Written evidence from the Royal Aeronautical
Society
EXECUTIVE SUMMARY
Aerospace remains one of the few world class,
export orientated manufacturing sectors left in the UK. There
is considerable and growing competition from overseas aerospace
industries, usually well supported by their national governments.
There is a long and successful legacy of UK government-industry
partnership in supporting most aspects of the industry either
through funding for technology acquisition and product development
as well as backing for exports. These mechanisms are all under
pressure from the prospect of reduced public expenditure. Fortunately,
barriers to entry in aerospace are high, which provides British
companies some respite. But given the level of government support
elsewhere, this will not last, and capability lost to the UK will
not easily be recovered, if it at all.
INTRODUCTION
1. The Royal Aeronautical Society (RAeS)
is the world's only professional body dedicated to the entire
aerospace community. Established in 1866, the Society has 17,000
members in over 100 countries (including 3,500 classified as young
members), and is a leader and provider of foresight within the
aerospace community. The work of the Society is supported by a
number of specialist groups.
GOVERNMENT SUPPORT
FOR THE
UK AEROSPACE INDUSTRY
2. The present technological and commercial
standing of the UK aerospace industry has been built on a wide
and deep relationship between industry and government. This has
many dimensions both direct and indirect, nationally and regionally.
3. Through the Ministry of Defence, the
government is a major customer for UK industry, which has helped
to sustain demand and consequently capacity throughout the industrial
supply chain and across most sectors, including space. The MoD
is also an important source of technology acquisition through
project-related R&D as well as its dedicated programme of
fundamental research and technology demonstration. An important
current example of the latter is the MoD-industry work on unmanned
aerospace systems.
4. Government investment in civil aerospace
through the Repayable Launch Investment (RPLI) scheme, where public
money is advanced to cover a proportion of launch costs usually
to be repaid from a levy on sales and subsequent royalties throughout
the life of the aircraft or engine. RPLI dates from 1960 and in
its present format since 1973. RPLI has helped to maintain a world
class capability in large aircraft wing design and manufacturing
and large commercial aero-engines. Investment in Airbus and Rolls-Royce
projects has indirectly afforded support for the wider UK-based
supply chain.
5. Support for technology acquisition, largely
for civil aerospace, but often with applications for defence purposes.
Most of the current investment is channelled through the Technology
Strategy Board and has had a considerable impact on several key
aspects of aerospace development, notably in supporting research
into composite materials. The UK space sector receives support
through funding from the British National Space Agency (formerly
the British National Space Centre), largely in the form of subscriptions
to the European Space Agency. Following the report of the Space
Innovation and Growth Team, additional funding has been provided
for national space research.
6. The UK aerospace industry has benefited
from government programmes designed to improve manufacturing processes
and supply chain relationships. Aerospace also depends heavily
on public investment in Higher Education, academic research and
the promotion of STEM subjects throughout the British educational
system.
7. The aerospace industry has received support,
primarily for infrastructure development and some research activity
through the Regional Development Agencies and their equivalents
in the Devolved governments. This has been especially useful in
seeding new activities such as the Unmanned Aerial Systems facilities
at Aberporth in Wales, as well as helping smaller aerospace companies.
Significantly, infrastructure improvements in relation to the
Airbus A380 have not contravened the WTO subsidy code.
8. Government support for UK aerospace exports
has been facilitated by the Defence Export Sales Organisation
(now subsumed into BIS) and the ECGD. The former has had a direct
impact on both the UK's ability to sell defence equipment abroad
and to maximise the value of offsets on imports to UK industry.
The latter has helped to sustain a range of UK civil aerospace
products, and has played an especially important role during the
recent down turn in civil aviation in financing export sales.
9. The cumulative effect of this support
has helped to sustain a globally competitive aerospace sector
with an enviable breadth and depth. In particular, the UK has
benefitted considerably from the positive environment created
by the totality of government support which has encouraged inward
investment in the UK from European and US defence and aerospace
companies, as well as ensuring continued investment in the UK
by UK-owned aerospace transnational enterprises.
KEY ISSUES
FOR THE
FUTURE
10. Reduced expenditure on defence procurement
will necessarily have an impact on demand for UK aerospace products.
In the light of current economic circumstances, if regrettable,
cuts in production are understandable. However, the government
should be aware of the potential damage this will do to a wide
range of companies throughout the UK supply chain. More damaging
for long term sustainability would be any additional cut in resources
devoted to technology acquisition. The level of MoD spending in
this field has been falling in real and in absolute terms for
many years. The temptation would be to cut this aspect of defence
spending to save reductions in operational areas and to protect
current equipment programmes. This would be short sighted and
risk loss of bedrock technological capability, and the source
of future support for UK operational sovereignty as well as future
wealth creation. A similar concern applies to the future level
of support afforded to technology acquisition through the TSB.
11. The Defence Industrial Strategy (DIS)
was also particularly important to the aerospace industry. It
provided a guide to industrial investment and was an explicit
recognition of the importance of maintaining an on shore industrial
capability in support of UK armed forces. The DIS recognised the
need to maintain on shore capabilities in high technology areas.
Many of these have important civilian applications, as well as
underpinning future developments in vital areas such as unmanned
vehicles and complex weapons. These include the UK's world-class
rotary wing capability, communication satellites and other space
based equipment, propulsion systems and a wide range of high technology
equipment and other imbedded technology.
12. The DIS also recognised that as the
number of new military projects and equipment procurements decreases,
industry needed to maintain its financial base. This has been
achieved by industry changing from equipment suppliers to service
providers and taking more risk for support of existing platforms.
This matches the MoD's desire to reduce the number of personnel
involved in non-front line activities and stop "man-marking"
industry equivalents.
13. Although the WTO ruling did not explicitly
declare RPLI illegal under its subsidy code, and the WTO ruling
is subject to appeal, the long term future of RPLI is uncertain.
Technically, the ruling does not apply to RPLI granted to aero-engines,
or other aircraft projects such as the C-Series of Bombardier
airliners. However, there may therefore be a need to consider
adjustments to the scheme or to seek alternatives to the current
procedure. To date, the UK government has received a substantial
return on its investment in civil aerospace, as well as ensuring
the continuation of a very-high value industry in the UK, the
like of which several other countries are seeking to emulate.
The French government is already exploring alternatives to its
form of RPLI, which was already open to a wider range of aerospace
companies than the more stringent British mechanism. Without continuing
support from the UK government, much of the next generation of
Airbus and Rolls-Royce development and manufacturing could move
offshore, and foreign companies will have less incentive to invest
in the UK.
LACK OF
LEVEL PLAYING
FIELD FOR
SPACE EXPORTS
14. Britain is an important supplier of
space systems to the world market. The size of the UK space sector
is about £6 billion per annum and it is heavily export-oriented
and growing at about 10% per annum. France and Germany, among
others, compete with the UK for this market and have arrangements
with many countries to which they export space systems for the
exports to be VAT exempt, typically on a reciprocal basis. The
UK is slower to set these arrangements in place, and UK industry
loses out on export opportunities as a result. Some of our space
agreements with other countries, such as the Memorandum of Understanding
(MoU) signed with Russia in July, lack any reference to tax. Such
MoUs are a useful first step, but need to be replaced as soon
as possible with more substantive agreements.
15. Recently, a number of major commercial
contracts have been secured by foreign companies in high-value
export markets thanks to the availability of overseas government-backed
finance. France and the USA have been particularly active and
their companies have won major contracts as a consequence. The
UK lags in this area, and this has become more of an issue now
that there is a significant difference between central bank rates
and commercial rates following the recent financial crisis.
FINAL WORDS
16. Aerospace remains one of the few world
class, export orientated manufacturing sectors left in this country.
Given the known returns both directly and indirectly to the UK
economy, this is not support for an ailing industry. Fortunately,
barriers to entry are high, which provides British companies some
respite. But given the level of government support elsewhere,
this will not last, and capability lost to the UK will not easily
be recovered, it at all.
7 September 2010
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