Examination of Witnesses (Questions 20-39)
Mr Andrew Mathewson, Mr Robert Regan and Mr Ian Hall
26 JUNE 2008
Q20 Lord Anderson of Swansea: Are
there some countries which have a niche capability. I am thinking
of the Czech Republic and chemical warfare for example, and Slovakia
which, in the old days, was very much the heavy end of the Warsaw
Pact capabilities. Do they still retain niche areas which can
be built upon in this wider context?
Mr Hall: If I were to be very honest, and I
would not want to comment on those countries in particular, I
would say we should be very careful not to think that there are
some niche centres of excellence throughout Europe which we can
somehow synergistically join up. There are some but they tend
to be the exception rather than the rule. For instance, although
it is outside the EU, Switzerland has a significant capability
in what we would call energetic materials, explosives, propellents,
etc; however, that tends to be the exception rather than the rule.
One has to be cognisant of the fact that there is an enormous
stratification in Europe in terms of the capability between those
countries which spend the most and those countries who spend relatively
little. As I mentioned before, one has to be very careful not
to divert resources from things perhaps at which they are good
at to things they cannot do so well.
Q21 Lord Chidgey: I would like to
turn to the concerns over the European Defence Technological and
Industrial Base Strategy which you slightly referred to in passing.
The Strategy, as I understand it, is currently being drafted and
seeks to retain a competitive defence industry in Europe. Can
I firstly say whether you would agree with that comment, whether
it is a question of retaining a competitive defence industry or
establishing a competitive defence industry? Again referring to
the Explanatory Memorandum we are coming onto later, in paragraph
2 it makes the point there is a widely held view that the European
defence equipment market is not as open or transparent as it should
be and that the European Defence Technological and Industrial
Base could be more efficient, responsive and competitive, which
could be a coded message to say it is not responsive and it is
not competitive and it is, as some might suggest, rather stitched
up in favour of national interest. The first question is whether
or not it is feasible to talk in terms of establishing a competitive
defence industry in Europe and does the UK government support
this objective. I will come on in a minute to comparisons with
our own Defence Industrial Strategy but if you could respond to
that question first.
Mr Regan: We have set some of the context for
the question in terms of a background of declining defence budgets
across Europe. There is, by general agreement, a lot of duplication
and protectionism in the existing European defence equipment market.
I do not think a European Defence Technology and Industrial Base
Strategy as such has an end state of something that is called
a competitive European defence industry. What the EDA has done
is to identify some of the characteristics that would be associated
with a competitive industry and is now working along a number
of strands of policy, firstly to give much greater visibility
to the nature of the European defence equipment market. This will
lead us later into what the European Commission are trying to
do with their defence package which is another echo of this issue.
From a UK government perspective, we support this work. There
is undoubtedly over-capacity and duplication. Mr Hall has given
some indication that there are a number of small players but the
European defence industry itself, in terms of prime contactors,
there are competitive companies but you can probably number them
on the fingers of one hand: EADS, BAE Systems, Finmeccanica, Thales
and so on and so forth. We do support it and we think it echoes
much of the work that we have been trying to do with the Defence
Industrial Strategy through things like the electronic bulletin
board which the EDA have already established to give visibility
of requirements. There is pressure on the application of Article
296, which we will come to in a short time. The final point I
think I would make is that it is leading us towards a capability-based
approach to the delivery of equipment to the armed forces rather
than some of the industrially and economically-based decisions
that are a feature of the way some other nations choose to procure
their defence equipment.
Q22 Lord Chidgey: You have mentioned
the comparison with our own Defence Industrial Strategy which
is one of the questions I was going to follow with. The DIS is
generally accepted and approved across parliament as a very sensible
way forward for our defence industry and our defence needs. Now
I understand there is some concern about whether that strategy
may be under pressure given defence budgets and so forth. It is
interesting you should make a comparison with the European Defence
Strategy and whether or not there is an equal problem coming up
there. The main thrust of my next question is concerning the comment
made about one of the benefits of a European Defence Technological
and Industrial Base Strategy would be opening up markets in the
US. I have to suggest to you that that may be somewhat pie in
the sky given the difficulty of penetrating the defence industry
in the US. The manner in which our defence industry has been successful
is to become established as US companies rather than European
companies, talking about BAE Systems of course. Given that background
could you perhaps explain to the Committee how the UK's recent
award of a contract for the Future Rapid Effects System to an
American company relates to the aims of the strategy? It
is rather complicated and it does not seem to match any of the
policies and aims set out by the European strategy itself or in
our response to it.
Mr Regan: Could I deal with your point about
the Defence Industrial Strategy first. It was never intended to
be a permanent document but was supposed to be, and is, a living
document and is in the process of being redrafted. The previous
defence equipment minister had a vision that it would be reissued
once every two years because it needs to take into account changes
in the availability of resources to sustain some of the sectors.
With the United States model you are absolutely correct. I spent
four years in our Embassy in Washington and there is no doubt
that the route to success in selling to the United States is to
become a part of the United States defence industry. That is how
BAE Systems and Rolls Royce have approached it very successfully
in both cases. In terms of FRES, I am in danger of getting into
semantics a little. The award of the design contract for FRES
has gone to GDUK. In defining what British industry is as a part
of a European defence industrial base, we are not so much interested
in ownership as in the presence of design authority capability
and technology.
Q23 Lord Chidgey: White collar rather
than blue collar?
Mr Regan: Yes and no, with respect. These vehicles
are originally a Swiss design. They will be manufactured, for
the most part, in the United Kingdom and we will establish the
production facilities here. We have not yet determined which company
may assemble or build those vehicles but the main thing is to
retain in the UK the design authority, the competence and the
intellectual property that will allow us to equip, fit out, maintain
and upgrade them on the basis of national operational sovereignty.
In our support for the European Defence Industrial Strategy I
think I should add a codicil to what I said earlier, which is
that the UK will continue to look to the global market for the
delivery of equipment capability. There is nothing inherent in
a European Defence Technological and Industrial Base, as far as
the United Kingdom is concerned, some others may disagree, that
automatically points you to the European defence supply market
for capability.
Q24 Lord Hamilton of Epsom: I should
declare an interest. I do work for an American company, way down
the food chain, on the FRES programme. Is there any difference
between BAE owning a seriously large number of defence companies
in the United States and General Dynamics owning GDUK and Lockheed
Martin owning Huntings and all the other American majors owning
companies over here? In principle does it make any difference?
Mr Regan: In principle I do not think it does
make any difference. From the Ministry of Defence perspective
we would regard those UK subsidiaries as part of the UK Defence
Industrial base.
Q25 Lord Hamilton of Epsom: Can we
move on to the serious elephant in the room which, when we are
talking in European terms, we like to ignore which is the United
States of America who are spending more money on defence than
we can even dream about. They are increasing their defence budgets
year on year by practically the same amount as we spend in one
year and spending 35% on research and technology. If we do not
actually buy in one way or the other into the United States we
are going to be left miles behind if we want our troops to be
properly equipped, are we not?
Mr Regan: That is why we default to the global
market and why we are involved in programmes like Joint Strike
Fighter, for instance. That is where the technology base and the
equipment capability that we need can be sourced. From a defence
equipment and support perspective, we will go where the best capability
can be found. It is not just a question of massive investment
but there is also the issue of interoperability because we generally
tend to be engaged in coalitions with the United States. That
is a factor not only for us but for other European nations as
well.
Q26 Chairman: Is the parallel, therefore,
between our own Defence Industrial Strategy, which enables us
to have a capacity here but also our procurement is global, and
in the same way the European Defence Technological and Industrial
Base is to ensure that there is a capacity within Europe but also
with the options for global purchase?
Mr Regan: Absolutely. The overriding factor
in those procurement decisions is a reflection of what I said
earlier about FRES; the ability autonomously in the United Kingdom
to be able to maintain and upgrade those aircraft. We have gone
to extraordinary lengths not only with other nations but with
the Americans, in particular on Joint Strike Fighter, to ensure
we are able to maintain them and have what we term operational
sovereignty in our ability to deploy the equipment in the way
we see fit and without any hindrance.
Q27 Chairman: Were there tough negotiations
before we finally agreed the contract in order to maintain that
technological advantage to the UK?
Mr Regan: Indeed, yes.
Q28 Lord Selkirk of Douglas: Perhaps
I should announce that I am an unpaid trustee on one of brother's
companies which had a relationship with Lockheed Martin but not
on the subject which I am going to raise with you. You mentioned
the subject of helicopters. How optimistic are you that the helicopter
availability initiative will make a real difference to improving
the availability of helicopters for European security and defence
policy operations?
Mr Mathewson: We live in hope and we are going
to try is the top line of the answer. There is a problem with
the availability of helicopters for demanding military operations.
The analysis NATO has conducted shows there are a number of helicopters
around; they are not widely available in Afghanistan. In some
cases it is the pilots not sufficiently trained, in some cases
they are not practising in the hot, dry, dusty conditions, in
some cases the helicopters are simply not up to the task and we
have identified this as an area we need to work on. We have made
a small amount of money available, money which was programmed
at end of the last financial year to support peace-keeping operations,
and was available as end of year under-spend which we managed
to got hold of from the Treasury. Nationally we have put in about
7 million EUR, which has been built up so far to 10 million EUR,
with additional contributions from Norway, Iceland and Lithuania.
We are still working others to try to get them to contribute.
We are identifying solutions, both in the area of training, and
we will be inviting interests to come and make a case for access
to money for upgrading. We have done quite a bit both in terms
of money and in terms of staff time that we have put into this.
We are working the issue pretty hard. It does require, at the
end of the day, countries actually who have the helicopters wanting
to play their part in the project and wanting to commit some of
their resources to it as well. If the initiative is simply our
10 million EUR so far, then clearly it does not go very far. We
do require the countries with the helicopters or with the pilots
who need upgrading to come forward and be willing participants
and put some of their own resources into it.
Q29 Chairman: We have already touched
on it but can we move to the Commission Defence Package and, first
of all, the Directive on the coordination of procedures for the
award of certain public works contracts or defence works contracts.
Could you confirm that is Directive designed to open markets rather
than in itself to set up joint procurement programmes?
Mr Regan: Yes, I can confirm that is the case.
The objectives I think are twofold: on the one hand, to recognise
the peculiarities of defence procurement. It is a means of providing
equipment in a way that has some unusual features that are not
part of the broader public procurement policy in the existing
directive. Secondly, the Commission have long-held reservations
about the use of Article 296 of the Treaty which has undoubtedly
been abused but I would like to think not by the United Kingdom.
There are nations in Europe who invoke Article 296 on grounds
of essential interests of national security at all possible opportunities.
They are, therefore, providing a framework for process in procurement
rather than trying to impose a policy that drives us towards more
collaborative programmes. The key really is if there are collaborative
programmes which would be brought together by consenting states
they will be able to use the provisions of the new Directive to
govern them. It is a matter of process rather than policy.
Q30 Lord Hamilton of Epsom: Is the
whole idea of putting out to competition very major defence contracts
completely utopian? If we wanted to get best value for money on
our carrier programme, there is an argument you should have it
built in the Far East but we all know politics rules here. You
have masses of shipbuilding interests all around the country.
We are in the farcical position now where these carriers are going
to be built in segments in practically every port in England and
Scotland and then sailed around to Rosyth for final assembly.
It is about the most inefficient way you could build anything.
Rather interestingly Rosyth is in the Prime Minister's constituency.
What world are we living in? The fact is that it is not an option
to have these carriers built abroad, and it must be the same in
France, Germany and everywhere else. They have to use, and their
governments are expected to use, their own defence industries
for major contracts. There is a lot going on in terms of minor
contracts. It is quite interesting this document we were given
which said there was a tremendous problem with licensing and then
they went on to say there are 11,500 licenses issued every year
without any difficulty at all. One part of the document contradicted
the other. The fact is at a low level below the radar there is
business going on across Europe but when it comes to major contracts
they will be awarded nationally. How will you ever get away from
that?
Mr Regan: There will always be major national
defence equipment programmes which are a part of the industrial
capability-based approach that any nation would take and that
will inevitably remain the case. On the utopian idea of competing
major equipment contracts, I agree there is a certain real politick
that has to be attendant on that. It can be argued that in terms
of the autonomy, as I was saying earlier on the ability to develop,
design and maintain equipment, is a part of the framework of operational
sovereignty and, therefore, is a legitimate part of the essential
interests of national security as defined in Article 296. There
is a process, however, that goes beyond that, which is the exposure
of the abuses of the system. I have seen examples of Article 296
used to justify national procurement of firemen's helmets. There
is a scale and a horizon across which this business takes place.
The Commission recognise that they will not remove Article 296
and that will still be a feature of defence procurement, but they
are trying to limit its use. That is the main objective. A part
of that is generating better transparency of what is going on
in the market.
Q31 Lord Boyce: I wonder whether
or not you could make a comment on how well the Code of Conduct
is operating which was supposed to alleviate some of these problems,
Italian wine glasses for officers and so on.
Mr Regan: I have not brought any statistics
on the use of the Code of Conduct, however there is a very healthy
balance of business which is now being demonstrated. These are
contracts which are subject to Article 296 but which are nevertheless
available for international procurement. That has been monitored
by the EDA and some countries are now starting to be named and
shamed in international forums.
Q32 Chairman: Is it the case that
while we have had relatively good schemes of licensing and have
been relatively open in terms of our own market, except for the
critical large items to which Lord Hamilton has referred, that
is not the case in many other countries and, therefore, it would
be to the advantage of the UK industry to the extent that there
was an opening up of other people's markets?
Mr Regan: I have to limit my response simply
because this is a matter for BERR. However, as a general comment,
yes, we have devised an export control system which we think works
quite well. I am not expert on the intra-Community Transfer Directive
but I think if you read it carefully it shows certain echoes of
the UK system which is likely to be adopted in a broader context
across Europe.
Q33 Chairman: We are more likely
to gain from something of this sort.
Mr Regan: We certainly will not lose by it.
Q34 Lord Jones: Following on from
Lord Roper, and the context in Baroness Taylor's letter of June
18, you know that the government is pursuing the aim of removing
the security sector from the scope of the Directive. That, I believe,
is inclusive of non-military security purchases. What are the
reasons given by the Commission for the inclusion of the security
sector in the scope of the Directive, and if the security sector
is removed from the scope of the Directive will the MoD and the
sector itself still be able to benefit from the specific provisions
in the Directive on, for example, security of supply and security
of information?
Mr Regan: The UK is in a small minority in the
position we have taken, and, under QMV, I would not wish to hold
out much hope that we would be ultimately successful. However,
the reason why security is included in the scope is because across
Europe you will find gendarmeries, carabinieri, Guardia Civil,
paramilitary forces which are not technically part of the defence
and military structure but which are nevertheless in that security
sector where increasingly they operate alongside military forces
in overseas operations. The Commission, therefore, believe, supported
by the nations that have these paramilitary forces and given that
a lot of the equipment they use is similar if not identical to
equipment used by the military and defence armed forces, they
should be included in the scope of this Directive. From the UK's
perspective we see it somewhat differently because we are thinking
more in terms of security services than paramilitary forces.
Q35 Lord Jones: Security services
being what?
Mr Regan: Intelligence services which brings
us into the area of classified contracts which must be retained
on a national basis. One of the issues that we are still in discussion
with the Commission over is Article 14 of the existing Public
Procurement Directive which provides an exemption in those circumstances
but which has been removed from the Directive that we are now
considering. We are making considerable progress in that negotiation.
I think I may be getting ahead of myself slightly. To answer your
second point, if we are successful in removing security from the
scope then of course we will still be able to use the provisions
on security of supply, and security information will still apply
to the defence sector.
Q36 Lord Boyce: Understandably the
government expressed some concerns in the EM about the Directive
in relation to security of information and whether one would get
into the ECJ taking a stance on what could be perceived as interfering
with the national and Member States' own ability to make its own
decisions and also the deletion of the research and development
exemption. Since the EM was written has there been any progress
in resolving some of those issues?
Mr Regan: Yes, we have expressed our concern.
There are now new security of information provisions. We have
been successful in getting references to some aspects into the
recitals and to some of the early articles. We are still working
to get a more explicit recognition of the need to have security
of information explicitly included, i.e. that would be reciting
Article 14 from the Public Procurement Directive. As far as the
potential for involvement of the ECJ is concerned, I think we
are so far being successful in limiting that aspect of it. However,
the Commission have already indicated, and they will stand by
their intention, to refer what they consider to be abuses of Article
296 to the ECJ in a more proactive and vigorous way than has been
the case hitherto. The ECJ will, I suspect, still be playing a
more prominent role but perhaps not so much in the area of security
of information.
Q37 Lord Boyce: Are we concerned
that the ECJ will try to make decisions on what would be considered
to be issues of national security on our part?
Mr Regan: We have been successful in modifying
the language. This is very much work in progress. The negotiation
continues but we have been successful in getting some recognition
of this into the document and we have produced alternative wording
should we be unsuccessful in replicating the exemption that is
currently in Article 14 of the Public Procurement Directive. We
will see where this goes under the French presidency but they
are quite keen that they should complete work on this in the course
of their presidency of the EU. We are looking now towards a fairly
vigorous continuation of these negotiations.
Q38 Lord Boyce: What about the research
and development exemption?
Mr Regan: We are looking at the wording that
the Commission have proposed on research and development exemptions
which is still a matter of discussion. We are consulting with
lawyers as to the precise subtleties and nuances of the language
that the Commission have provided. Some of this they are taking
back to reconsider, and I should add that on security scope one
of the issues that the Commission are starting to discover is
that some of these definitions—and we have had something
of this debate this morning on what does security mean—they
are having to go back not necessarily to the drawing board but
certainly they are going to be shading some of the drawings.
| 
