 Mr Holloway: Could this be a barrier to enterprise for small companies?

Mr Godden: The Treaty itself is not a barrier.

Q34 Mr Holloway: No, the list?

Mr Godden: Yes, but that exists at the moment, that is a given. Today that is the case in terms of --

Q35 Mr Holloway: Sure, but is it going to make it harder for small, enterprising companies?

Mr Hayes: I would not necessarily think so because if they are currently handling ITAR-controlled data and handling it correctly, then their IT systems should already be at or close to the necessary standard for membership of the approved community.

Ms Wood: And also if they are doing secure work for the MoD - and most SMEs provide us with high technology and high innovation - they would be at List X status anyway.

Q36 Mr Hancock: Could they do it on the back of a prime contractor?

Ms Wood: I believe they have to have their own listing, but somebody needs to check that.

Chairman: Moving on to a different subject, foreign ownership of shares in defence companies in the UK; Kevan Jones?

Q37 Mr Jones: Can I ask a question with regard to foreign companies in the UK. I am thinking particularly of companies like MBDA and Thales, to name two, who have got major holdings in the UK and major jobs in the UK. How will they be part of this community and if they are excluded in some way will that make the Treaty worth pursuing?

Mr Godden: Again, I am going to sound a little bit like a record going round in that there is nothing that is going to be worse than today. For them they have the option of going back to ITAR etc. and operating in exactly the same way they are, so in that sense there is no extra issue for them, so nobody will be worse off, but we believe the new arrangements for this are still underway and it is difficult for us to fully judge what this process will be like. That is one of the issues.

Q38 Mr Jones: Yes, and perhaps I am being unfair in asking Dr McGinn a political question; are there going to be problems in terms of the ratification of this Treaty to include the likes of Thales and others which although they are foreign owned have large footprints in the UK and actually produce a lot of equipment which will actually be beneficial under this?

Mr Hayes: The way this is approached is where a US company has foreign ownership, control or interest then arrangements are agreed with the Defense Security Service to mitigate that foreign ownership, control or interest. I do not know this for a fact obviously, but I would envisage a similar sort of system operating here whereby if there are concerns over foreign ownership, control and interest of a company in the UK, then a means is found to address those concerns which would satisfy both Governments and enable the company to participate within the constraints of that agreement.

Q39 Chairman: That sounds a bit vague. I am not entirely sure that I understand what this Treaty actually says about it.

Mr Godden: We have to say we do not know because we have not been party to what the clauses will say and are saying, so we have to fall back and say it is going to be no worse.

Q40 Mr Jones: You are representing UK industry though, Mr Godden, so would you not actually have a situation whereby it would be okay for BAE Systems and others to be part of this but to exclude foreign-owned partners of the likes of Thales and other people?

Mr Hayes: I think the same situation would exist currently in any event in relation to the handling of classified material in those companies which carried a national caveat. Although the company is foreign owned it is fair to assume that in certain circumstances they will be handling data that is classified "UK eyes only" and they must have the means for handling such data. I can see a logical case for extending similar sorts of arrangements to this kind of data.

Q41 Mr Jones: Dr McGinn, any observations from the other side?

Dr McGinn: I think I would echo the comments of David because again we have not been privy to these discussions between the Governments. I think that they are going to handle this in the way they handle the situation now in dealing with UK licences in support of operations where you have got US secret programmes that are released UK eyes only. I think a similar type of arrangement will be established.

Chairman: Huge proportions of British defence industry like EADS, Thales, Finnmechanica, GD, BAE Systems are not entirely British. This strikes me as being a fundamental issue to which nobody knows the answer and is it not rather crucial to the future of this Treaty?

Mr Havard: Can I interject.

Q42 Chairman: Because from GD UK's point of view, you will have a view.

Dr Wilson: Indeed. I think it is essential that foreign-owned companies get onto the approved list because we cannot imagine working without them in the UK. There is a wider context to this discussion however. There are Anglo-French initiatives on-going and if you wanted to take a view that will greatly help the transport, if you like, of French technology into the UK, what this Treaty will do is work against the imbalance that exists today on getting US technology into the UK, and sometimes that US technology will be of great value to the UK operationally. I think there is a wide range of pluses for this in that it will eliminate some of the barriers that currently exist and that might favour US-owned companies if they sit on the approved list, but then again there are other things going on in the country in terms of the Anglo-French thing which would help French companies do it. So there is a whole series of pluses and minuses if the actual Treaty became quite restrictive, which we do not know.

Q43 Mr Jones: In terms of GD, I would be very surprised if you were not on the approved list.

Dr Wilson: Indeed.

Q44 Mr Jones: But it is a bit different, for example, for Thales, Finnmechanica, MBDA and others and it would make this Treaty pretty worthless to UK plc if these companies were not on that approved list.

Mr Godden: It is absolutely our ambition they are on there.

Dr Wilson: I think it becomes quite difficult if they are not on there because GD UK would be working with Thales UK on a variety of programmes.

Q45 Mr Jones: I am not asking you to write the little paragraph I am trying to write in the report, but what I want to offer you because you are representing UK industry is that you would actually want all UK industry irrespective of where they are owned on the approved list.

Mr Godden: Yes we would like that but obviously the Governments have to decide whether that is appropriate.

Q46 Mr Jones: Hang on, fight a bit harder, come on! Let me write in the report that you actually want all these on because, frankly, if I was Thales and I got that response I would not be paying my membership to your organisation.

Mr Godden: We want it on, and we are absolutely clear.

Mr Jones: Good, but it took some getting, did it not!

Q47 Mr Hancock: Have they given you an indication that they will support that view? Is that an issue that you have raised with them?

Mr Godden: Yes.

Ms Wood: Yes.

Q48 Mr Hancock: And what has the Government's response been?

Mr Godden: They have not promised anything or said anything back; they have listened.

Q49 Mr Hancock: But they have not said, "We are wholly supportive of that principle"?

Mr Godden: Not to me. I do not know whether to any of my colleagues.

Mr Hancock: That is a pretty difficult situation for us to be in then, is it not?

Mr Jones: That is one we need to ask the Minister.

Q50 Chairman: We will ask the Minister.

Mr Godden: I can only tell you what has happened to us.

Q51 Mr Hancock: Will this lead to a greater dependency on the part of the UK to be forced into a position of buying from the United States? Will this not have a detrimental effect on research and development in the UK?

Mr Hayes: No, because I think the whole concept is optional. Just because the Treaty exists it does not mandate its use. We are still free to shop in whatever market-places we choose.

Q52 Mr Hancock: But will it act as a deterrent then against UK/European collaboration?

Mr Godden: Not that we can see. We have debated that and not that we can see.

Q53 Mr Hancock: You have debated amongst yourselves and with Government presumably?

Mr Godden: And we have mentioned that and made the point and we do not think so.

Q54 Mr Hancock: What was the Government's response to that? Sandy, you wanted to come in, and then maybe we can come back to find out what the Government said to you about it.

Dr Wilson: I think I would just reiterate a point I made earlier that if you are producing a system in the UK you do have a choice of where you go for that technology. It might be indigenous to the UK, it might be from Europe, it might be from the US. Currently there are many advantages to not using US technology because the administrative burden on that and the way that it slows down the through-life evolution of the system, having to go back for TAA reapproval and the like is very negative. We consciously have made decisions not to actually use US technology coming from the greater GD in certain programmes in the UK. You have to take a pragmatic view of that. Sometimes the US has fantastically good technology and it would be very useful and beneficial to the UK to have that here, and it would still be fought for in the competitive market-place that is UK defence, but I just think it is a sensible way of getting rid of a barrier that has prevented us from offering some things into the UK because it is such a difficult process.

Dr McGinn: I would like to underscore the importance of looking at this Treaty as very much a two-way street. It very much goes in both directions. I can speak for my company and we do business with a lot of UK companies for some of the systems that we build for the US and UK Governments and UK technology will allow US companies to be more collaborative with UK companies as well. It goes very much in both directions.

Q55 Mr Hancock: Have you looked at the way in which a bilateral Treaty with the US like this would affect EU Treaties which the UK has signed up as being in conflict with them?

Mr Godden: We have not specifically looked at that subject because I think that is a subject of law which certainly the SPAC has not, and I do not think any of the companies have, taken a judgment on how this relates to EU law.

Q56 Mr Hancock: Nobody has raised that as a potential problem? None of your European partners have raised an issue of you being ---

Mr Godden: No, they have not raised it in any collective forum that I am aware of.

Q57 Mr Holloway: Would that not be quite an important point to clarify particularly from the point of view of the United States?

Mr Godden: Yes, but I see that very much as a Government point. I am not trying to duck it; I do not see how a company or our association could actually make judgments except to mention it.

Chairman: Fair point. Willie Rennie?

Q58 Willie Rennie: The US spends a much higher percentage of GDP on science and research than the UK does and some parts of the British science base are quite fragile. Is it not logical that with a bigger critical mass of scientists and science organisations and defence organisations in the US that it is going to act as a sucking mechanism where all the best science is going to be done over in the States and therefore this breaking down of the barriers will just mean it is a one-way street and it will all go over there?

Ms Wood: As we have been thinking about what the Treaty will do to create benefit, that issue has been a debate about how do we make sure that for the whole of the UK industry footprint, in which I would include the universities and the science community, that we manage that going forward to make sure that we actually benefit on a reciprocal basis and that we are able to move the technology and the people and that we put the UK industry, alongside our customer, in the position where we have got more choice. We view the Treaty as being able to have more bilateral co-operation but being able to do it by not losing UK scientists to the US but rather the reverse; having US scientists co-operate with ours and us move technology and research partnerships across. It is not without risk but it is something we believe is managed in the benefit of it. It goes back to the question of it is important to us that the whole of the UK defence industrial footprint is able to participate in this Treaty because that is the way we will be able to preserve critical mass.

Q59 Willie Rennie: Do you think universities know about this Treaty?

Ms Wood: I actually do not know the answer to that question.

Mr Godden: I am not sure either.

Dr Wilson: Just one comment, I think compared to about three or four years ago we are in a much stronger position because the Defence Industrial Strategy, with its focus on through-life sovereign control of technology and capability and the link of that to the Defence Technology Strategy, gives us a framework for managing it. It is now firmly in everybody's minds that having the R&D and the management of capability in-country is the right thing to have. I think that is a good framework.

Q60 Mr Havard: I do not want to prolong this but that is the whole point, is it not? Is this not therefore a mechanism whereby if you choose to enter it - and it will be industry that chooses to enter it - that could undermine the exact point that you have just made and government would effectively abdicate control to you on the basis of your individual needs and whether you decide to participate or not, so strategically we actually lose control rather than reinforce control and the benefits you put out about the Defence Industrial Strategy are lost?

Dr Wilson: I could not see that happening.

Mr Godden: Neither could I.

Dr Wilson: I think there is such a thrust within the Ministry of Defence on sovereign through-life control that I cannot imagine that happening, no.

Q61 Chairman: Can I make a point about the tone of what we do in select committees. What we do in select committees is we probe, we ask questions, and we therefore do our best to reveal weaknesses, and that tends to create an atmosphere whereby whatever we are asking questions about looks rubbish, but clearly your overall view is that this Treaty is a thoroughly good thing, it a step forward. I wanted to make that point in the middle of this exchange in order to rebalance the tone.

Mr Godden: Yes, that is absolutely right.

Chairman: Bernard Jenkin?

Q62 Mr Jenkin: Thank you for that preamble to my question, Chairman, because I was almost going to say the same thing! Personally I am a huge supporter of the principle behind this Treaty, but concerns have been expressed to us about the unequal nature of the Treaty - that effectively the US gains, by proxy or by actual fact, control over what we export in terms of technology, but we are giving them a blank cheque to export any technology that we transfer to them. Would you describe that as an unfair caricature of the Treaty?

Mr Godden: Yes!

Q63 Mr Jenkin: Can you reassure us?

Mr Godden: I think it is. I think the whole principle here is that UK-based operations will have an advantage in the US versus what they have at the moment in that for the very reasons we mentioned - the slowness and the overheads - behaviourally it means that the US is less likely to use the resources here, so in that sense it is reciprocal, there is a reciprocity about it.

Q64 Mr Jenkin: But it is absolutely true, is it not, that whatever technology we transfer to the United States - this is part of the problem of being a very unequal partner - as part of this arrangement whatever we give them we no longer control their export of that technology to another country, a third country, and we do not have a say over that?

Dr McGinn: That is not correct.

Q65 Mr Jenkin: That is not correct?

Dr McGinn: That is not correct.

Q66 Mr Jenkin: Could you show me within the Treaty text itself or is that too complicated?

Dr McGinn: The Treaty talks about an approved community and the approved community is approved US and UK entities. Within that approved community you can transfer goods and services under mutual agreement, but when things leave that approved community, either on the US side or on the UK side, then the licensing laws fall into effect, the ITAR.

Q67 Mr Jenkin: Our own licensing laws or American licensing laws?

Dr McGinn: For a UK product that went to the US it would fall under US ITAR.

Q68 Mr Jenkin: That is the point, is it not, we might have different arms export policies from the United States but once we have transferred our technology to the United States, which we are obliged to do under this Treaty, if you are in the approved community, they can export it to a country that perhaps we would not have exported it to, but we do not have the same freedom to export technology that they have given to us?

Mr Hayes: That is exactly the situation that exists today, it is no different.

Q69 Mr Jenkin: I think that is the key point.

Mr Godden: It is no different, it is just taking what we currently have.

Q70 Mr Jenkin: Except that we can choose not to export certain items to the United States now.

Mr Godden: We can choose not to do so under the Treaty.

Q71 Mr Jenkin: So how does this Treaty make any difference?

Mr Hayes: It makes it easier for goods and technology to flow from the United States to the UK.

Q72 Mr Jenkin: I understand. What you are saying is that this Treaty is necessary to enable the United States to change their arrangements; it really will not make much difference to the arrangements we already have in this country?

Mr Godden: That is close I think.

Mr Hayes: I think it is important to appreciate that we are looking at two sides of the same coin effectively. This is an export control situation from a US perspective; it is a security situation from the UK perspective.

Q73 Mr Jenkin: Can I just ask one final question on this which is the export of the technology from the approved community requires the consent of the United States, but does that then bring British technology under the control of the United States so we cannot then export British technology to a third country of our choice because it is not part of the approved community?

Mr Hayes: Only if it is co-mingled with US technology.

Q74 Mr Jenkin: So it has to be "contaminated" with US technology? I think that has been of great reassurance

Ms Wood: Again that is today's situation.

Mr Godden: It is the same.

Q75 Chairman: You said this was in the UK a security issue and in the US an export control issue, so if in the UK something is passed outside the British approved community, then the sanction is the Official Secrets Act?

Mr Hayes: Yes.

Q76 Chairman: There is no similar sanction in the United States if in the United States something is passed outside the American approved community is there, or is there?

Mr Hayes: Being passed outside the American approved community within the United States or outside of the United States?

Mr Jenkin: Outside.

Q77 Chairman: Either probably.

Mr Hayes: If it is passed outside of the US approved community outside of the United States then it would be punishable under ITAR unless there was a licence or agreement in place. If it was passed outside of the approved community of the United States, depending on how that approved community is defined, it may still be an offence under ITAR because you are required to register under ITAR if you are a manufacturer of defence articles in the United States, regardless of whether you export them, so it would be a case of the recipient company holding military and technical ---

Q78 Chairman: I see so the Official Secrets Act in the UK and ITAR perhaps in the US?

Mr Hayes: Yes.

Q79 Mr Jenkin: Very briefly to make sure that we have absolutely understood it, basically we are depending on the ITAR system to be gatekeeper to British technology in the United States, but what you are saying is that we have such an intense technology-sharing relationship at the moment that really amounts substantively to no change?

Mr Hayes: Correct.

Q80 Mr Jenkin: But we will now be under an international obligation under this Treaty to share that technology which at the moment we are not under? That is correct, is it not?

Mr Hayes: No, we are not under an obligation to share technology at all. It provides an opportunity for us to do so ---

Chairman: I think we have understood that. I want to move on now. The prospects of ratification; Kevan Jones?

Q81 Mr Jones: In terms of ratification in the US - and quite a few of us have had the experience of meeting Congressman Hunter - what is US industry doing in terms of ensuring in lobbying that this will be ratified throughout the Senate?

Dr McGinn: US industry, as I mentioned, has been very supportive of the Treaty in principle but US industry is also very keen to see how the implementing arrangements will work because, as we have discussed, the real devil is in the detail, so to speak, and how this regime will be set up will govern how useful it is. We have seen the Government on the US side as forward leaning as I have seen them in trying to make this a very useful regime. Our previous effort was done with the Joint Strike Fighter to try to do something through global project authorisation. That did not work and therefore the Governments have tried to make this as useable as possible. We have not seen the implementing arrangements so we cannot really comment on those. So far as your question on ratification, we have had some initial discussions with staff in the US Senate and there have been some discussions with members of the Senate as well. The responses we have heard have all been very positive in the sense that they see that this is a recognition of the strong relationship we have but, that said, one thing they want to see before they approve the Treaty are the implementing arrangements. They want to see how the mechanism will work, but in our discussions the underlying assumption - and again I cannot speak for the US Senate - is that this is a good thing and the prospects look pretty strong for passage.

Q82 Mr Jones: Has US industry been lobbying hard for this?

Dr McGinn: This is a national security priority for our two Governments. That is the perspective that we have taken. It was not done as an industry initiative so we do not want to get in front of the Governments. We have taken the approach where we had some initial conversations and now we want to wait until the implementing arrangements are complete and the Senate has had time to consider them, but we will very likely be strongly supportive with members in the US Senate.

Q83 Mr Jones: That sounds like a "No" to me

Dr Wilson: Could I give a perspective here?

Mr Godden: I will as well.

Dr Wilson: In the UK, GD UK has worked through the trade associations to get its point of view across, and we are doing exactly the same in the US. Underlying that, because we have specific issues on ITAR and TAAs, we have been lobbying quite hard for improvements to the system in a much more general sense than this specific Treaty. We have done that directly into the State Department at the normal governmental level and we have involved the UK MoD as well in that because they are things that affect us in the UK. I think we have been fairly even-handed in the way that we have approached this both in the US and the UK through the trade associations which is the right way to engage with government when it is a government-to-government deal.

Q84 Mr Jones: Let us be honest, Mr Wilson, we saw the ITAR waiver and other things fail not because the two Governments did not agree but because the people on the Hill just did not want this and stopped this. Surely in terms of both trade associations and industry, if this is actually going to go through the Senate a hell of a lot of work has got to be done with the Senate because Senators I have talked to do not have a great deal of understanding of some of these issues. Although government-to-government relations might be good and everybody might be slapping themselves on their backs in the embassies saying how wonderful it is, if it does not get through the Senate, frankly, it is a waste of time, is it not?

Mr Godden: Can I comment having just come back from the US and discussing with the trade associations in the US this very point. I came back last week from Phoenix. My interpretation is that the associations are very active. Whether they are active enough, I cannot judge, but they are active, they are very positive about this Treaty and they are promoting the idea of the Treaty. I cannot say any more than that. I cannot comment not being on the Hill all the time but from the positive mood in SBAC's equivalent association, the AIA, of which Jerry is a member, my observation is they are very positive and are campaigning for it.

Mr Havard: They are being very careful about who they bankroll to be the next President as well.

Q85 Chairman: Our next witnesses are waiting. I said that I would ask you a few questions about DESO. I will ask you, Mr Godden, one question about DESO because I want to get on. The decision to abolish DESO - and this has got nothing whatever to do with the American Treaty and it will not form part of our report - which in my own personal view was a bad decision, is one which has been taken. The operation now moves to the Department for Business, Enterprise and Regulatory Reform. What in British industry's view are the key safeguards that need to be put in place in order to ensure that the new regime is as helpful as possible to the British defence industry and to the British military?

Mr Godden: We remain disappointed that that was done. However, we have moved on and the two key things from our point of view are the quality of the leadership of the new unit and the fact that it needs to remain as a unit and not be dispersed in some manner. From our point of view, the remaining unit with strong leadership reporting into the ministers is absolutely essential, and secondly, the continued support by the Ministry of Defence and the Armed Forces on the whole concept of defence exporting in the field round the world ---

Q86 Chairman: --- with uniformed personnel?

Mr Godden: With uniformed personnel and with equipment, ships, etc., that is essential and in fact that is probably where our worry has shifted as a result of the budget cuts which have been imposed on that Ministry. Our concern is strong leadership of a separate unit within UKTI and a continued commitment by the Ministry of Defence, tough as that may be within the budget cuts, to the support of defence exports. Those are the two key points.

Chairman: That is very helpful. It being now two minutes past your witching hour you are just about to turn into pumpkins, so if I may say thank you very much indeed for a very helpful session. You have managed to get through a lot of ground with great discipline. We are most grateful to you all for coming.

Memorandum submitted by the Ministry of Defence

Examination of Witnesses

Witnesses: Baroness Taylor of Bolton, a Member of the House of Lords, Minister for Defence Equipment and Support, Mr Stephen French, Director General Acquisition Policy, Mr Tony Pawson, Head Defence Export Services, and Ms Gloria Craig, Director General International Security Policy, Ministry of Defence; and Mr Paul Lincoln, Head of Defence and Security Policy, Cabinet Office, gave evidence.

Q87 Chairman: This is a continuation of the session into the US/UK Defence Trade Co-operation Treaty. May I begin, Minister, by welcoming you to your first meeting of this Select Committee, so new into your job. You are particularly welcome since you and I were Whips together and that is a community which nobody ever can break. I understand that you would like to begin by saying something to the Committee.

Baroness Taylor of Bolton: Thank you, Chairman, and thank you for those comments. I do look forward to working with the Committee. I am afraid that before I introduce the team to the Committee this morning I have to say that there was a loss of an RAF Puma helicopter near Baghdad in Iraq last night and two Service personnel were killed. Their next of kin have been informed. Two other personnel were seriously injured and they are being treated in hospital. Obviously we cannot speculate about the cause of the incident but an RAF Board of Inquiry has been convened and is en route to Iraq to start that investigation. I thought it right to tell the Committee because obviously this will become public news and you have an interest in all of these issues.

Q88 Chairman: I am grateful. We on this Committee have travelled regularly on those Pumas in Baghdad and we were and remain utterly astonished at the things that they do and the perils that they face, so thank you for telling us. Minister, would you like to begin by introducing your team and then would you like to go on to tell us how the Treaty is likely to work and what the arrangements will be?

Baroness Taylor of Bolton: Can I introduce the team. Tony Pawson is head of the Defence Export Services Organisation. Gloria Craig is Director General International Security Policy and has been leading for the MoD on the transfer of the defence trade promotion function of the MoD to UK trade and investment. Stephen French is Director General of Acquisition Policy - all these wonderful titles - and he has been leading within the MoD on the Trade Treaty. Paul Lincoln is Head of Defence and Security Policy from the Cabinet Office, who has been leading on the negotiation of the Treaty. They are here to answer detailed questions as well as add any other information that they think is appropriate. Obviously I am new to this position but I am quite impressed with what I have inherited in terms of the discussions that have taken place on the Defence Trade Co-operation Treaty. I think everyone will recognise that we have very close links with the United States and that defence relationships between the UK and the US are very good. We are always seeking to improve them, not least for the benefit of our front-line troops. Part of the benefit that will come from going down the route that is being suggested is that access to the best technology would help us to support even more our troops on the front-line. We do believe that the Treaty represents a major opportunity to improve our ability to operate alongside the United States. It is a long-standing policy of both sides that that is the direction in which we should go and we think that both UK and US forces operating together will benefit from further co-operation. Obviously the threat that we are facing is an evolving one, it is changing, no-one anticipated ten years ago the nature of the threats that we have today, so flexibility and being up-to-date are absolutely essential to everyone. At present, in regard to UK/US defence trade, or indeed any trade, there are barriers, there are administrative hurdles that have to be overcome, and we think if we tackle those administrative barriers properly and can remove those barriers, it will allow the UK and the US defence industries to co-operate in new ways. As I said earlier, there is a great deal of co-operation at present but we think that there is scope for more and we think that there is real benefit to come from this Treaty on both sides. Discussions have been going on for some time, it is not a new issue, but I think that the approach that has been adopted this time is one that those working on it are quite confident can lead to some agreement. We had visitors from the States last week talking about some of the detail (because there are still some detailed arrangements that have to be worked out). There is agreement in principle. Prime Minister Blair and President Bush did sign the Treaty so there is agreement in principle and there is goodwill on both sides. Most of the implementing arrangements have been agreed but there are still some outstanding issues which officials have been working on very closely with their American counterparts.

Chairman: Thank you very much, Minister. I think it would be right, because you said you were impressed by what you had inherited, for us to express our gratitude to your predecessor who had worked incredibly hard and very effectively on this Treaty and also to Tony Blair who signed the agreement with the President. Key to the Treaty will be the implementation arrangements; Mike Hancock?

Q89 Mr Hancock: Minister, you actually said that the implementation arrangements were nearly completed. When would you envisage that process being completed and when would you expect to publish them? We heard from the defence industry prior to you coming in that they were wanting to know and wanting to see what had actually been finally decided. Can you update us on when you would expect to complete them and when you would expect to publish them?

Baroness Taylor of Bolton: As I said, we did have officials from the States over here last week. I did meet them but my officials obviously spent a great deal more time with them. Officials are going over to Washington next week to try to finalise some of those arrangements. There are a couple of issues which are outstanding which will require some discussion and we are hopeful that we will make progress, but we cannot at this stage absolutely guarantee it because we have to protect our position on these issues. It is looking optimistic. In terms of the actual publication of the implementing arrangements, it is not anticipated that they will be a published document. Obviously we will have to be willing to discuss these with the Committee and one possibility might be to share with the Committee in confidence what actually is agreed once those are concluded, but it is not anticipated that that will be a published document.

Q90 Mr Hancock: Would that be different to what the Americans will do? We heard previously that the anticipation was that the American Senate, in particular, would not agree to ratify this Treaty without seeing the published implementation arrangements. So how can it be that we would only get them in an unpublished form through a confidential meeting, whereas ----

Baroness Taylor of Bolton: There will be a Memorandum of Understanding when this is completed. Perhaps Paul would like to comment.

Mr Lincoln: Indeed. We are still in discussion with the US on exactly the form in which we will place those implementing arrangements to either the Senate or to the Committee here. Clearly, we are prepared to share that. Of course, the difference is - and there will be concerns by industry on whether or not we need to share those as well - the implementing arrangements set out the commitments between the two governments are not necessarily the commitments which we place directly to industry. We will, of course, share and work up in detail with industry the exact requirements which need to be put in place with them. So, clearly, those will be done in detail with those who will be affected by this.

Q91 Mr Hancock: My question was that we were told that the Senate made it quite clear that they would only ratify this Treaty subject to full documentation on the implementation arrangements. As far as I know, they offered no caveats to that, it was as straight as that, but you are now suggesting it is different to that.

Mr Lincoln: I cannot speak for my US counterpart about the arrangements which they have come to with Congress. They will be speaking to them to give them briefings, I believe, starting Monday next week, to talk through, in exactly the same way as we doing now, where we have got to on any outstanding issues. However, it will be for them to decide whether or not to give detail, but I would expect, quite clearly, we would not expect the situation to be different on each side of the Atlantic, with one side putting the Treaty implementing arrangements into the public domain and the other side not.

Q92 Mr Hancock: Would the implementation arrangements be simply an addition to the Treaty or would they have to be subject to further ratification?

Mr Lincoln: As we envisage it now, the implementing arrangements will be a Memorandum of Understanding between the two governments which, as such, would not require further ratification.

Q93 Mr Hancock: But if that Memorandum of Understanding is not a public document how will industry know that this Treaty is beneficial to what they hoped it would deliver?

Mr Lincoln: Having the Memorandum of Understanding between the two governments is very different, as I said, to what we then put to industry and say: "These are the requirements which will be placed on industry as a result of this Treaty", which they will have very public access to.

Q94 Mr Hancock: Would you expect the British Government to ratify this Treaty without those implementation arrangements being made public, at least to this Committee?

Mr Lincoln: I am not going to answer that.

Baroness Taylor of Bolton: I did say that it was clear to me that the implementation arrangements ----

Q95 Mr Hancock: Before ratification.

Baroness Taylor of Bolton: ---- would have to come to this Committee.

Q96 Mr Hancock: Before ratification.

Baroness Taylor of Bolton: I cannot see any reason why not, but I would take advice on that before I made an absolute promise. Can I just go back to one point you said about industry knowing? I think it is important to stress that industry has been involved in the background to a lot of these discussions and it is not envisaged that we will be agreeing to anything that will take industry by surprise or which will cause them difficulties. Their approach and their concerns, if there are any - their situation - has been taken into account in all of these discussions. So industry will not be unsighted or surprised by the kinds of things that are being discussed.

Q97 Mr Hancock: Were there issues that they have raised during the consultation on this that you have not been able to get a satisfactory response from the US on?

Mr Lincoln: I am sorry. Could you repeat the question?

Q98 Mr Hancock: Were there issues raised by industry in this country on the implementation arrangements on which you have not been able to negotiate a satisfactory conclusion with your US counterparts?

Baroness Taylor of Bolton: There are two issues that we have not absolutely got conclusion on, and they are not issues that industry would be concerned about, as opposed to government. They are issues we have got to work through.

Q99 Mr Hancock: So, for the record, would it be fair to say that all of the issues raised by British industry in respect of the implementation arrangements for this Treaty you have been able to satisfactorily conclude with your US counterparts?

Mr Lincoln: I think it would be fair to say that we have taken account of industry's concerns throughout this and discussed with them ----

Q100 Mr Hancock: That is not an answer, is it, to the question?

Mr Lincoln: I am sorry. There was one question in particular, which you spoke about earlier with industry, relating, for example, to a list of exclusions which would apply, which is clearly a key issue to both government and industry, which is one of the outstanding areas we need to discuss with the US. Our intention, as was the position when the Treaty was signed, was that that list of exclusions would be as small as possible, such that the benefits which can be derived from both governments' Armed Forces on operations and industry, both on the UK and US side, can be maximised as far as possible. We will have continuing discussions with the US on that.

Q101 Chairman: Minister, you said you could not see any reason why the implementation agreement should not come back to this Committee before ratification, but you would take advice on that.

Baroness Taylor of Bolton: Yes.

Q102 Chairman: One issue that you will need to be aware of is that the Leader of the House has told us that she is happy to extend the period of ratification of this Treaty to allow our Committee to conduct an inquiry, but that she wants any report from this Committee to be received by 12 December. Now, that would mean, if you were to come back with the implementation arrangements, that it would need to be very quick, or it would mean that the ratification of the Treaty would need to be delayed, which might not matter if the ratification of the Treaty in the United States was also likely to be significantly later than that. I would ask you to consider that with your officials when considering whether to bring the implementation agreement back.

Baroness Taylor of Bolton: Yes. I do not think that there is any opportunity for ratification in the United States this side of Christmas. So in terms of getting out of line, I do not think a marginal delay would cause difficulties, but I would not wish to pre-empt the right of the Leader of the House to make recommendations on the timing of Government business, and therefore I will look at that. I do not think that that will cause a problem.

Chairman: Indeed not. However, what you have just said about the ratification in the United States will be a disappointment to us, but we will come back to that. Moving on to the British approved community.

Q103 Mr Holloway: One of the criteria for getting into that is this business about foreign ownership. At what level of foreign ownership will a company in the UK be ineligible within the British approved community?

Baroness Taylor of Bolton: As I understand it, it is not simply a question of the percentage of ownership or control, it is far more complex than that, and because I want to be very precise I am going to ask Paul to answer because we do already have that provision within this system that we operate, and it is that similar system with additional requirements which will operate under this Treaty. It is not just a simple issue of the percentage of foreign control.

Mr Lincoln: We have discussed with industry before that the baseline standard for becoming part of the approved community would be the current arrangements for the list X communities and facilities, which are currently operated by the MoD's Industrial Security Service, and the arrangements which fall underneath that. Those already take account of a level of foreign ownership, control and influence within companies, including the percentage of UK nationals at board levels overseeing the security-cleared facilities. That will be our baseline point for departure for discussions on a case-by-case basis with any company.

Q104 Mr Holloway: Have the US put in any sort of nationality restrictions in terms of the people who work on these programmes here? For example, people with a joint registered Iranian or Chinese past?

Mr Lincoln: Again, our baseline standard, which we have discussed with the US, is that they must have the appropriate UK security clearance and need to know, which is the current method, of course, of reserving access to security-controlled material within our existing arrangements. However, it would be wrong to say there are still some issues to be worked through on access to third-party nationals where the UK has a difference in approach for its risk management at the individual level compared with that for the US, which tends to do that in a more blanket level of denying access. Rather than, perhaps, rehearsing the arguments here, that is one of the outstanding issues which we want to come to close with the US next week.

Q105 Mr Holloway: Again, if there was, perhaps, something that could only be handled by UK citizens, could that put us up against EU law?

Mr Lincoln: We have been very careful in all our negotiations to make sure that we do not discriminate against any commitments we have with the EU, and the Treaty itself says that we will maintain our international obligations and commitments to any international body. Similarly, the Americans have other international commitments which they will not be in a position of breaking either.

Q106 Mr Holloway: Finally, would university research departments, or whatever, be approved communities?

Mr Lincoln: There is a potential for that to be the case. There are currently some existing university facilities (I think we need to be careful to say "there are facilities within universities" rather than "universities" as a whole) who currently carry out defence work, who are cleared through the appropriate security regime in order to meet the list X status, and subject to them applying and meeting the criteria we are prepared to put that case forward.

Q107 Mr Havard: If I could ask you about what is involved and what is not involved. We are being told in a memo from the Ministry of Defence that: "Some of the most sensitive technologies are expected to be excluded from the Treaty as well as technologies specifically controlled under existing international arrangements". What are these "sensitive technologies"? What is this exception process? What is not in the Treaty as far as sensitive technologies are concerned?

Baroness Taylor of Bolton: The things that are covered by national treaties anyway are not going to be altered at all in terms of the excluded list. That is one of the issues still under discussion. Do you want to update on that again?

Mr Lincoln: Certainly. From the outset we realised that there are some defence articles which the US for sensitive reasons would not be prepared to transfer without a licence. Our expectation is that they fall into a small number of categories, which would include stealth and sensitive communications technology. That is not to say that they cannot still be transferred without a licence to the UK, as they are done currently. Similarly, both countries have international obligations under things such as the Missile Technology Control regime, which limit our ability to transfer goods without a licence, and then there are the EU treaty regulations which, of course, exclude certain goods for the UK, and we would not be able to enter into a negotiation of those because that comes under European competence.

Q108 Mr Havard: It also references something called the US Foreign Military Sales Programme, which I am afraid I am not familiar with, but apparently does not apply. Perhaps you could enlighten me about that? How significant is that, if at all?

Mr French: It is a mechanism whereby the UK when buying equipment that is used by the US forces buys direct from the US Government, who have an arrangement with the commercial companies. Therefore, there are a number of things that we buy through FMS, as it is called, at the moment. They come through on a route which effectively bypasses the licensing system and would continue like that. So it is a direct sale from the US Government to the UK Government.

Q109 Mr Havard: Thank you very much. There are press reports that, however, there are going to be another set of qualifications, which is that equipment worth more than $25 million and spare parts and services worth more than $100 million would be outside the scope of the Treaty and still require Congressional approval. Is that the case - that there is this monetary qualification?

Baroness Taylor of Bolton: That is not because of this Treaty; that is existing US law, and that will stay the same.

Q110 Mr Havard: I will ask you some questions in a moment about Joint Strike Fighter in relation to this. I think it is getting clearer in my head, but what is involved in the Treaty and what is not involved in the Treaty is becoming quite a complex thing for people to understand, I think. That is why I ask the question about whether there are these exceptions. Can I just ask you about Joint Strike Fighter, because quite clearly from the Committee's point of view and others, we have asked questions in the past about the significance of technology transfer, and it has been vested in this debate about ITAR waiver and, also, now the Treaty. However, we appreciate it is more complicated than that. This seems to be only part of the thing that deals with the problem that we are really concerned about, which is having operational sovereignty over the fleet of JSF aircraft if we are going to have them. This is an issue that the previous Minister dealt with, and said that they had come to a Memorandum of Understanding. So what I want to be clear about is which technologies, in relation to the F35 Joint Strike Fighter, are now going to be vested in this Treaty process, or is this Treaty process actually irrelevant as far as that is concerned? Are all those issues covered by the Memorandum of Understanding that was specifically struck about the F35?

Baroness Taylor of Bolton: The Joint Strike Fighter is a multinational programme and, therefore, as such, as a whole, it is not covered by this Treaty. However, aspects of the Joint Strike Fighter are actually where we have bilateral projects with the Americans. If it is a UK/US aspect of the Joint Strike Fighter programme, in terms of any development, then it can come in with this Treaty - it does not have to but there is potential for that - but it is not, as a multilateral project, one that automatically all comes within this Treaty.

Q111 Mr Havard: Do we think that the US Government will seek to exclude the Joint Strike Fighter from the provisions of this Treaty?

Baroness Taylor of Bolton: If you are talking about all these aspects, because it is a multilateral programme involving a number of other countries, then the project per se is not in total covered by the Treaty. However, some aspects of the development could be, if the companies involved choose it. Do you want to elaborate?

Mr French: The JSF project itself, being multilateral, is not covered under the Treaty. There may be some bilateral UK/US projects within that which would come under the Treaty, but on your major point, all the details of securing operational sovereignty were done through that separate MoU that we agreed before, and those are unaffected. So the Treaty has the potential to add more benefits to a subset of the Joint Strike Fighter project but because it is a multilateral project it is not covered under the basic criteria of the Treaty which is a joint US/UK collaborative project.

Q112 Mr Havard: Is there a list of defence equipment covered by the Treaty and a list that is not, then?

Mr Lincoln: There is a two-stage argument to that. The list within the Treaty states the type of programme and projects which must be covered in order to fall within the scope - so those are things which are for joint operational use, those which are collaborative US/UK programmes, mutually agreed HMG only and those which fall for US-only MGs (?). Those are the four areas which are covered by the scope of the Treaty. Within that you then have to look at what would be the exclusions in terms of the list which we have just discussed, which would then be a subset of that area, in terms of defence material which could be transferred between the two countries.

Q113 Mr Havard: As I understand it, parts of this were covered by something called the Global Projects Licence, as far as JSF is concerned. There is a whole architecture of different things here that relate to one another, of which the Treaty is quite clearly only part. There has certainly been confusion in my mind. I have been trying to sort of list this structure of agreements and what is in them and what is not in them, and it is quite a difficult exercise to do. If I am having difficulty with it then Joe Public is having difficulty with it in understanding where we are on this question about JSF, in relation to all these things. That is why I asked the question, and I asked the question about the Memorandum of Understanding because you talked about a Memorandum of Understanding, Mr Lincoln, earlier on, in relation to the Treaty as well. So there is a Memorandum of Understanding about the F35 and we have a different and separate Memorandum of Understanding about the Treaty, as I understand it. Is that correct?

Baroness Taylor of Bolton: That is correct.

Mr Havard: Then, underneath that, there is a highly classified supplement to the Memorandum of Understanding about the F35 which actual deals with the issues of operational sovereignty. Is that right? Thank you.

Q114 Mr Jones: Can I ask, in terms of a component that goes into JSF programmes, if I say to you a UK component, call it "widget X', goes into the programme under this Treaty, once it is actually part of the JSF programme what happens to the ability of the company in the UK that produces widget X to export that outside of the JSF? Is it confined to what it can actually do or does it get authorisation for what it has to do with it from the US?

Baroness Taylor of Bolton: As I understand it, it is still subject to export controls were it to be exported to another third party.

Q115 Mr Jones: That is not the answer then.

Mr Lincoln: I am sorry - you are talking about a UK widget?

Q116 Mr Jones: It goes into JSF, and if it comes to be part of, obviously, JSF, it is done under this Treaty. Does it then put any restrictions on the UK company being able to export that widget to another third country?

Baroness Taylor of Bolton: That is not American technology that you are talking about; you are talking about a British widget?

Mr Lincoln: The difference here, Mr Jones, is that if it is a British widget it is not something which is coming under this Treaty, because it relates to material which must have been exported from the US originally into the UK.

Mr Jones: No, no, no.

Q117 Chairman: Can you expand on that? So this Treaty applies only to material which is exported from the US into the UK?

Baroness Taylor of Bolton: Technology.

Mr Lincoln: A material technology. The terms there are that the material technology must have come from the US into the UK and we have then done something with that, but if it is just a pure UK widget that has been developed in the UK without US technology then this would not apply to any restrictions on UK technology in that respect.

Q118 Mr Jones: What happens if it becomes part of a bigger widget? Let us say you have widget A and widget B, and widget A is British and widget B is US, and it comes together under this Treaty into a vital piece of JSF. Does that then restrict what the manufacturer in the UK can do with widget A?

Baroness Taylor of Bolton: I do not think it restricts widget A but it might restrict widget B.

Mr Lincoln: It might restrict widget B. We can give you some quite detailed examples ----

Chairman: Before we disappear up extraordinary places, Willie Rennie.

Q119 Willie Rennie: Just returning to the Congressional approval for the $25 million or $100 million on parts - technology and so on - on sales of goods out of the US, what limitation is that going to place on this Treaty? How many goods come under that kind of value? Is it going to prolong the process?

Baroness Taylor of Bolton: This is not a new limit, remember; this is what the present ---

Mr French: This is the current Congressional notification and agreement under the ITAR. A number of these notifications happen each year, but it is a handful. We envisage that most of the technology that will be covered will not get that high. The $25 million is almost for a single item. It is the $100 million which is the broader material. So it is a high threshold which might cover that.

Q120 Mr Havard: Can I be clear on the JSF, that as far as this Treaty is concerned (and if it is not ratified by the US Congress it really will not make a difference) it may be an enabler that might make it easier but it will not be a showstopper if it is not agreed. Is that right?

Baroness Taylor of Bolton: I think that is correct. It may facilitate the speeding up of certain aspects.

Q121 Chairman: Paul Lincoln, you said that it was for technology that was exported from the US to the UK. Does the Treaty cover also technology exported from the UK to the US, or is it a one-way Treaty?

Mr Lincoln: This is not a one-way Treaty but what this does do, in essence, is create for the US system something which becomes very akin to our open general export licensing system. So we are trying to reduce the bureaucracy, particularly on the US side of the Atlantic, in order to facilitate those transfers.

Q122 Mr Jones: Can I come on to intellectual items covered? I understand that those that are currently on the US munitions list, apart from certain highly sensitive technologies - would everything on the list actually be covered by this Treaty? If, in future, the US Government take things off the list for any reason, will the UK Government be consulted beforehand?

Baroness Taylor of Bolton: Basically, the content of the US munitions list is, and will remain, a matter for the US Government. We cannot influence that except in terms of international influence on all treaties about controls. So we do not have any influence on that. I am sure that people in the American defence industry do, from time to time, and the more they co-operate the more they would be wanting to maximise their impact, but in answer to the straightforward question, no, we do not influence that list.

Mr Lincoln: I would supplement that, in that we do have regular discussions with the US on a range of export licensing issues, as to what the substantive lists are, and we do that through international fora. There is also a consultation mechanism under this Treaty under which we will, at least annually, review the operation. That will include what will be on the exclusions list if we thought there was a problem with the operation of it.

Q123 Willie Rennie: There is a list of excluded EU goods from the Treaty. Can you explain what these goods are?

Baroness Taylor of Bolton: Basically, they are dual-use goods.

Mr Lincoln: They fall under one of the annexes of the EU dual-use regulations and they are goods which could be potentially used for civil purposes, not just military purposes, and for which we are not able as a government to enter into negotiations because they form the European competence.

Q124 Willie Rennie: In terms of the relationship between the US and the UK in future, will this Treaty lead to the UK procuring more defence equipment from the US? Do you think that will happen?

Baroness Taylor of Bolton: Not necessarily because we do acquire a great deal. The biggest difference, from my understanding, is that some of the agreements to allow us access to some of that technology will go through more quickly. At the moment, in terms of the export licences that have to be applied for in the US for information to come to Britain (I think there are about 8,500), over 99 per cent of those are actually approved and granted but there is very often a very significant time delay, and it is to cut down on that time delay that I think will be one of the benefits of this Treaty in particular.

Q125 Willie Rennie: The thing that I am most concerned about is that if this Treaty is going to make it easier to have collaboration between researchers in this country and the US, you will get technology in the kind of widget description that Kevan was talking about earlier on, where you effectively get a whole lot of technology that is mixed up together and, therefore, the US will have a stranglehold because they have tougher regulations about how they can export, as we have experienced before, but because they have those tougher rules it will make it more difficult for us to collaborate with other countries outside those two countries.

Baroness Taylor of Bolton: I really do not think that is what is envisaged.

Mr Lincoln: I do not think that is the case. I believe that industry would say that that would not be the case either, in that the way in which they currently deal with US companies and US technology is they do already, as a matter of course, comply with those conditions which they get under licence from the US.

Q126 Willie Rennie: If you are going to get more mixed up technology, the logic is it is going to be more difficult for us to collaborate elsewhere, surely.

Baroness Taylor of Bolton: Not necessarily because, as I say, there is a great deal that happens already; it may just alter the pace of some of that happening, and that has to be to everybody's advantage.

Mr Lincoln: There are also controls in place in most companies, not because those come through intellectual property rights or commercial reasons. Those controls are very tight in terms of making sure that where you do contaminate (I think was the word used) you are quite sure about how that contamination has happened, and where the respective rights lie within that.

Willie Rennie: I just wonder if we are creating a big barrier around the two countries that will restrict activity between us and other countries. That is my concern.

Q127 Mr Jenkin: This is a related question of the potential for the United States to control UK exports. This all rests on Article 9 which is quite clear: "Her Majesty's Government shall, with certain exceptions, that shall be mutually agreed and identified, etc, require supporting documentations including United States Government approval of the proposed retransfer or re-export". That is a new obligation on the United Kingdom in international law, is it not?

Baroness Taylor of Bolton: On any technology that we have and want to export there has got to be some control. We have it over our own and we do not have the right now to transfer technology that we acquire from anywhere else.

Q128 Mr Jenkin: At the moment that is expressed in executive agreements or commercial agreements; it has not actually been expressed in a Treaty before.

Mr Lincoln: There is an existing Treaty, which is called the General Security Agreement of 1958, which also does set out our dealings with the US on security matters and the implementation agreement, which does say that when you have got material which has been provided in confidence from the US you should ask their permission beforehand before you provide that to a third party. So, on a security basis, those are provisions which already stand.

Q129 Mr Jenkin: So those that complain that this is handing over control of United Kingdom defence exports to the United States are missing the point entirely; these obligations already exist, in fact, and we would not have the American technology over here in the first place unless we had already agreed to arrangements that are exactly the same as in this Treaty.

Mr Lincoln: We have some of those arrangements in place already and, as I say, companies say that they comply with all those agreements with the US already.

Q130 Mr Jenkin: Just very broadly, what is the objective in terms of interoperability? How will this improve interoperability between the United States and the United Kingdom Armed Forces? What is the upside? I am sure there is plenty of it.

Baroness Taylor of Bolton: The upside is that if we have got those technologies and things moving more quickly and we have got people working on them then they can work with Americans who are working to the same standards on the same issues, and they can have confidence in each other that they are able and allowed to do that.

Q131 Mr Jenkin: But this is the main reason for doing this, is it not?

Mr Lincoln: If we are offered (?) interoperability then we would expect that, in due course, Armed Forces working together on the frontline would be able to share information, technology and repair equipment together, etc, on that front line, in a more effective and cost-effective manner.

Q132 Mr Holloway: Just on interoperability, we are told that previously there have been problems on the ground caused on this, and the Treaty is going to solve that. What sort of problems have there been previously?

Mr French: There are some occasions when the ability to address problems on the ground has been delayed as the information that needs to be transferred at the operational level has been subject to licence, and thus the time of being able to do that, and there is some reticence in some areas to do that as a matter of course. We feel that this Treaty should take away that issue.

Q133 Mr Holloway: In what sort of areas? ECM, or more basic stuff?

Baroness Taylor of Bolton: I think it could be any - widget B, as much as anything else.

Q134 Mr Holloway: Just in terms of the last few years in Iraq and Afghanistan, what sorts of equipment has this involved?

Baroness Taylor of Bolton: I cannot be specific because I do not know, but the examples that were given me were repairs on equipment that had technology that was not ours; we did not have a licence for it and there were people there who could have repaired it but could not repair it with British people present because the British people were not empowered to work on that because they were not covered by the licence. If the basic licence covered everybody then ----

Mr Holloway: That is understood, I was just wondering, so we can visualise the sort of equipment we are talking about.

Q135 Mr Jenkin: Apache helicopters?

Baroness Taylor of Bolton: Quite possibly.

Chairman: In the middle of the earlier session I made a point, which I shall make again, that it is the process of a Select Committee that in cross-questioning people about anything we tend to probe at what might be perceived as the areas where we do not know enough or where things might be going wrong, or weaknesses. We are not, thereby, intending to suggest that this entire Treaty is a bad thing, because I do not think, for a moment, we will come to any such conclusion. The fact that we are questioning these things does not mean that we think that the arrangements that have been entered into are bad ones. I just needed to set that tone.

Q136 Willie Rennie: The US spends a greater percentage of its GDP on research compared with the UK. Is there not a danger, if these barriers come down, that the US will effectively suck in what are the best researchers over to that side of the Atlantic and we will end up having sometimes a fragile research community in the UK damaged by this?

Baroness Taylor of Bolton: I think everybody is very conscious of the need for a good research base here. However, I do not think that by having this Treaty we will alter US perceptions about what they should be doing. They have spent a lot of money, they continue to spend a lot of money and I would suspect they will spend a lot of money regardless of whether this Treaty goes ahead.

Q137 Willie Rennie: That is my worry, in some ways; effectively, it will act as a kind of suction on the UK research base.

Baroness Taylor of Bolton: I see no reason why it should make any difference. I think they are intent on spending it and will spend.

Mr Lincoln: I do not see that we see that, necessarily, in the same light. We would think there is an opportunity here, also, for US technology, research and development to do further collaboration within the UK. If you consider that the US are the largest foreign investor in the UK in any case, and in defence as well, and they exploit our technology on both sides of the Atlantic as well, we would expect that there would be some expertise and knowledge which comes here too.

Q138 Willie Rennie: Do you think universities and the rest of the research sector in the UK know about this Treaty and are ready to respond to the implications?

Baroness Taylor of Bolton: As was mentioned earlier, there are parts of universities which are already covered by list X, so in a sense they are part of "the system", but they will be aware both of the discussions and of the potential.

Mr Lincoln: That said, of course, we will be looking at how we do communicate more widely once we have come to a final agreement with the US on the implementing arrangements as to making sure that those people who may or may not benefit from the terms of the Treaty will be aware. I would expect industry prime contractors who use those universities or subcontractors, etc, to be explaining to them the benefits also throughout the supply chain.

Q139 Chairman: So, instead of a list X company, there would be list X elements within the university. Is that correct?

Baroness Taylor of Bolton: I think that is the position at the present time - that universities are not given list X status; it is certain facilities within certain universities that get that status.

Mr French: That is true for companies. There are not list X companies, there are list X facilities of companies.

Chairman: I am with you.

Q140 Mr Havard: Can I just say that one of the answers given to us, when we asked this question about the potential for research and development technology to be skewed towards the US rather than not vested in the UK, was that, in fact, the Treaty will help to avoid that, because at the moment the temptation is that people have to put their money into the US to do the research (one answer), and the other answer is that the Defence Industrial Strategy and all the plans to develop home-grown, as it were, capacity through that is another safeguard. You are also going to have a technology plan, as I understand it. Is your answer to all of this that all these things will actually avoid this problem? Is that the hope? Is that the test that I have to put on this Treaty, as to whether it will actually help to do that or whether it will actually not help?

Baroness Taylor of Bolton: I think the tests that you put on this Treaty are long-term: whether we do improve interoperability and whether we do have a system where, when we have companies co-operating with the United States and asking for an export licence at present, which do take time, that system is speeded up, it would be to the advantage of British companies. In terms of research and development, I do not think that there is one answer to how we make sure that we maximise our effort on that. Part of it is resources, part of it is how those resources are organised, and part of it is getting co-operation. There is not one answer but there has to be determination and a commitment to make the most of our opportunities to develop the talent that is in this country.

Q141 Mr Havard: Can I ask a cheeky question, which is: am I going to see the revision, then, of the next stage of the Defence Industrial Strategy and the Technology Plan together published on 12 December, before we go off for Christmas?

Baroness Taylor of Bolton: I think the date that was previously suggested was 13th, and I have just written to you, Mr Chairman, to say that as I have come into this position I want to review the whole situation, so we will not be publishing anything on 13th. I think we need to make sure that anything we publish on the Defence Industrial Strategy dovetails in with decisions we are taking on the planning round. I think it would be foolish for me, having just come into this, to make statements on 13th in advance of other work that is going on.

Q142 Chairman: Minister, you are aware of how highly regarded your predecessor was.

Baroness Taylor of Bolton: I am.

Q143 Chairman: One of his great attributes was not just his knowledge of industry but his ability to force things through the Ministry of Defence at a pace which was understandable to industry but quite astonishing to the Ministry of Defence. I look forward to receiving your letter but I am afraid I will receive it with sadness.

Baroness Taylor of Bolton: I think that it would be wrong to get consideration of the second phase of the Defence Industrial Strategy out of kilter with the planning round. Certainly, from what I have seen, to simply reiterate what was said the first time round would not take us very much further forward, and to give indications to industry on a more specific basis outside the planning round might not be a wise thing to do. So I want to consider that further, not because I do not want things to happen, and not because I do not admire what my predecessor did in many respects. Some of the urgent, operational requirements that he managed to get moving very quickly, as you say, were probably a great shock to the MoD, but so far as DIS 2 is concerned I think it needs further consideration.

Mr Jones: Can I just reiterate what the Chairman said, Minister? I just hope that you have not actually started wearing the grass skirt already and gone native within the first few weeks, because one thing I think industry is looking towards, which your predecessor did do, is not just to bring clarity to the decision-making process but, actually, give clear deadlines that industry can work to. I think that is important. So if it is going to be delayed, I hope that we can certainly have a date very quickly in the New Year and that you do not get sidetracked (which I always thought would happen, frankly, if your predecessor left) and that civil servants - I know they would be very brave to take the honourable Baroness on - do not make attempts to dilute the pace at which change has been happening over the last few years.

Q144 Mr Havard: Can I ask a sub-question to what I asked earlier? Is the Technology Plan coming with it then? Are they going to come together?

Baroness Taylor of Bolton: I do not want anything to get out of kilter; I want to be making sure that we have a comprehensive strategy overall which does not leave anything hanging and being added.

Q145 Mr Havard: That is a yes, then, is it?

Baroness Taylor of Bolton: I am not committing myself to any publications on any dates at this stage. I think it is two weeks today that I came into this job and, whilst I do appreciate deadlines and I do not like delaying things unnecessarily, I think it is important to get these decisions right. As I said, I do very much admire what my predecessor did; I said that in the House two weeks ago during my first debate, and I meant it. He has a lot of respect and, as you said, Mr Chairman, he probably was a bit of shock to MoD and got things moving there. I think that the impact of that will remain. I hope I have not yet got the grass skirt (perhaps I will get it when Mr Jones gets his) but I think we have got to have an absolutely comprehensive look at what we are doing. We have got an important planning round coming up and I think we have got to make sure that industry does not think we are doing things quickly just for the sake of it and then we make changes later. I want us to have a consistent approach and I think that is the way in which industry will have confidence in what we are telling them.

Q146 Chairman: All of this, of course, is completely irrelevant to the UK/US Treaty, but you tempted us and we fell. Let us get back to enforcement of the Treaty. On the issue of enforcement, the UK and the US Governments will co-operate on enforcement if there are breaches of this Treaty. How will that work in practice? Will US law enforcement officers have any jurisdiction in the UK? Will UK law enforcement officers have any jurisdiction in the US?

Mr Lincoln: There are a whole series of existing mechanisms which are in place between the UK and the US through existing treaties, all of which potentially will apply to enforcement matters on the Treaty itself. On the specific example you said - will we have US police, or whoever, coming over to the UK - only in such situations as we would currently envisage that happening now.

Q147 Chairman: So no change?

Mr Lincoln: So no change to the existing mechanisms in that respect. The primary mechanism for enforcement of the Treaty is using the MoD's industrial security service, which is already adept at compliance with companies for security matters. That is a system which has been in place for some time.

Chairman: Thank you. Is this Treaty going to be ratified? Kevan Jones.

Q148 Mr Jones: Obviously, we have attempted before to try and get ITAR. A lot of work was expended on it and, obviously, it came up against a problem in Congress. What steps, Minister, are you going to be taking to ensure this Treaty is ratified? For example, are you, yourself, going to visit the United States to lobby for it? Although I understand (there is a timetable in the memorandum that you sent us) that there is a brief window of opportunity before December, it is unlikely, frankly, with the way the Congress works. So what is the process of trying to put maximum lobbying on, for example, the Senate to ratify this? Also, if it does not get ratified, what is option B?

Baroness Taylor of Bolton: You are quite right to say that this has been tried before but it has not been tried in this way before, and I think this new approach is what is giving some optimism that there might be a realistic opportunity to hear. As we mentioned earlier, we did have officials from the United States here last week. I did meet with the main official there and we want through quite a few of these issues that were outstanding that we were talking about earlier, in terms of the actual list of exclusions and things of that kind. So we have done that so far. My officials are going next week to follow up on those discussions in detail, both on the issue of nationality and making sure that our system of classification and vetting is fully understood, so that people can have more confidence in that. I, myself, am trying to get there in, possibly, a fortnight's time. You will appreciate that with Parliamentary responsibilities, especially in the Lords, and some of the other commitments that I have it is not easy, but we think we may have identified two dates. I have written to some of the main players in the Senate to express our view of the benefits that could accrue and, hopefully, that will be a part of highlighting the importance that we attach to this to the people who will be making that final decision. We do not yet know when Congress will rise for Christmas (the dates are not fixed quite as ours are); we know that they are coming back on 15 January, and we are hopeful that they will be responsive to the position that we are setting out. It is in the interests of the United States, in terms of their relationships with us; that they have an interest in interoperability as well, and so we are hoping that we can explain that fully.

Q149 Mr Jones: Can I ask you all to consider (because Mr Rennie and I went last year to talk to Senators about issues around technology transfer) doing two things: one, use our report when it comes out as a lobbying document from our Parliament's position, in terms of the Hill? Can I also suggest that, possibly, the Ministry look at the British and American Parliamentary Association and individual Members of Parliament who have got contacts on the Hill to actually try, if they are visiting, and reinforce the message, but also possibly just write to their contacts on the Hill about how important this Treaty is?

Baroness Taylor of Bolton: I think they are both suggestions that we would not be averse to. Obviously, we do want to ratify as quickly as possible ourselves, and that will also be good leverage, and that is where we have to be careful about the timings in terms of your report and other things which are happening. We will try to co-operate to make sure that we make the timeframe as tight as possible, but I think that using colleagues to try to emphasise the importance of this Treaty is no bad idea. I am not averse to that. Lord Drayson, some time ago, did write to some people within the House about this, but I think it is certainly something we will follow up. It is getting to a critical stage, so it might be appropriate to do something in the near future.

Q150 Mr Jones: If you could actually ask, perhaps, individual Members of Parliament or Members of the Upper House who have got contacts to write on this too - because we all have friendships with individual Senators - it might also help the process.

Baroness Taylor of Bolton: I think it might well.

Q151 Chairman: Kevan Jones asked about a plan B.

Baroness Taylor of Bolton: Plan B. We cannot make a plan B when we are hoping that plan A will work. It is not as if we cannot get the technology, it is the delay; it is not that we cannot get interoperability, it is just far more complex and causes delays. So, at the moment, we are absolutely concentrating on trying to deal with the two outstanding issues, which we do not think are insurmountable. We think that there are good reasons for thinking that we can convince those who are making decisions in the United States that the protections that we have on security and our vetting classification are very strong and very significant, and we think that by discussing the excluded list we can possibly get agreement on that. We are still hopeful.

Q152 Chairman: So when you say you cannot make a plan B when you are working on plan A, there is no plan B.

Baroness Taylor of Bolton: There is no plan B. We are very intent on making sure that this works. As colleagues have pointed out, this has been tried in the past and there have been difficulties, but this is a new approach to the problem, by getting this kind of agreement for transfer in this way. Hopefully, this new approach, with different mechanisms around security protection of material, will give confidence that it will work. So our efforts, I think, should be concentrated on explaining why we are adopting a new approach and how it is secure, because it is that bottom line - security - that probably has to be underlined as being critical to this working.

Q153 Chairman: Minister, I think that concludes the questions that we want to ask about the UK/US Treaty. There are one or two questions which we would like to ask about the Defence Exports Services Organisation. Therefore, we are most grateful to Tony Pawson and Gloria Craig for coming here today. The decision to abolish DESO was obviously taken above all of our pay grades, yet it is one which has caused deep concern amongst industry. I, myself, having been in your position, or something like it, in the past, found DESO to be an exceptionally useful and valuable organisation for the Ministry of Defence, for the Government and for the country. Although you did not take this decision, you are now in a position where you need to be able to justify it. So how would you justify it?

Baroness Taylor of Bolton: I think I would justify it by saying that UK Trade and Investment does take the lead on exports across the whole picture, and you could argue that the old system was actually an anomaly with defence exports out of that. If it was simply transferring the DESO role to new civil servants who had no experience of this in the past and were going to reinvent the wheel of how to do defence exports, I think I would be more concerned, but that is not what we are talking about; we are actually talking about a lot of people who have been working on defence exports for a very long time within MoD going to UKTI, and I think they will take with them their expertise and they will work in their situation with people who are working on exports across the board and will, therefore, gain their expertise as well.

Q154 Chairman: However, what they will not take with them is constant contact with people from the military in uniform, which is one of the things that industry earlier on told us was one of their key concerns. Does that matter?

Baroness Taylor of Bolton: It matters that they have contact and it matters that we have arrangements for people in the military to play their part in terms of talking about defence contracts that we have or those with other countries, where they can talk about how equipment works, or what equipment we need. The suggestion is that when people are transferred there should be not just a bock transfer and that is the end of it, but that there should be rotations of individuals so that some of that expertise is, in fact, maintained. I think that that would be helpful to those who are working in the new section, but it will also mean that the links are kept with MoD, and there will be new working arrangements to make sure that there is proper contact between the departments. It is envisaged, actually, that there will be service level agreements between the two departments setting out what each department will do for the other. I do not know, Tony, if you want to emphasise anything else within that.

Mr Pawson: Clearly, DESO has got a great track record and I think it is a great place to work and will continue to be a good place to work, because what you are doing is contributing to both security and prosperity. That, in a sense, is a great motivator. For the new organisation to work, as the Minister has said, we do need the expertise transferred across. The plan is that the military personnel in the core of DESO will transfer across on the same sort of basis as now. There will be a mixed economy in relation to the civil servants - some will be on permanent transfer, some will be on loan - to ensure a sort of refreshment of that. UKTI is a large organisation, it does have a large number of people compared to DESO overseas, which will be able to leverage for the future. Clearly, the defence branding is very important indeed. The plan, as you probably know, Chairman, is that there will be a separate element of UKTI that will deal with defence and security issues; that those links back to MoD, as the Minister has said, are planned to be maintained and, therefore, with the support of the MoD, support (of course, proportionate to what is under consideration) should, I understand, be fully forthcoming and therefore will go forward on that basis.

Q155 Chairman: Will the MoD be a sponsoring department with the FCO and the Department of Business, Enterprise and Regulatory Reform?

Baroness Taylor of Bolton: No. There was discussion about that but that was thought to make the situation more complex, and that is why there will be a service level agreement between the two departments about what each should be doing for the other. I understand (it was before my time) that the idea of it being a sponsoring department was considered but it was thought that that would make the situation even more complex.

Mr Holloway: Forgive me, I do not understand. What was the reasoning behind this?

Chairman: It was an anomaly.

Q156 Mr Holloway: What was the reasoning behind this change -beyond that it was an anomaly?

Baroness Taylor of Bolton: It was thought that by bringing all export potential together and expertise together that could maximise the effort. As I say, there was a great deal of experience within those two departments about trade and exports of this kind, and it was felt that the defence exports side of MoD could benefit from having that expertise with them and working with them on an ongoing basis.

Mr Holloway: Does Mr Pawson think that was a good idea?

Chairman: I do not think that is a fair question to ask.

Q157 Mr Jenkin: Howard Wheeldon published an article in Jane's Defence Weekly, in which he pointed out the success of DESO, to which you referred; that we take 20 per cent of the global defence exports market and, obviously, clearly thinks that this is a grave error that will undermine the success of these efforts. What measures is the Government putting in place to assess the success or failure of this change? If it turns out to be detrimental to the effectiveness of UK defence exports, would you at least leave the door open to possibly reversing the decision in order to restore what has been an extremely effective working relationship?

Baroness Taylor of Bolton: I do not think that anybody would welcome that sort of ping-pong and decisions being made to move back quickly.

Q158 Mr Jenkin: The criteria for success?

Baroness Taylor of Bolton: In terms of the success, I think we will see defence exports in the future at a very high level. I think that the comments you made about the success of the past are very valid and one that those involved should be very pleased with, but I think the Committee should understand that the Government would not want us to take a step backwards in terms of our achievements there. Government Ministers would not make that decision without a genuine belief that this was one way of improving the situation in the future. That was part of the reasoning behind this decision: they thought that it was the right thing to do, and the Prime Minister made that decision. We are now working with everybody involved, working with the two sponsoring departments, working and having very careful discussions with industry to make sure that they feel involved and know what support MoD will give to defence exports, and we are hopeful that when we are able to finalise some of these arrangements (this is very early days) we will in fact have the confidence of industry that we will be offering the kind of support that will be helpful to them and maintain the success in this area.

Q159 Mr Jenkin: But this does contradict what was in the Defence Industrial Strategy, and it, presumably, is one of the reasons why you wish to delay it.

Baroness Taylor of Bolton: No, not at all.

Q160 Mr Jenkin: I thought you might say that.

Baroness Taylor of Bolton: You were right, I did say it! The reason I want a delay is because I want to dovetail everything together and hold discussions on the new planning round. Having been here two weeks I am not prepared to make snap decisions. So I want to look at what we are doing on the planning round, hence the decision on the Industrial Strategy. We are confident that we can get agreements between the departments. We are confident that we can get the service level agreements about the kind of support that we will provide. We have been working them up in some detail between the departments and my colleague, Lord Jones, and I have been looking at these issues in some detail. We will be moving to making a decision about those before long.

Q161 Mr Jones: Is it not a fact, Minister, that honestly the forces of conservative - both with a big "C" and a small "c" - are whipping this up into a situation whereby they think if they keep squawking hard enough the decision will be changed, but is it not a fact that this actually gives industry and MoD some great opportunities which should be grasped rather than just this silly argument of keep going on? Is it not also a fact of life, whether they like it or not, that DESO and the MoD brought a little bit of this on themselves, in the sense that what this also gives an opportunity to do is a little more transparency to the position of arms exports, which I would personally support? As someone who supports the arms industry in this country as being very important to the UK economy, it will actually give public confidence too, which was not there before.

Baroness Taylor of Bolton: I think you are absolutely right to say that this decision will not be changed. The decision has been made and it has been made because it was thought right to put defence exports in with all other exports within the department ----

Mr Jenkin: Political correctness.

Q162 Mr Jones: It is not at all.

Baroness Taylor of Bolton: ---- that has the expertise. I do not think we should underestimate that the department has throughout the world on issues of this kind. I think, therefore, that with the MoD supporting the work of that department, where appropriate and as specified in the service level agreements that we are going to establish, that will put the industries in a very strong position.

Q163 Chairman: One final question on this: Minister, you say the department has the expertise. UKTI does not usually do government-to-government contracts, but defence agreements are usually government-to-government contracts. How are UKTI going to adapt themselves to that new role?

Baroness Taylor of Bolton: I hesitate to disagree with you but it is not the case that the majority of contracts now are government-to-government. We do have government-to-government projects, and it will be possible for us to maintain the position of having a Memorandum of Understanding government-to-government, but the day-to-day responsibility will have to be worked out in detail. You can have government-to-government relationships and agreements in the new system and there will be occasions when that happens, but they are not the usual projects, and government-to-government projects these days are considered to be exceptional.

Mr Jenkin: Is that in numbers of projects ----

Chairman: I think we have finished now.

Q164 Mr Jenkin: Is that in numbers of projects or is it in value terms?

Baroness Taylor of Bolton: Certainly the number of projects is very small.

Q165 Chairman: Minister, thank you very much for coming before this Committee so soon into your regime, and for, if I may delicately say so, answering questions so thoroughly competently.

Baroness Taylor of Bolton: Thank you.

Q166 Chairman: We are grateful to all of your team. It is a very important issue. Can we remain in contact, please, about the timing of further discussions with this Committee about implementation arrangements and about the timetable for ratification by the UK?

Baroness Taylor of Bolton: Yes. I think that we will have to try to keep things very tight on that, and we will keep you as informed as we can.

Chairman: To you and your team, thank you very much indeed.