Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)



  Chairman: Gentlemen and members of the audience, I am sorry we had to keep you waiting. We had a very long pre-committee agenda.

  Mr Viggers: On a point of order, I think the whole Committee would like to congratulate you for being raised to the Privy Council. It is a recognition of your enormous efforts. As you never get a compliment without a sting in the tail, let us hope you are not being softened up for something.


  1. Thank you very much. I hope, Mr Gould, the MoD have been giving you French lessons for your next career move.
  (Mr Gould) My predecessor, working for a French company? I would describe that as an international defence company now.

  2. They would say that, wouldn't they? Mr Gould and Mr Pawson, thank you very much for coming. As you will be aware, this session today follows the publication of the Framework Agreement concerning measures to facilitate the restructuring and operation of the European defence industry. It is an agreement not in force yet and this Committee has over the years insisted that whenever there is a treaty or agreement relating to defence, however insignificant—and this is significant—we will examine it and report to the House. In addition to providing us with the opportunity of examining a treaty, we have been most interested in the question of European defence and have produced reports. We had a session like this on OCCAR last year and this is obviously a subject of considerable importance. If I could start with a rather broad question, the Framework Agreement brings together discussions by the six countries and this goes back to December 1997. Since that time, there have been some major industrial rationalisations and more appear to be in the pipeline. On what basis do you conclude that there is still a problem to be tackled and how will you know when it is solved?
  (Mr Gould) It is certainly true that there has been a lot of industrial reorganisation and restructuring in Europe. You may well be right that there will be more. That remains to be seen. The position that we are into now is not so much how much more restructuring has to take place but how companies will be able to operate within that restructured, commercial sector. A lot of commercial restructuring has taken place, but in terms of government behaviour, in terms of the way government contracts are let, in terms of government development and cooperation on defence industrial matters, very little has changed in the formal sense. A lot has happened in the informal sense, in terms of discussions, cooperation, the use of goodwill and best endeavours, but no legal change has taken place. What the treaty is intended to do is to put in place a framework where there will have to be changes in contract law; there will have to be for some countries changes in their export control procedures and so forth. I think it is a very opportune time to consolidate what has happened on a goodwill base up to government level and put in place a framework that will enable industry to operate better at the European level.

  3. What goal is the government aiming for in terms of restructuring? What does it want eventually to see in Europe?
  (Mr Gould) What the government wants to see in Europe in terms of defence industry restructuring is a more competitive European industry that is able to operate better in the global market, but by being more competitive one is able to respond much better to government requirements for defence equipment. The more competitive and efficient the industry is, the better we shall be able to acquire defence equipment faster, better and cheaper.

  4. If this agreement had been in force ten years ago, what difference might it have made to the shape of restructuring and the efficacy of the European defence industrial sector?
  (Mr Gould) It is very difficult in terms of would it have made a difference to companies' commercial decisions about how they restructure and which joint ventures they set up. If this had been in place ten years ago, I would not like to speculate on joint ventures or companies, but I am convinced it would have happened more quickly and I think we would have made quicker progress on putting in place better management arrangements for cooperative programmes. We would have broken down some of the barriers, some of the issues that linger a long time in public programmes, like work share and so forth. We would have had better tools to deal with that. It would have required an awful lot of hindsight to have done that.
  (Mr Pawson) It would not only be the agreement there ten years ago; the underlying consensus and policy that goes with it and which led to the agreement is important, the political will behind it. One of the factors, regardless of restructuring or ownership, is whether or not you duplicate capabilities in Europe or indeed R&T in Europe and the sort of reassurance that is provided by this Framework Agreement would have helped and will help in the future to avoid unnecessary duplication—hence, enhanced efficiency and more competitiveness—which will lead to a stronger and more competitive defence industry.

Mr Viggers

  5. I am a firm believer in industrial decisions being left to industrialists, but governments are inevitably involved because they are a major purchaser. In what circumstances and in what areas would the Ministry of Defence try to be more proactive in shaping a robust and efficient industry?
  (Mr Gould) I absolutely agree with you that it is for companies to take commercial decisions and the Ministry of Defence must not get in between companies and their shareholders in terms of the commercial viability of decisions they take but obviously we do have an important role to play because we are the major customer for some companies. Our behaviour as a customer will condition the way in which their commercial success works. There are three or four ways in which we can influence, positively I hope, the competitiveness of the European defence industry in the future. Mr Pawson has already mentioned research and technology. Most defence research and technology takes place as a result of government sponsorship. The government pays for it, in our case very largely resulting in contracts but not exclusively contracts placed with DERA. We and France have the largest R&T budget in Europe but our budgets are about ten per cent each of what the US spends on defence research and technology. These are broad brush figures but if you add the whole of European R&T expenditure up it comes to about 40 per cent of what the US spends on defence research and technology. What that means is that if we want to have a world class, competitive, European defence sector we cannot afford not to use that 40 per cent to the very best advantage. If we duplicate, that would not be using it to the best advantage, which means we will have fewer and fewer sectors which are world class competitors by comparison with the United States. That is point one where the government has a very important role to play. Secondly, inside Europe each country has quite different contract law. What you can do in terms of contract law is quite substantially different as you move from country to country inside Europe. The more that we can do to rationalise that contract law and make it compatible across European borders, the easier it will be for companies to operate. This is something that affects the timescale with which cross-national projects work. To move a contract from English law to German law, for example, can take a year if it is a big contract. There is an impediment there. Release of information, getting technology produced by government to government research into the defence supply chain. It is of no use to us in terms of defence capability unless we can move the technology up the supply chain into products. Removing impediments that governments have in place through their research information being made available to European transnational companies is a very good way in which we can improve matters. Finally, there would be the issue of security of supply. Very often, security of supply is used as a reason for retaining capacity within a national boundary, rather than creating a dependency across a national country, which can then lead to that capacity being underloaded and that is not good for company efficiency. Those are four examples of key things.

  6. I can see the advantage of the size of American industry, with its one main customer, and the complexity of the smaller European competitor, but how do you get round the problem and make sure that, in seeking to harmonise the European companies, you are not making life more complicated for them?
  (Mr Gould) You have to have a basic rule of thumb. If what you are doing looks as though it is making life more complicated, you should not do it. The treaty I think is consistent with that rule of thumb. As we develop these detailed changes in export control regulations, changes in technology transfer regulations and security regulations and ultimately changes in contract law dealing with intellectual property and so forth, we must take the companies with us. They have to be the test case, if you like. We have to work with them through the working groups of each area of this treaty to make sure that they agree with us that what we are doing is making life easier, not more difficult.

  7. What is the mechanism for them telling you that?
  (Mr Gould) Each of the working groups that worked on the treaty worked very closely both with our Defence Manufactures Association, the National Defence Industries Council, and the European Defence Industries Group and will continue to do that. The trade associations are the key mechanisms.
  (Mr Pawson) One other advantage is a reduction in the regulatory and bureaucratic burden. This is particularly the case in the export control area. For example, currently we process over 1,000 licences each year to the LOI countries and, surprise, surprise, as far as I know—certainly not in the last three years—we have never refused a single one. To the extent that we can broaden those licences, we can reduce the burden on the industry.

Mr Hancock

  8. Is the Framework Agreement intended to introduce processes and obligations only for those companies which would be considered to be in the transnational companies, or are they for the wider defence industries in the six countries who have signed up for it?
  (Mr Gould) There is no obligation in the treaty for us to make every company comply in terms of the treaty. It is a cooperative venture, but it is intended to apply as broadly in the defence industry—it is quite difficult to define these cases as some companies are diversified—to defence industrial activity as we can make it work because that is going to give the greatest competitive advantage to industry if we do that.

  9. What do you see as the potential problems of that arrangement?
  (Mr Gould) I do not think the potential problems lie in the treaty. The potential problems lie in the practical application. This gives us a framework. We now have to work through the executive committee and then through the working groups and with the companies to give practical expression to each of these things. There are obviously deep legal and historical differences, even between the six countries involved here. They will take hard work to overcome. I would not like to pick out any particular area as being the one that will give most difficulty. At the moment, the intention I have detected is that all the countries intend to pursue this agenda, but there will be differences in the pace at which people want to go and differences of perception, which we will have to deal with through the executive committee structure.

  10. Is that a view shared by your colleagues in the other six countries, that this is an issue that you are going to have to work through?
  (Mr Gould) It is.

  11. You have discussed that already?
  (Mr Gould) Very frequently. They are all good, pragmatic people that I work with.

  12. Will the measures of the Framework Agreement differentiate between projects and firms lying wholly within the six countries and those which also involve overlaps into other countries and the problems there?
  (Mr Gould) The treaty does foresee that there is a difference between the two. It makes provisions which make it possible for projects to encompass countries that are not part of the six nations. There are provisions in the treaty which enable that to happen but obviously they are not exactly the same as countries which are members of the six nations.

  13. What would the arrangements be for countries, particularly like Belgium and the Netherlands who have been very staunch allies of ours and have cooperated on defence projects, that have chosen to stay outside? What arrangements will there be specifically to expand the Framework Agreement's coverage to beyond the six and to make them feel that they are still part of the allied family?
  (Mr Gould) The basic reason Belgium, the Netherlands and some other countries are not in the six is that they have not asked to join the Agreement. I suspect that is because if you take the six nations that are part of this arrangement you have about 80 to 90 per cent of the European defence industry in there, so there is not a lot left outside. It would have to be a pragmatic arrangement. I can see imminently that you might have a project which involves three of the LOI or Framework Agreement nations and maybe the Netherlands. If the Netherlands wanted to apply the provisions of, for example, technology transfer, information transfer, security of information, in this treaty to that project, the treaty allows that to happen, but it would be a matter of choice. Otherwise, there would be some other arrangement.

  14. Would it have to be agreed by all six?
  (Mr Gould) It would have to be agreed by all six if they were going to join the six to make it seven.

  15. But cooperation?
  (Mr Gould) No. It would be for the countries involved in the project to decide which regime they wanted to apply.

  16. They could do that without getting the agreement of all six?
  (Mr Gould) So long as they are not becoming one of the Framework nations, yes.

Mr Brazier

  17. The Framework Agreement is presented as a legally binding treaty even with proper clauses for enforcement. In fact, it is full of holes, most of them labelled "national security". Why should this treaty actually give us any more confidence than the Letter of Intent that was there before?
  (Mr Gould) Because it is a legally binding instrument in international law and therefore it foresees that changes to national legislation will need to take place, whether they are primary, secondary or just regulations, and it creates an obligation to do that, which the Letter of Intent does not do.

  18. Let me turn the question round. As a suspicious Brit, I can envisage circumstances in which HMG of whatever political complexion is being chased through the courts by, say, a French supplier who thinks that they should have been involved in some project or other. Somehow, I cannot see the equivalent ever happening in the French courts. Am I wrong?
  (Mr Gould) They do not come any more suspicious than people who have worked on collaborative programmes. I do not think it is an issue of being chased through the courts. We would be chased through the courts if we had done something which was contrary to United Kingdom commercial law in this country. If a French company had a contract with the United Kingdom government in English law and we did something that was against that, I can see a problem. I do not think the treaty really copes with that. To the extent that we harmonise contract law, it should make that less probable. Where I do see difficulties, interpretation of things like national security in the context of security of supply could be quite tricky to deal with from time to time. People will see these things differently. That is why we have procedures in the treaty which we have never had before for resolving disputes. We have a properly constituted executive committee where we can go and discuss these things and try to get them resolved, which we have never had before. It does provide mechanisms for resolving these things which we have not had in the past but fundamentally, if there are political differences of interpretation between countries, we shall have to go as fast as those political differences can be resolved. This makes it better but it has to be worked at. It does not cure everything just by being a treaty.


  19. We seem to have a very narrow definition of national security. There are very few areas of production now. I do not think the MoD have told us what are classified as essential to the British national interest. We are not on an anti-French path this morning but it seems to me that the French would have a rather less narrow perception of what is in the national security interests of France. Am I being grossly unfair, as I am often accused of being? How is national security defined? Is there some way in which we can say to another country, "You cannot say this because this is a totally different approach to national security to that which we have." It is often used as a cloak behind which countries seek to maintain a capability.
  (Mr Gould) Everybody is guilty of it too.

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