Rebalancing the Economy: Trade and Investment

Written evidence from A|D|S

A|D|S is the trade organisation advancing the UK Aerospace, Defence, Security and Space industries. Farnborough International Limited (FIL), which runs the Farnborough International Airshow, is a wholly-owned subsidiary. A|D|S has offices in England, Scotland, Northern Ireland, France, the Middle East and India.  A|D|S was formed from the merger of the Association of Police and Public Security Suppliers (APPSS), the Defence Manufacturers Association (DMA) and the Society of British Aerospace Companies (SBAC) in October 2009. A|D|S also encompasses the British Aviation Group (BAG). Together with its regional partners, A|D|S represents over 2,600 companies. A|D|S also supports SC21 , Sustainable Aviation , Defence Industries Council , RISC , Flying Matters , Defence Matters and hosts the Aeros pace & Defence Knowledge Transfer Network .

A|D|S is a member of ASD, the trade association that represents the European Aeronautics, Space, Defence and Security industries. It has strong links with relevant Trade Associations in many countries including the USA and has signed MOUs with many other national Trade Associations.

A|D|S welcomes this inquiry and the opportunity to make its input into the Business, Innovation and Skills Select Committee’s call for evidence.

1. The role of BIS in providing support for exports and investment

1.1 The UK is a world leader in the supply of Aerospace, Defence, Security and Space capabilities and services. The Aerospace sector in particular is one of the UK’s largest exporters, delivering exports worth over £15bn annually, and has achieved a consistent balance of payments surplus for more than 10 years. The UK Defence sector is the largest exporter of Defence products to the United States and the largest global exporter amongst European Union Member States. Defence export revenue averages £5bn annually, with the 2009/10 total at £7.2bn. The UK security industry also offers the country the opportunity to generate significant new levels of economic growth. Figures issued in March 2010 by the UKTI Defence & Security Organisation (DSO) stated that the UK Security industry’s exports were valued at £1.36bn, an increase of more than 14 per cent on previous years. Finally, the UK Space industry recorded a total turnover of over £7.5 bn. in 2008/09. This represented a real growth of 8 per cent between 2007/08 and 2008/09 and the global market is anticipated to continue to grow at 5 per cent on average in the next decade.

1.2 The Department for Business, Innovation and Skills (BIS) plays a crucial role in supporting exports, particularly through UK Trade and Investment (UKTI) which A|D|S commends for the invaluable support it provides to industry. The support for exports that has been shown in recent months by the BIS Ministerial team on overseas trips to China and India for example is to be warmly welcomed. There is a concern however that a reduction in the budget of the Department could pose risks to the impact it has in this respect. A|D|S would ask that UK Government considers where it can best make the necessary savings without losing the resources affiliated with the UK’s export agenda that can help rebalance and grow the UK economy. A|D|S furthermore welcomes the appointment of Lord Green as Trade Minister and the review being led by Lord Brittan is an encouraging sign.

1.3 A|D|S welcomes the announcement of the Growth Review for Advanced Manufacturing as the first stream of the Growth Review. A|D|S shares the goals that the Government has outlined in the Advanced Manufacturing review to grow manufacturing in the UK; make the UK Europe’s leading exporter of high value goods and related services and increase the proportion of the workforce seeking, and capable of, a career in manufacturing. A|D|S understand that there will be a focus on specific sectors and ask Government to consider it represents as candidates for this.

1.4 All responsible Defence and Security companies rightly face export controls and regulations. Because these are so variable in their policies, systems and procedures, the bureaucratic burden within (especially multinational) companies is often increased in attempting to conform to them. The UK Government should work at bilateral and regional levels to establish a greater degree of harmony between national control systems. A|D|S believes that the proposed international Arms Trade Treaty (ATT) is a potential initiative that could assist greatly in addressing this if it reaches full implementation.

1.5 A|D|S would welcome the establishment of a cross-departmental Government authority with the remit to drive forward the policy measures that are necessary to realise the economic benefits that the UK Security Industry can bring, at home and internationally. An authority of this nature should include representation from BIS and all the other relevant Government departments that are involved in National Security and Resilience. The global Security market is growing and is estimated to be worth around $140-180bn annually. Industry welcomes Rt Hon Baroness Neville-Jones' wish to see "a major uplift in the performance of UK Security exports" (currently estimated to be worth around 4% globally) with the Government playing the sort of role it has assumed in the past in relation to Defence exports.

2. How the Government measures success in its support for trade and investment

2.1 A|D|S believes it is important to measure both qualitatively and quantitatively the level of support for trade and investment for UK industry. The Trade Promotion Organisation (TPO) Network has independently rated UKTI as the Best Trade Promotion Organization from a Developed Country, but A|D|S is not aware of measurements in this area.

2.2 A|D|S proposes one future measure of success, particularly as part of the Government’s drive to aid SMEs (Small and Medium sized Enterprises) would be an improved rate of engagement for SMEs and especially the rate of SMEs which become first time exporters.

3. The Government Trade White Paper

3.1 A|D|S has submitted evidence to the Government’s Trade White Paper. A|D|S looks forward to the Department’s Trade White Paper, and welcomes the Government’s recognition that exports can help rebalance the UK economy. A|D|S closely associates itself with the Government’s commitment to free and fair markets which it believes will be in the interests of its members which have demonstrated that they are very competitive in global markets. A|D|S also looks forward to working with Government on the US-UK Defence Trade Cooperation Treaty and the Anglo-French Declaration on Defence and Security Cooperation to improve bilateral trade with the United States and France respectively.

3.1.1 Among the key subjects covered in the key recommendations were skills. Making long-term plans in the skills area is essential for the Aerospace, Defence, Security and Space sectors. Many projects run over years rather than months. Uncertainty over whether companies can recruit and retain the right staff to complete these projects is a major concern. An inability to find highly skilled workers could hamper performance on existing programmes, reduce participation in future bids and proposals and companies may reconsider their investment in the UK and take their operations to other countries.

3.1.2 The need for more affordable advice and greater support to attend overseas trade missions for SMEs was also highlighted in the A|D|S submission. Sustainment of the excellent level of support already seen from the Prime Minister and other senior ministers with their overseas counterparts to boost trade would also be welcome. The potential return on this investment through increased economic growth is considerable.

3.1.3 The submission pressed the need for the UK Government to increase pressure on other governments around the world to root out extortion and the tacit or overt encouragement of corrupt practices by officials and government-owned companies. UK effort could be targeted at helping some governments implement OECD and UN conventions on bribery and corruption.

3.1.4 Finally the submission emphasised the need for strengthening the political and economic relationships with emerging markets, such as the BRIC countries – Brazil, Russia, India and China. However there are also further markets alongside those such as Korea, Taiwan, Mexico and Australia which are also likely to be economically significant in the future.

4. The role of UKTI with regard to identifying opportunities in established markets, emerging markets and key sectors

4.1 In UKTI, UK business has a dedicated trade and investment body, which is the responsibility of both the Department for Business, Innovation and Skills (BIS) and the Foreign and Commonwealth Office (FCO). With UKTI and UKTI DSO joined together, A|D|S believes that there is an appropriately joined up attempt to pursue trade and investment objectives in the defence and security markets. The concern A|D|S has is that in attempting to reduce both Departments’ budgets as set out in the Comprehensive Spending Review, crucial resources may be at risk with implications for the Government’s commercial objectives.

4.2 A|D|S supports the principle of charging for UKTI export services. But the cost of export support services have risen to a level that companies, especially SMEs have difficulty affording. At a time when the Government has made it one of its priorities to support SMEs, the level of charges should be reconsidered.

4.3 A|D|S would welcome greater financial support for SMEs to go to markets on Trade Missions or to exhibit at overseas Trade Exhibitions. This is a potentially beneficial investment as the sums involved are small compared to the potential benefits in terms of revenue and jobs in the UK.

4.4 With UKTI, A|D|S has helped put together trade missions on behalf of UK AeroSpace companies interested in opportunities in China, Brazil, India, Mexico and Russia. A|D|S believes that Government can help provide more information about the business opportunities in emerging markets, both through UKTI and the Embassies/High Commissions in such countries. It is also important that UK representatives on the ground are able to raise awareness of the products and services that UK companies can offer, particularly if the customer has traditionally turned to another country for the same products and services. To this end, A|D|S has put together "Ambassadors’ Packs" to help inform the diplomatic community about the strengths of the sectors it represents.

4.5 In the Defence and Security arena UKTI DSO has accurate sight of "up and coming" markets and the potential opportunities that they might present for UK Industry. We welcome the important work of the UKTI DSO and look forward to continuing our close work with them.

5. The effectiveness of the Exports Credit Guarantee Department and the flow of trade credit

5.1 ECGD is currently used by a limited number of A|D|S Members; this is primarily because the cover provided is for large-scale sales. Of those Members that have extensive experience of working with ECGD, there is a feeling that the level of bureaucracy has increased in recent years.

5.2 ECGD is, in some instances, less competitive on price both with commercially available Export Credit Insurance and with equivalent Government facilities in other countries, for example France, Italy, Sweden and the US. Additionally, ECGD requires stringent terms which no longer fit today's business requirements nor those of many customers. Specifically, defence customers require flexibility in payment terms depending on performance of the contract, whereas ECGD seeks to minimise its risk to such a degree that it becomes inflexible (e.g. requirement for backstop provisions and/or bonds from customers).

5.3 There is a feeling amongst A|D|S Members that ECGD tends to implement internationally-agreed guidelines in a more stringent way than international counterparts. This makes ECGD less competitive internationally. A|D|S, CBI and BEXA have made many representations about these steps.

5.4 ECGD’s operating statute does not allow it to fund directly in situations where its guarantee cannot secure commercial bank funding. This was an issue during the financial crisis, not because banks were reluctant to accept the sovereign credit risk of the UK Government, but because they were shrinking their balance sheets and preserving liquidity. Although this situation was averted as banking liquidity improved, it still remains a risk and one that should be addressed. A|D|S believes that ECGD, along with its European counterparts, should look to specifically address this situation and establish a comparable mechanism to US ExIm, allowing for direct loans to be made in circumstances when commercial bank funding is not available.

5.5 ECGD remains an important partner for UK exports and there are steps that could be taken to improve performance. The Business Principal’s consultation process, which is currently underway, presents an ideal opportunity for changes that allow ECGD to focus on helping to increase UK exports. A|D|S would also note that the recent negotiations with the OECD on the Aviation Sector Understanding resulted in positive outcomes and industry was pleased with the role played by UK officials.

6. How other countries similar to the UK export to emerging markets and what our Government could learn

6.1 A|D|S wholeheartedly welcomes Government vocal support of UK exports and applauds the way that, through recent high-level visits to India and China, the Government has demonstrated a real commitment to the export drive. A|D|S would like to see this support go beyond elected politicians to civil servants across Government, particularly in UKTI, MoD, Home Office, FCO and BIS and diplomatic staff. As things stand, many competing countries, particularly Germany, France and the USA continue to enjoy higher levels of Government support at most levels. It would also be beneficial to have more advance notice issued of when and where Ministers are visiting in order that companies can better prepare.

6.1.1 The Defence market, more than any other, is driven by political considerations, since governments are the customer in all cases. The relationship between the customer government, and that of the exporting nation, is of real consequence in the successful conclusion of major export deals. The most successful exporting nations devote significant political effort in achieving major sales, and each of them has developed systems and infrastructure to support this activity.

6.1.2 The MOD and the Armed Forces have a key role to play in promoting exports, through the provision of training and advice to overseas militaries and Ministries of Defence. The MOD and Armed Forces are respected and their support of UK made Defence equipment makes it more attractive to overseas buyers. A|D|S urges Government to recognize this contribution and ensure their continued support to the export drive.

6.2 At trade shows, A|D|S is aware that the French and German Governments, among others, frequently help support a smarter and more enhanced presence for their companies. In view of the returns and the extent to which similar funding from the UK Government will help boost export potential, and more importantly bring UK SMEs into the export market, A|D|S believes this is a small step that would immediately assist the Aerospace, Defence, Security and Space industries.

7. The role of British Business Ambassadors

7.1 A|D|S welcomes the Government’s appointment of British Business Ambassadors and supports the idea of championing British products around the world. A|D|S also welcomes the wealth and breadth of experience that the Business Ambassadors represent, including representatives from the Aerospace and Defence industries. Industry particularly supports the focus that the Ambassadors have on championing UK business which face greater hurdles in seeking to export.

7.1.1 A|D|S would welcome greater clarity and guidance from Government as to the remit of each Ambassador and the process by which trade associations can represent their members, particularly SMEs.

January 2011