Examination of Witnesses (Questions 20
WEDNESDAY 10 JANUARY 2001
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 shareholderif
the government is a major shareholderthey 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.
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
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
(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 itto 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
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 ityou may be
able to correct me if I am wrongat 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 countriesit
was said that, because they are minor partners, they do not have
disproportionate influenceto 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
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 objectsSweden or
whoever it might bethen 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