Select Committee on Defence Minutes of Evidence


Examination of Witnesses (Questions 20 - 39)

WEDNESDAY 10 JANUARY 2001

MR DAVID GOULD AND MR TONY PAWSON

  20. Be careful. You might not get a job with Thales or whoever.
  (Mr Gould) I already speak French. That happened before I knew which job I was going to. Historically, the French approach to these issues is different. They have a different national, historical vision; they have put a lot more effort into developing national technology. They do acquire defence equipment from overseas, including from the United States, but not to the extent that we do. If you look at things like contracts bulletins, things which are open to competition, it is true that the United Kingdom market is more open than most of the European markets. That gives us an advantage in the sense that we get quicker, better access to technology on a broader basis than happens elsewhere, but if you have a broader view of what is national security you could not have such an open policy as we have. On the plus side, France take their national security extremely seriously. They spend about what we do on defence, slightly more in dollar terms. They are the other European country that has a clear ability to deploy, to project, force as we do. It would be very much to our advantage if the French defence budget was spent to maximum effect. It would be to the European advantage. It would be to our advantage if, through the creation of transnational companies, their defence market became more open to our products. That is the kind of dialogue which we would hope to develop through the executive committee, through the subsequent MoUs dealing with research and technology, but it will take a lot of time and effort.

  21. If you are dealing with BAE Systems, you are dealing with a company where the British government has, despite being the major purchaser, an arm's length relationship. Dealing with a French company, you are dealing with a public corporation where they are proud of the fact that they are reducing the element of state involvement, but it is still very substantial. Does this have any effect upon the way in which British industry or these proposals are operated?
  (Mr Gould) We talked earlier about leaving commercial judgment to commercial companies and governments not getting in the way of that. Nonetheless, we are not disinterested and we do have concerns and mechanisms for embodying within the companies ways of dealing with those concerns. Shareholding is one of them which the British government does not tend to use. We still have golden shares in some companies, which limit their freedom of action in certain areas. We tend not to use that as a mechanism now but when mergers and acquisitions take place we do require deeds of undertaking dealing with security issues, sometimes with competition issues. BAE Systems and their takeover or merger with GEC Marconi is a case in point. There are degrees of such mechanisms. Shareholding is one. Clearly, if you are a major shareholder—if the government is a major shareholder—they are involved to some degree in companies' commercial judgment and in their long term strategic aims. Deeds of undertaking and golden shares are others. A major government shareholding does have an influence when one is thinking in terms of a merger or an acquisition because obviously the government's influence as a shareholder is not the same as the government's influence as a customer. I would say it does tend to inhibit merger, creation of joint ventures and so forth rather than encourage it. I must be careful not to speak for French companies.

  22. Not yet.
  (Mr Gould) Ever.

  23. It is a very sore spot with this Committee.
  (Mr Gould) Dealing generally with other European countries, certainly the industrialists I deal with from the five other European nations in the LOI would like to see less government control in their companies. That is the direction they want to go in. They are very polite about it, but they have to be polite about their shareholders. It is an inhibiting factor. It is not necessarily something that puts a complete block in the way of creating joint ventures in particular, but it is an inhibiting factor.

Mr Cohen

  24. I heard what you had to say about national security in relation to security of supply. Security of supply is very important, particularly for this Committee. We had our own inquiry into Bishopton last year and a previous committee expressed considerable concern when Belgium would not provide ammunition during the time of the Gulf War. The agreement seems to have a lot of mechanisms for quick consultation where there are disagreements but not much else. I know you mentioned the executive committee but are you satisfied that there is sufficient assurance from the Framework Agreement by the signatories of the other countries in relation to security of supply?
  (Mr Gould) Security of supply is an issue now, even without the treaty. There is a wide range of articles which are essential for producing deployed defence equipment which we acquire from overseas. Think of Tornado and Eurofighter Typhoon, for example. Those are three and four-nation projects and the chain of supply is back into all of the other nations involved. There are many other examples I could give. We do not have a framework treaty to date. What the Framework Agreement actually says is that the parties shall not hinder the supply of defence articles and defence services produced, assembled or supported on their territory to the other parties. That is a pretty powerful undertaking. I would agree that this is an international treaty; it is not a lease of a flat in London, SW1. The same sorts of legal constraints do not apply. When you come down to sanctions of international treaties, if you are worried about acquiring defence equipment on a short timescale, going to the international court is not a very good idea. By the time they have resolved something and come across a remedy, it will be too late. It seems to me there are two things. One is that, given that very firm undertaking in the treaty which I have quoted, if a country did hinder supply to another one of the six nations, that would be a pretty serious thing. It would destroy an awful lot of trust which presumably you will have spent some time trying to build up. It would also affect the commercial judgment of companies working in their country because they will say, "If this country is going to behave like this when there is a treaty obligation not to, we need to think twice about where we invest in the future." There is a lot of indirect sanction in here, but you are right. Legal redress for a short term defence supply problem is not the answer. Ultimately, it comes down to trust. I think the treaty helps us create trust rather than the opposite. It is a problem we face now, quite frankly.

  25. I presume the executive committee that you referred to will not have a judgment power?
  (Mr Gould) No.

  26. How will that be constituted? Will every country have somebody on that?
  (Mr Gould) There will be six members of the executive committee. I shall be the member for the United Kingdom and presumably my equivalents in the other countries, such as they are, for the six other countries. The treaty does not lay down precisely how the executive committee will work or terms of reference but we will be working on that over the next few months.

  27. The terms of the agreement allow countries to retain strategic activities, assets and installations. Is there any country that is going to spell that out in advance or just when you need the supply you might get a nasty shock.
  (Mr Gould) I would be inclined not to spell it out in advance because what we are trying to do here is have a flexible framework. If we try and spell things out in advance, we will probably spend two years trying to agree what things are and are not restricted and have a longer list than we would want to end up with.

  28. Do you not then risk the nasty shock?
  (Mr Gould) The import of this is if a transnational company wants to rationalise its source of supply, if it has turbine blade repair facilities in two different countries and wants to consolidate them in one, the nations will not put an unreasonable block against the company doing that sort of rationalisation. Elsewhere in the treaty, it does place an obligation on countries that want to do that kind of thing, which they do now anyway, to consult before they do it. It would make it an easier mechanism to enable a company to come forward and say, "We want to source all our production", of whatever it may be, "in country X" and enable us to do that with greater reassurance than we have had in the past.

  29. I would like your comment on the point in The Herald, a Scottish paper, on 1 December which said that Royal Ordnance got £10 million in payments under what amounts to false pretences. It says basically that Royal Ordnance intends to hold on to the contract for the propellent supply by qualifying with Bishopton propellent while trying to transfer the business to Germany. I would also like your comment on the MoD's role in this CHARM training round and dual qualification process. My understanding is that at this point in time the German propellent is not as well developed as the Bishopton one. It has safety problems which appear to remain after firing in the tank gun and there is another safety problem including quite poor performance at low temperatures. On top of that, the MoD are subsidising a move to the German propellent with additional public funding via the capability retention levelling to bring that German propellent up to the level of the existing Bishopton one. In addition to that, the projected timescales have been relaxed in this contract to accommodate problems encountered by using the German propellent. That is a pretty serious set of charges. I would like your comments.
  (Mr Gould) I am afraid I have not seen the article to which you are referring so it is rather difficult for me to comment. The chain of circumstances you describe seems to me to be pretty improbable. I will have to come back to you with a note because it is not something I am prepared to discuss off the cuff.

  30. Can I take you on to the export issue and the white list, with countries agreeing beforehand a list of prospective export destination countries? How will export licensing currently in place change under the new arrangements of the Framework Agreement?
  (Mr Pawson) The concept is that there will not necessarily be changes to the procedures in terms of the national applications. What there will be changes to is the substance in terms of the breadth of the licences, the timing, and the fact that they will be collectively agreed. What we would envisage is that there will be more use made of what are termed global project licences. "Global" is not a geographic term; it just means a whole or broad licence covering a particular area. There will be consultation among the nations concerned with a particular project to ensure that we can provide the necessary reassurance for industry about the future licensing of it. The fact that it is done in advance also is, we think, a considerable advantage. There is a system in the United Kingdom for doing this now. Not all nations have that.

  31. Will the parties participating in a particular programme agree to the export destination list and presumably also have the right to subsequently remove destinations from that list. Is that so?
  (Mr Pawson) Yes.

  32. Will they all have the same list or will those in different programmes have different lists?
  (Mr Pawson) As now, every nation retains its sovereignty. This is not under a collective European Commission; it is under the CFSP umbrella, if you like. It is an intergovernmental machine so all governments do, in extremis, retain a veto. You can think back to the spring of 1982 and that is something that we ourselves might want to think about quite clearly in those circumstances in terms of things going to Argentina. You can foresee extreme circumstances when the security of supply is a double edged sword. The governments have said, "We are not absolutely going to rule out our veto in advance." It has never been the case. There has always been a national veto in all the arrangements that I am aware of. Those are for most exceptional circumstances. I think it is important not to underestimate the value and importance of the agreement and the political commitment that goes with this agreement. With it has gone already clear cooperation between the nations concerned. It has been very effective in all the working groups and executive committees. There is a sense of common purpose, much more broadly in the St Malo declaration and others. The visibility that is given to these decisions now will be extremely helpful. If you are concerned that a minor partner may have a disproportionate influence, that is not a concern that we think in practice will be realised. The members of the working parties understand the need for proportionality. They have signed up to the importance of defence industrial competitiveness and restructuring. They will recognise that if they want to use disproportionate weight they are unlikely to be a partner of choice in future collaborations. They will also have, because of the visibility of these structures under the Framework Agreement, to take into account what will happen in relation to bilateral relations with the countries concerned, as well as the industrial coalitions. If one looks at that compared to the current situation, I think it is a great improvement but it is not absolute.

  33. I hear what you say about the importance and I agree with it and the political agreement and international cooperation that has but that will really imply that everybody should have the same white list. If they are not going to have the same white list, that undermines export controls and political cooperation in the longer term. What is the criterion for a country being deemed to be a participant in a particular programme? On the question of the veto, if a country is just marginally involved in production, then they should still have a veto.
  (Mr Gould) I think you need to distinguish between veto in the export of a whole product and veto in the export of a component of the product. Certainly it is the case now that a country that builds a component, for example, of a Tornado or a Eurofighter, if they disapproved of the country that we wished to export the aircraft to, they could embargo their component of it now. That will remain the case and that will remain the case under this. They will not be able to embargo components of a product that the other countries have put on the white list. In extremis, as Mr Pawson said, they could stop the complete part being exported. Unfortunately, we cannot remove that right from other partner nations without removing it from ourselves as well.
  (Mr Pawson) The fact that the licences are being considered earlier also provides an opportunity for industrial consortia to see whether they want to make alternative arrangements, whereas now one tends to hit these problems at the time of export or further downstream when it is extremely difficult and costly to change the makeup of a major equipment. In that sense, this will help as well. In terms of the so-called white list, if as we sort of envisage industry would apply it—to take an example, something like an A400M, Airbus Military would come to the nation concerned and say, "We would like a global licence for components to come together to form an A400M and we want other nations as well like Turkey, who signed up to the programme"—we would agree all those. Currently we plan to agree those much later than we would under the new system. If one country had an objection and it was making a small component of that, you are in a better situation than you would be if you had not got the collaboration, understanding and mechanisms in place that this Framework Agreement will bring.

Mr Gapes

  34. Can I press you on this issue because we have had a number of written submissions from organisations expressing concern about the implications of the white list. For example, Mr Pawson mentioned Turkey. As I understand it—you may be able to correct me if I am wrong—at least one of the six nations has a policy of not allowing arms exports to Turkey. That is Sweden. There are concerns that the development of a white list and the culture that goes with it will lead to a lowest common denominator and will undermine national goals in countries which might be more restrictive on their arms exports than others. How is this going to work in practice? Are these smaller countries—it was said that, because they are minor partners, they do not have disproportionate influence—to be disregarded? Will they have to comply with what the big countries want?
  (Mr Pawson) One starts with a base of what happens now. Countries have a sovereign right to restrict exports, regardless of any framework agreement. What we are saying is that this is a better system than the current system which has no collective mechanism for collective discussion, consensus of decision making, with those countries concerned. It is done in advance and made more visible at a time when options for alternatives are present.

  35. As I understand it, these white lists are confidential, are they not?
  (Mr Pawson) It is more visible between the parties concerned.

  36. But not to the public and parliamentarians and defence committees in the relevant countries?
  (Mr Pawson) The question of disclosure of the information is a separate issue and a matter of commercial confidentiality. White lists we would not see as being great lists of all possible countries for a project. We do not get into the white list and black list issue of why is not a particular country on a white list or not. We would envisage that industry will come forward and say, "We have seen realistic prospects for this collaborative project in not only those involved in the collaboration but also in the following areas. We would like your view on it." There are particular safeguards written into the Framework Agreement in Article 13 that, in terms of reaching decisions, countries do have to take account of the defence industrial interests in Europe criteria and secondly, in terms of changing their minds in the future, because these projects are very long lived, it is the changes in the target destinations that will affect it, not change in policies at home. There is a far greater reassurance there than there is at present.

  37. There is an EU code of conduct?
  (Mr Pawson) There is.

  38. Which all these countries have signed up to and other countries have signed up to. Is there not a danger that we are creating a tension, a system where there is an EU code of conduct which is restrictive in terms of arms exports; and on the other side we are creating a fast track system to speed the process with a white list, which is not published, of countries to which you are trying to speed through collaborative projects. The problem will arise when there are countries which are, for whatever reason, regarded as having human rights abuses or whatever, using arms for internal repression, which some countries do not sell to but other countries do sell to; yet the process of the white list in effect undermines the EU code of conduct.
  (Mr Gould) I am not sure if what you say about Sweden and Turkey is true.

  39. I am told that Sweden does not export to Colombia, Egypt and Turkey. There are others.
  (Mr Gould) You may well be right. I cannot confirm that. Provided that that which you are trying to export does not have a component from the company which objects—Sweden or whoever it might be—then you can avoid that problem by not going for a global licence under the LOI framework treaty. You could have a government to government arrangement with the other collaborative programmes, as we do with a number of collaborative programmes now. There is a mechanism for not encountering that particular problem, provided that it is not a collaborative project where the country which objects is actually a producer of the component.


 
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