Rebalancing the Economy: Trade and Investment

Written evidence from Surrey Satellite Technology Limited

Executive Summary

SSTL is a vibrant SME with a primarily export based space sector business that has spun out from the University of Surrey. From small beginnings and with some government help at key times, SSTL now employs over 300 people and has a turnover of £50M pa. Elements of that key help at the emergent phase of this business in the early 1990s are regrettably no longer available to this business and to today’s new start-ups.

This submission is focused on just three topics:

(a) The inferior scope of Export Credit Guarantees available through ECGD, by comparison with other ECAs of our international competitors;

(b) The apparent reluctance of UK government Departments to enter into new Memoranda of Understanding (MOUs) with other national governments in the International Space Sector;

(c) The current minimal level of support for National Space Technology that is urgently required to stimulate innovation in export markets and to help match firms to opportunities in the collaborative and research programmes of the European Space Agency (ESA) and the European Union’s Framework and pre-operational programmes

The recent Innovation and Growth Team report on UK Space [ Ref 1] includes a strong recommendation that UK government provide comparable credit guarantees and other financial services for exporters and for non UK purchasers, i.e. ones that are comparable to those available to UK competitors in the Space sector. However, this problem seems to apply to all sectors, other than civil aviation and construction, and applies particularly to SMEs.

The IGT Working Group on Finance [Ref 2] compares the range of services available from the ECAs of the our leading Space sector competitors, awarding scores out of ten. The three ECA of Canada, France and the USA score 10 while the ECGD scores 5 equating it with the scope and contribution of those in Greece and Turkey. Specific detail is provided.

We have welcomed recent direct discussion with ECGD, which clearly has able staff that could play a greater part in the Space sector. We draw the Committees attention to the apparently restricted mandate of ECGD :

(a) Primarily limited to Aerospace and Civil infrastructure (not including Space and most other sectors);

(b) Modest staff resources effectively limiting significant contact with SMEs;

(c) Modest range of services by comparison with other ECAs

(d) No direct loans.

Unwillingness to support credit to UK telecommunication operators for purchase of European satellites, even though services from those satellites are supplied at significant risk into international markets.

Due to the commercial importance and foreign National strategic significance of many exports from the UK Space sector, HMG is often the only actor in a position to offer assistance to UK firms in the Space sector, primarily through agreement on Memorandum of Understanding (MOU) with those governments. Such MOUs are government to government agreements, i.e. Treaties having the full force of government, rather than simple letters of agreement between their Space Agencies.

By comparison with most other Space capable nations, the UK appears to other Space Agencies to be reluctant to enter into government to government agreements (Treaties) in the Space sector. This appears to have been a consequence of two issues, first the non executive status of the British National Space Agency BNSC, during the last 25 years, i.e. inability to act or lead due to Departmental constraints, and second a fear that MOUs might encourage bilateral commitments in support of industry for which BNSC has inadequate running costs. The welcome decision of the last government – endorsed by the current coalition – to create an Executive Space Agency (UKSA) might create the conditions needed to sweep away both constraints and provide an essential stimulus to industry from a National Technology programme, but at first sight this reluctance to reach inter-Departmental agreement seems rather deeply engrained in the action of government officials, particularly so in DBIS, its Research Councils and in HMT/HMRC. Negotiation of a full MOU, a Treaty, necessarily requires agreement with HMT/HMRC about tax and duty implications and with FCO and MOD if there are any political sensitivities. This is not yet happening.

Introduction

SSTL is a vibrant SME with a primarily Space export based business that has spun out from the University of Surrey. From small beginnings and with some government help at key times, SSTL now employs more than 300 people and has a turnover of £50M pa. Elements of that key help at the emergent phase of this business in the early 1990s are regrettably no longer available to this business and to today’s new start-ups.

Noting that another Committee is currently looking at the (rather slow) implementation of a new Executive Space Agency (UKSA) and that government is working ( again rather slowly) to implement some Recommendations from an Innovation and Growth Team Report on the UK Space sector, this submission will deal primarily with a small number of issues within this Committee’s focus of Inquiry that are of particular importance and are based solidly on SSTL’s direct experience at the interface to BIS and BNSC(now UKSA) and in the Space export and collaboration marketplaces. These three topics are as follows:

(d) The inferior scope of Export Credit Guarantees and associated services available through ECGD, by comparison with other ECAs of our international competitors;

(e) The apparent reluctance of UK government Departments to enter into new Memoranda of Understanding with other national governments in the International Space Sector;

(f) The current minimal level of support for National Space Technology that is required to stimulate innovation in export markets, to exploit bilateral opportunities enabled by MOUs and to help match firms to opportunities in the collaborative and research programmes of the European Space Agency (ESA) and the European Union.

We wish to draw the Committee’s attention to the substantial body of very recent work created by the Innovation and Growth Team Working Groups on Space that lead to the publication of the IGT report in October 2009, and to the previous Government’s response to that report in March 2010. In particular, we draw attention to the Working Group report on Space Finance and Procurement which highlights the need for creation of and access to key enabling technologies alongside key sources of finance at both the start-up and investment stages of new businesses and during challenging national and international opportunities.

The IGT Recommendations No 3, 4 and 11 deal with our three topics above but have lost some of the sharp edged detail that underpins them in the Working Group reports. Likewise, Government’s response is generally positive, but lacks discussion of some important topics that are grouped together under some "Umbrella" Recommendations, e.g the topic of MOUs is being ignored under R11. In addition we perceive that government’s implementation of the accepted recommendations is near glacial even in those cases where government action is not constrained by uncertainties about the level of significant budget lines resulting from the current Comprehensive Spending Review.

Export Credit

Introduction

The UK’s Export Credit Guarantee Department (ECGD) is the current manifestation of the world’s oldest Export Credit Agency (ECA). Set up just after WW1, the UK’s ECA has a long history of providing export credit guarantees for exporters in the aviation industry and facilitating financing for overseas purchasers.

ECGD’s current actions are deemed rather narrow; limited primarily to credit guarantees (insurance) to the aviation and construction industry. A glance at its latest report on-line (2007/8) shows that ECGD is primarily focused on these two sectors: There is no specific mention of the "Other" sectors in the supporting text, though helpful graphs show that support for "Other" civil and Defence sectors languishes at about 2%. The overall number of guarantees is measured in 100’s showing clearly that this body lacks the mandate and manpower resources to deal with Space or a significant number of SMEs from all sectors.

The recent Innovation and Growth Team report on UK Space includes a strong recommendation (No 4) that UK government provide comparable credit guarantees and other financial services for exporters and for non UK purchasers, i.e. ones that are comparable to those available to UK competitors in the Space sector. However, this problem seems to apply to all sectors, other than civil aviation and construction, and applies particularly to SMEs.

The IGT Working Group on Finance compares the range of services available from the ECAs of the our leading Space sector competitors, awarding scores out of ten. The three ECA of Canada, France and the USA score 10 while the ECGD scores 5 equating it with the scope and contribution of those in Greece and Turkey. We add more detail below:

The ECA role is crucial to many sales, especially but not exclusively in the case of developing countries. ECA guarantees arranged by ECGD (ExIM, Coface etc) are usually provided in conjunction with debt financing by one of more national commercial banks who are willing to lend at a lower interest rate because ECGD (government) is prepared to share through insurance some of that risk. In addition, ECGD can facilitate further financial engineering by those banks to pay the invoices during production direct to the exporter, while repackaging the loan seen by the purchaser for a longer term and sometimes one at a fixed interest rate. Although commercial merchant banks are always prepared to consider such deals, they generally do so at higher rates of interest, and will decline to do so where there is significant political risk. In addition, most other ECA’s will offer loans of last resort when banks are still unwilling to share the risk, even with government. In addition, ECAs frequently offer a range of financial services to the exporter and or to the purchaser to improve the financial management and transparency of a major project, and if required to manage the project on behalf of the purchaser.

Examples of actions by ECAs outside the UK that do act in the Space Sector

This submission will now discuss three of those top scoring ECA’s, i.e. those in the USA (ExIm bank), France (COFACE) and Canada (EDA). They operate industry wide and in recent years have expanded in mandate, manpower and financial resource terms to pay much more attention to SMEs.

ExIm Bank is the official ECA of the USA. It should come as no surprise that ExIm is a major player in both the Aviation and the Space sectors; given that the USA declares export and strategic goals to dominate in the Aerospace and Space sectors. While it offers export guarantees (insurance) to US exporters, ExIm bank – by comparison with ECGD – appears to be a much more pro-active financial engineer, taking the lead to arrange credit "lines" for the actual debt financing for exporters from cooperating banks. For the largest projects, ExIm Bank will work with international banks, usually in conjunction with other ECA’s , in particular in the Space sector with COFACE (France). Recent examples of ExIm bank action in the Space sector are easy to find and very significant, e.g. first working in support of Orbital Sciences (US) to secure financing and project success to supply the second satellite HYLAS 2 for the UK AIM listed satellite telecommunications operator, Avanti and second, in conjunction with Coface, to secure financing for the Thales Alenia ( Fr/It) successful bid to supply a multi-billion dollar replacement constellation of more than 50 satellites to Iridium Inc.

Coface is the official ECA of France, though its national presence is to a degree disguised by a commercial veneer. Coface is actually a commercial insurance company owned by a single shareholder, but crucially it has an outsourced contract from the French Treasury to run the French ECA schemes. The insurance and on occasion direct debt financing arranged by Coface is underwritten by the French Treasury. Coface has offices around the world and is pro-active on a significant scale in the Space Sector, i.e. wherever there is a sustained sales interest for French exporters. Like ExIm, Coface will cooperate with other ESAs to secure major export sales for French firms, ensuring sufficient local content to satisfy market rules in key export markets. Coface’s involvement and associated success for Thales with Iridium Inc is particularly notable when observing that the major competitor was a US company, Lockheed Martin.

EDC is the ECA of Canada and is state owned. EDA is recognised in the Space sector as the provider of the most flexible packages of export insurance (to Canadian exporters) and of managed finance to purchasers of Canadian goods. Whereas ExIm and Coface will only arrange and/or provide direct finance to exporters as a lender of last resort – when commercial insurance and longer term finance is not available – EDA can and does provide more regular direct loans, including significant numbers of loan guarantees to SMEs.

The purchase by a small German start-up of the RapidEye constellation offers a detailed example of EDC involvement in the Space sector, and particular evidence of significant loss of business to UK firms. RapidEye is a constellation of four small satellites and is based on a concept pioneered by SSTL, i.e. its Disaster Management Constellation (DMC) and evidence of greater capability validated by the QinetiQ/SSTL TopSat small satellite. Both DMC and TopSat were cofunded at a key moments by UK government (BNSC) technology funds. RapidEye secured funding from its Space Agency DLR, German regional government and German commercial banks. Initially, the RapidEye start-up advised that SSTL would be its most likely prime contractor following an open competition. This proved to be an unsound assumption, because financial guarantees required by the German banks could not be secured in support of SSTL. QinetiQ then put forward a bid as prime contractor with SSTL as a sub contractor; but it appears that despite being the largest R&D laboratory in Europe, it was unable to satisfy guarantees for the project team as a whole. However, a white knight soon appeared in the form of the Canadian ECA (EDC) which secured guarantees on behalf of the Canadian space contractor MDA, which took over QinetiQ’s role and reduced SSTL’s involvement to supply of the small satellite bus which was in any case crucial to the project. This resulted in a substantial loss of business to the UK, especially so given significant prior UK government investment by BIS and MOD and clear UK competitive advantage.

We have welcomed recent direct discussion with ECGD, which clearly has able staff that could play a greater part in the Space sector. We draw the Committee’s attention to the apparently restricted mandate of ECGD :

(e) Primarily limited to Aerospace and Civil infrastructure (not including Space or most other sectors);

(f) Modest staff resources effectively limiting significant contact with SMEs;

(g) Modest range of services by comparison with other ECAs

(h) No direct loans

(i) Unwillingness to support credit to UK telecommunication operators for purchase of European satellites, even though services from those satellites are supplied into international markets (refers to case of Hylas 2 see above).

Memorandum of Understanding in the Space Sector

Introduction

Due to the commercial importance and foreign National strategic significance of many exports from the UK Space sector, HMG is often the only actor in a position to offer assistance to UK firms in the Space sector, primarily through agreement on Memorandum of Understanding (MOU) with those governments. Such MOUs are government to government agreements, i.e. Treaties having the full force of government, rather than simple letters of agreement between their Space Agencies.

Recommendation 11 from the UK Innovation and Growth Team Report calls for prompt and consistent action by HMG to create a competitive environment for UK Space exporters through better regulation and prompt provision of effective MOUs. Thus far, UK government’s official response and subsequent actions to the IGT have ignored the important point about MOUs. In addition, Recommendation 3 seeks to rejuvenate a national technology programme without which bilateral activities enabled by MOUs cannot be fully exploited by UK firms.

By comparison with most other Space capable nations, the UK appears to other Space Agencies to be reluctant to enter into government to government agreements (Treaties) in the Space sector. This appears to have been a consequence of two issues, first the non executive status of the British National Space Agency BNSC, i.e. its apparent inability to act or lead due to Departmental constraints, and second its fear that MOUs might encourage bilateral commitments in support of industry for which BNSC has inadequate running costs. The decision of the last government – endorsed by the current coalition – to create an Executive Space Agency (UKSA) might create the conditions needed to sweep away both constraints and provide an essential stimulus to industry from a National Technology programme, but at first sight this reluctance to reach inter-Departmental agreement seems rather deeply engrained in the action of government officials, particularly so in DBIS, its Research Councils and in HMT/HMRC. Negotiation of a full MOU, a Treaty, necessarily requires agreement with HMT/HMRC about tax and duty implications and with FCO and MOD if there are any political sensitivities. This is not yet happening.

The particular case of a MOU with Russia

A particularly unwelcome example of glacial negotiation has occurred in response to requests from UK industry and Russia that a new Treaty level MOU should be negotiated between the UK and the Russian Federal Space Agency ROSCOSMOS, which does have the status in Russia of a full government Department.

Following the break-up of the USSR and the subsequent evolution from the FSU to today’s Russian Federation, the Russian Space Agency and UK industry have sought a new MOU consistent with that negotiated by Russia with about 40 other Space fairing Nations, (including France, Germany, Italy , Korea etc). Between 2003 and 2008, the apparent response of some UK government Departments was to argue that a MOU signed in 1987 with the USSR was still valid, thereby snubbing the overture from a full Department of the new Russia. This reluctance to negotiate by UK Departments appeared to lead BNSC to reject requests for almost all new MOUs, the only exceptions being a number of non treaty level MOUs (Lite MOUs) , e.g with Algeria. Though called MOUs, those agreements contained no clauses about methods of procurement, control of IP, reciprocal management of tax and duty etc.

Lack of any mutually recognised Treaty level MOU with Russia had a number of significant impacts on UK firms. The most important from a financial viewpoint being as follows:

· Inability for UK exporters and Russian importers to predict the level of duty to be levied by Russian authorities; thereby making UK bidders uncompetitive for Russian customers with their European and International Competitors;

· Inability of UK firms and their customers (Russian and non Russian) to predict the level of duty to be paid on goods arriving in Russia, including satellite equipments, payloads and satellites, that are shipped for launch by Russian launch service providers;

· Similar inability to predict the duty liabilities and unpredictable transit delays, when goods need to pass through Russia prior to launched by other launch service suppliers, e.g. from the Ukraine.

Following a partial easing of this slow negotiation process in 2008/9 and the decision in 2009 by the former Labour government to form a new Executive Agency, UKSA, BNSC began negotiation with ROSCOSMOS about a Lite MOU, which was signed this July at Farnborough International. While overcoming the problem of lack of recognition by the UK of the Russian Agency, that Lite MOU does not contain solutions to any of the procurement problems; continuing to leave UK bidders and exporters at a severe disadvantage.

A second phase of negotiation is needed urgently. In particular, it is apparent that pressure needs to be applied to HMT and HMRC so that a few clauses concerning Tax and Duty can be agreed, either on the basis of those already concluded by ROSCOSMOS with many other nations, or through negotiation about mutually acceptable alternatives. We understand that BNSC , in conjunction with UKTI, did forward such prior text to HMT and HMRC in June/July 2009 but HMT and then HMRC appear to have refused to provide feedback or to open formal discussions. It is important to note that all Space goods and a majority of services exported from the UK to Russia are not subject to UK export duty, so the balance of advantage gained from a MOU would be with UK exporters, without any significant revenue implication for HMT.

The topic of MOUs is covered by Recommendation 11 and action item 11.1 of the IGT. Government has accepted Recommendation 11, but its response makes no explicit mention of MOUs. The main stumbling block appears to be unwillingness of HMT/HMRC to discuss tax and duty issues and of DBIS to raise MOUs with HMT while it is considering DBIS budgets during a CSR. That could be deemed understandable had not the problem pre-dated this CSR by many years! This problem requires some inter-Departmental discussion, is not dependent on significant resources from a CSR and remains a barrier significant to export business valued at approximately £50m pa.

Access to National Technology Funding at Key moments in the development of firms and projects

Access to intellectual property relating to key enabling technology is valuable in all sectors, but is of particular importance in the Space sector due to its strategic as well as commercial significance. The previous government’s acceptance of the Case for Space in 2007 and by this government of the IGT report on Space suggests that government should be pushing ahead to ensure the necessary creative linkages between firms and key technologies, both through National and European Technology actions and access to credit at key moments, but the reality of the last three years has been very different.

The old DTI, then DBERR and now DBIS plays at least two key roles. First, to ensure an effective bridge between the University and Industrial sectors for the vehicles of innovation and second, to stimulate access for both of them to national, ESA and EU led efforts needed to create that technology and IP, and to bilateral opportunities opened up by MOUs. The arguments about the importance of balanced National, bilateral and European Technology efforts are likewise discussed in IGT working group reports and the NAO report on the UK Space Activites [Ref 3].

Acceptance of the arguments has not ensured effective inter and intra-Department solutions, especially by the BNSC partners within DBIS. Coincident with government acceptance of the Case for Space in 2007, STFC made a bid on behalf of the whole BNSC community into CSR 2007 for a National Space Technology Budget and this was approved by HMT. However, subsequent unanticipated turmoil in the STFC budget eventually resulted in the NSTP being zero funded for the three years of that CSR. The planned budget would have provided equal 1/3rd distribution of funds to national technology, ESA technology (GSTP) and national small missions, i.e. ensuring some balance across UK technology efforts. The Finance WG report of the IGT confirms that well argued and accepted triangle of technology funding was zero funded under the CSR which ends at 31st March 2011. We very much hope that the current CSR outcome will resolve the consequences of the current lack of a National Space Technology programme without which UK firms are unable to proceed at key moments to develop key enabling technology, to exploit bilateral opportunities opened by MOUs and to subsequently outwit their competitors in commercially valuable markets. SSTL faces serious competition from French, German, Italian and Belgium firms who benefit from much higher levels of consistent technology support, and national small mission opportunities.

Reliance upon the often financially frail intentions of individual partners in BNSC has often dogged DBIS (Space) Ministers, particularly so when preparing the UK strategy for investments in Space technology and Missions at the three yearly ESA Council meetings at Ministerial level. We understand that part of the motivation of the previous government to create an Executive Space Agency was to ensure a single focus for government decision making and implementation of UK Space activities, to resolve once and for all such inter-Departmental problems.

When looking at the effectiveness of DBIS support to industry, the Committee is asked to look at the role of DBIS and other Departments at the interface to UKSA, in particular concerning the distribution of responsibilities when bidding for new R&D activities and new projects at the start of each CSR, before Ministerials and for EU projects, all of which have cross Departmental interests. We understand that UKSA may gain financial responsibility for upstream Space technology, but not for civil operations or for the downstream services and products. As the prior host of BNSC, DBIS should be aware that a previous set of mixed responsibilities has not proved effective. We ask the Committee to be assured that the new Agency will have clear and effective lines of financial and appropriate managerial responsibility, without which solutions to current shortfalls in Space R&D activities and decision about investment in missions seem unlikely to be resolved.

References:

1. A UK Space Innovation and Growth Strategy 2010 to 2030: www.spaceigs.co.uk

2. Space IGS Working Group Report on Finance and Procurement: www.spaceigs.co.uk/documents;

3. The United Kingdom’s Civil Space Activities, NAO Report HC 359, 16 March 2004.

January 2011