4 Regulation and official secrets
46. The defence industry is strictly controlled.
As Dr Louth said, "Defence is a hugely regulated market.
If things have the capacity to kill people, then they need to
be properly licensed."[77]
At the same time the industry is international, which forces governments
to find ways of operating together, to allow sales across borders
and to enter into joint working. They do this by developing regulatory
regimes that, where it is in the interests of both parties, are
mutually recognised.
Regulation and export controls
47. The defence industry is regulated by government
in several different ways. Dr Louth described the infrastructure
associated with national security as "an enormous bureaucracy"[78]
designed to enable defence companies to operate with classified
information, clearance arrangements for individuals and companies,
and export controls. Any such framework in a separate Scotland
would require legislation setting out clearly the rules under
which a separate Scottish regime would operate. Other NATO countries
would be unwilling to enter into defence procurement with Scotland
unless such a framework was in place and functioning satisfactorily.
Professor Taylor said it was unlikely "that goodwill would
take you very far" until the Scottish Government had put
that legislation in place.[79]
In the first instance it would need to make clear how companies
would operate across the border with the UK. Otherwise, as Professor
Chalmers asked:
In the specific area of defence, having export
control regulations that are easy for companies to relate to will
be very important, because an independent Scotland would have
to have a separate set of export control regulations. Would that
regulate exports between different parts of the old United Kingdom?
Would you have to have an export licence to send a pump from Scotland
to another subsidiary in England?"[80]
48. Professor Chalmers also explained that the procedure
would not be a case of Scotland inheriting the current structure
and civil servants:
It is not simply a case of transferring units
from one authority to another; it is putting into place a whole
system of government, and export control is something that would
have to be done right. If you got it wrong, you might tip the
balance in terms of location. Companies do not want disruption.[81]
Security vetting in the defence
industry
49. The MoD limits the number of people who have
access to confidential information. Companies which are successful
in winning MoD contracts have their staff and premises vetted
by the MoD and any necessary security arrangements put in place,
before they receive protectively-marked material. If successful,
they gain what is called List X status.[82]
Les Mosco, Defence Equipment and Support, expressed doubt as to
how this would operate in a separate Scotland:
The UK Government accreditation system would
presumably not apply in Scotland. There would have to be a Government-to-Government
agreement as to how that is to work in the future, and that might
mean that the existing List X status no longer applied and the
facilities would have to be reviewed again. It would all depend
on the terms of the Government-to-Government agreement as to how
List X approvals would happen in the future. [...] It would have
to be negotiated and sorted out, case by case.[83]
It would be in Scotland's interests to reach an agreement
with the UK that List X approvals of companies operating in Scotland
would operate in the future—most of the facilities we visited
were List X sites. There is however no guarantee that an agreement
would be in place at the date of separation.
50. Philip Dunne MP, reiterated the difficulty of
allowing contracts with security sensitivities outside the UK:
The position in the event of an independent Scotland
is that there would be some projects that we would wish to maintain
with UK eyes only construction. Undoubtedly, some of the activities
and projects that take place in Scotland—I am thinking in
particular of some of the sensitive radar equipment procurement—we
would be most unlikely to seek to procure outside a UK eyes only
environment.[84]
51. The UK has bilateral arrangements with international
partners to mutually recognise their security measures that might
allow the UK to allow sensitive work to take place abroad. In
the event of separation, these would have to be renegotiated and
Mr Dunne told us that: "Scottish participation in any of
those agreements would be something for the Scottish Government
to seek to secure."[85]
Ian Godden stressed the importance of this:
They [Scotland] would have to set up a whole
series of dialogues with other nation states because, in my mind,
this would trigger a very significant difference."[86]
It would be important that Scotland developed the
bureaucracy necessary to enable it to manage the range of international
relations that the UK currently has, including requirements for
security vetting.
52. The regulation of any defence industry seeking
to operate beyond its national borders is complex and requires
extensive protracted negotiation. A separate Scotland could not
rely on existing arrangements continuing with the UK Government,
or provided through the UK Government with other countries.
Regulation and the US
53. Ian Godden stressed that international defence
relationships had to exist on three levels: governmental, military
and industrial. At the moment, the UK has such a multi-level relationship
with the US. For example it is the only Level 1 partner with the
US on the Joint Strike Fighter (F-35) programme.[87]
The US has export control laws relating to the distribution of
technology designed to limit access to sensitive information,
notably the International Traffic in Arms Regulations (ITAR) and,
at the moment, UK firms benefit from exemptions to ITAR.[88]
Mr Dunne described how the UK benefited from the relationship
with the US:
In relation to the US, we have a specific bilateral
co-operation treaty and it is fair to say that the British MOD
is a substantial beneficiary under those arrangements, which cover
procurement and capability. Quantifying that is not easy, but
it ranges across intelligence through to the deterrent programme—clearly
a major beneficiary of that relationship—to operational
exercises, joint training and operations in Afghanistan at the
moment both under NATO and with the US national forces. It would
be fair to say that it is a significant relationship, and one
from which, again, there can be no certainty that Scotland would
be able to benefit.[89]
Several witnesses said they did not think the US
would not allow the same privileges to Scotland as they do the
UK. Professor Taylor said:
The Americans are extremely sensitive about the
protection of their intellectual property. From the point of view
of the regulatory risk of a new Government, that is a relatively
visible thing.[90]
Mr Godden agreed and said he did not know how quickly
the legal framework for a Scottish security regulatory regime
could be put in place but:
I know that the relationship that goes alongside
that is equally important and would need to be absolutely in place
immediately with places like the USA; otherwise we will potentially
lose business and certainly our capability to do some of the existing
contracts that we are currently involved in.
He continued:
Without the relationship—military, industrial
and political—with the USA, I worry that Scotland might
be barred immediately from certain things it is currently doing.[91]
And gave the example of Selex Galileo in Edinburgh:
[The] Triple X ratings down at Crewe Toll in
Selex would be re-examined instantly by the US. There may be 25
or 30 people suddenly barred from doing any more work by the US
on x programme, which is a joint UK-US programme. It gets down
to that level of granularity and detail.[92]
The resolution of issues around a Scottish regulatory
and security system would be very important for Raytheon in Glenrothes,
who make components that go into weapons such as the Tomahawk
missile, and whose trade is predominantly with the US.[93]
54. The SNP has made it clear that it wishes to have
a foreign and defence policy that diverges from that of the UK,[94]
but it would have to develop and establish that policy while at
the same time persuading the US that the changes were not really
substantial and would not harm American interests. Ian Godden
noted that it took Australia many years to persuade the US to
enter into a bilateral relationship with them, and that building
such relationships takes time:
The US is very suspicious about anything new
and it would take it, I am guessing, two or three years to get
comfortable with the people it is even dealing with.[95]
55. The UK currently enjoys a highly privileged
defence relationship with the US. Scotland could certainly not
presume to inherit this relationship. First, it would have to
set up a regulatory regime for its defence industry, including
the ability to security vet personnel, and have it in operation
on the first day after the UK regulations stopped. Secondly, the
United States would be nervous of a new state and would want to
understand the defence policy of a separate Scotland before being
persuaded that it could do business with companies in Scotland.
These relationships can take time to build.
77 Q 1992 Back
78
Q 1982 Back
79
Q 1882 Back
80
Q 236 Back
81
Q 238 Back
82
Qq 2049-2052. See also National Security Through Technology:
Cm 8278. February 2012. Back
83
Q 2049-2052 Back
84
Q 2037 Back
85
Q 2053 Back
86
Q 1983 Back
87
www.jsf.org.uk/JSF-and-the-UK/Overview.aspx Back
88
See www.gov.uk/exporting-military-goods-to-the-united-states Back
89
Q 2053 Back
90
Q 1882. See also Q 1982 Back
91
Qq 1982 - 1983 Back
92
Q 1983 Back
93
Qq 1993-1994 Back
94
Qq 1991-1995. See also HC (2012-13) 676 Back
95
Qq 1982-1983 Back
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