Select Committee on Defence Appendices to the Minutes of Evidence


APPENDIX 3

Memorandum from the Defence Industries Council (6 December 2000)

INTRODUCTION

  1.  The Committee sought the views of the Council, along with others in the defence industries, on the above Agreement, which has recently been presented to Parliament. As the Committee will be aware, the Agreement is a further step in the process that was started by a declaration from the Heads of State and Governments of France, Germany and the UK in December 1997 to facilitate the restructuring of the European aerospace and defence electronics industries. This was followed by a joint statement of the Defence Ministers of France, Germany, Italy, Spain, Sweden, and the UK of 20 April 1998 stating their priorities to harmonise aspects of their activities which impact on defence industry restructuring and to remove obstacles to restructuring which fall primarily to governments. This statement led on directly to the signing of a Letter of Intent by the six Ministers on 6 July 1988. The letter set out in some more detail the subjects that would be covered by this work:

    —  Security of Supply.

    —  Export Procedures.

    —  Security of Information.

    —  Research and Technology.

    —  Treatment of Technical Information.

    —  Harmonisation of Military Requirements.

  2.  The Letter described the organisation for undertaking this work, with each nation chairing a six-country working group on one of these subjects, and an Executive Committee to manage the overall programme. It also gave a schedule for the work, which was for the Executive Committee and the six working groups to do their work from July 1998 until June 1999, and for this to be carried through into agreements between July and December 1999.

  3.  The Framework Agreement now before the House is the product of the process outlined above. It is not, strictly speaking, the end product, because in most areas the Agreement, as its title implies, is a framework for governments to act, setting out the things they have agreed to do, and, in many cases, the principles and guidelines by which they propose to operate from herein. There is, therefore, much work still to be done, in most of the areas covered by the Agreement, to implement its provisions. Most of the six working groups mentioned above are still active to this end.

GENERAL COMMENTS FROM INDUSTRY

  4.  The DIC welcomed the Letter of Intent initiative when it was launched and had some input into the selection of subjects for working group study. Industry has throughout the life of the initiative regarded it as a positive development and, in particular, supported its essential industrial objective. This is stated succinctly in the Preamble to the Framework Agreement (fifth paragraph) as "...to promote a more competitive and robust European defence technological and industrial base in the global defence market...". The spirit of the original Letter, which envisaged harmonisation of activity and removal of governmental obstacles in order to support this objective, is consistent with industry's own approach as stated in the DIC input to the Strategic Defence Review. In essence this is that industry has proved itself competitive in the global market and welcomes any measures which will improve access and efficiency in areas of that market.

  5.  It has become more apparent over time, that the process has had, to some extent, a wider political objective, as made clear in the same sentence quoted above: "to contribute to the construction of a common European security and defence policy". The relationship between industrial and political objectives in Europe is complex and it is not proposed to comment specifically on political issues in this note. However, in terms of the questions posed by the Committee, industry sees significant potential benefits from the Framework Agreement in facilitating the development of the European market for defence goods and services. But there is a risk that the fairly simple objectives stated in 1997 become part of a complicated political scene. In this respect the pace of progress has not been as fast as industry would have hoped; clearly it has not kept up with the rapid industrial consolidation taking place in Europe. Industry remains concerned to see the vigorous prosecution of harmonisation and removal of obstacles, as first mooted at the end of 1997.

CONSULTATION WITH INDUSTRY

  6.  It follows from the nature of the process involved, essentially one of governments finding consensus on regulatory and policy issues, that industry has had a consultative role in the drawing up of the Agreement, rather than a central one. To be more precise each government has consulted its national industry and taken into account the national industry view to the extent it thinks fit. Only on one occasion have the six governments and six industries sat together at the Executive Committee level, though, to be fair, there have been a number of more open meetings at the Working Group level. Industry has, on the whole, found it reasonably easy to agree its views at a European level, using the umbrella of the European Defence Industries Group (EDIG), though EDIG's membership goes wider than the six signatory members, so a sub-group has had to be formed.

  7.  Industry would have welcomed more dialogue with governments at the European six-nation level. This would have been a reasonable reflection of the fact that the globalisation of the industry has moved forward rapidly in the three years this process has been under way. To address the Committee's question again, there has been a good deal of benefit through the process of drawing up the Framework Agreement, in governments and industry consulting together at the technical level. The risks here are that given that the consultation remains dominated by national positions, that the implementation of the agreement will be dogged with disputes about national interpretations of its provisions. In general terms the UK tends to lose out where the debate is dominated by local and national considerations as opposed to the wider interest in creating a competitive and efficient market place. Industry has, in almost all areas, found it easier to reach consensus at a six national level than have the governments. For the future, industry proposes that the governments should work to establish an agreed approach to implementation and involve industry systematically in that process at the working group and Executive Committee level, moving away as far as possible from a national based approach.

  8.  UK Industry has been consulted by the Ministry of Defence about most areas of the Agreement, though the depth of consultation has varied. Industry's views have not prevailed in some cases, but it is accepted that the Ministry has made significant improvements to the drafts in almost all areas where industry has made representations. The view has been expressed that consultation between government and industry may be closer in other countries, but that it is impossible to judge objectively. However, industry sees the need for further consultation on the implementation of the Agreement, and on the implications for the development of the European defence market and the wider global situation.

WIDER INTERNATIONAL IMPLICATIONS

  9.  As the Committee has noted, the Government is also pursuing a dialogue with the USA under the Declaration of Principles, and a related initiative on export controls. The USA is believed to be discussing similar approaches with other European nations. There are also several other European initiatives that relate closely to the objectives of the Agreement: OCCAR, which the Committee has already studied; proposals for a European Armaments Agency; measures envisaged by the European Commission, and the consideration being given to the future of the WEU and its subsidiary bodies. These developments are inter-related and may not be consistent with each other in all respects; the overall picture is difficult to grasp. One risk is that UK industrial interests may be lost in the complexity of these many initiatives. Industry believes that government and industry should work closely together over the next few months on the way forward in Europe. Without such a dialogue there is again the risk that industrial objectives will be lost in the complex of initiatives being undertaken in Europe.

  10.  The transatlantic dialogue under the Declaration of Principles, and, in the area of export controls, the Defence Trade Security Initiative, is very important for UK industry: the USA is by far the largest defence market in the world, and has an acknowledged lead in many areas of technology. The Committee has asked how these initiatives with the USA might fit alongside the Framework Agreement. Industry is not in a position to answer that question, but would observe that it is essential for the UK to have a co-ordinated approach to these many separate strands of our relations with other governments on armaments matters. The effort to strengthen our relationships in Europe and the USA and open up markets on both sides of the Atlantic is welcome but there could be conflicting priorities and these need to be discussed. It should also be taken into account that there is a difference of approach: the Framework Agreement sets out the principles for six governments to agree a common approach to policy and regulation. The UK/USA dialogue is one in which the USA will have objectives to change UK policy and regulation as well as vice versa. Industry would like to be consulted on the balance of benefits available to each side.

INDIVIDUAL ASPECTS OF THE FRAMEWORK AGREEMENT

General Organisation

  11.  Industry regrets that this part of the agreement does not make specific reference to the consultation of industry. It would have welcomed consultation being a formal part of the process rather than being left to the discretion of working group or Executive Committee chairmen.

Security of Supply

  12.  Industry supports the objective of removing impediments to the restructuring of the defence industry into transnational defence companies (TDCs), leaving the distribution of capabilities to the commercial judgment of the companies involved. But the provisions in the agreement are only a modest step in this direction and are open to varied interpretations in different countries. For example, Article 4 speaks of ". . . measures to achieve . . . a fair and efficient distribution and maintenance of strategically important assets, activities and skills." Industry has expressed concern about the different ways these words could be interpreted. UK sub-contractors are concerned that it will be used to maintain national barriers rather than to encourage cross-border trade.

  13.  Article 8 dealing with the reconstitution of supply has caused considerable concern in industry. The desire of participating governments to reassure themselves is understandable, but it seems curious that these provisions, which will presumably only be needed where co-operation has broken down, should be supposed to proceed "in a spirit of co-operation with industry". Industry remains concerned about the way governments may use these provisions, perhaps beyond the intention of use only in "exceptional circumstances".

  14.  In the end it is the willingness of governments to open up their markets and defence industries to competition that will determine whether the industrial objective of the Framework Agreement is achieved.

Transfer and Export Procedures

  15.  Industry has been disappointed with progress in this area. As in other areas, the bringing together of the six authorities will probably lead to modest improvements in the handling of transfers within the area of the six nations. But the objective should be a system of free circulation subject to a single simplified export procedure.

  16.  But on the issue of exports outside the six nations, industry has put forward proposals via EDIG for lead nations to take responsibility for exports of products produced under collaborative arrangements. The industries of all six nations support this position.

  17.  This is one area where the relationship between the implementation of the Framework Agreement and initiatives with the USA could present problems of consistency.

Security of Classified Information

  18.  Government and industry have worked closely together in this area and a number of useful reforms are included in the Agreement. The main ones were agreements reached on:

    —  mutual acceptance of personal security clearances;

    —  how defence companies' facilities will be cleared to process classified information;

    —  acceptable rules governing access to participating nations' classified information by their nationals within their defence companies;

    —  rules governing the protocol for consent to the release of participating nations' information outside their programmes;

    —  use of commercial couriers for some categories of classified information;

    —  electronic transmission internationally of "Restricted" information using commercial encryption mutually accepted by the relevant national authorities;

    —  simplifying the international visits procedure by devolving certain responsibilities to defence companies, rather than involving officials at every stage.

  19.  This is a positive outcome, which will benefit companies involved in more than one of the six countries considerably providing they are implemented consistently across all the UK and other country agencies involved and at all levels within them. For example, in the case of use of commercial encryption, there is a risk that this will be interpreted in the UK as only permitting use of encryption which has been formally evaluated as in the past. This would imply long delays and limited choice and no real benefit to industry.

Defence Related Research and Technology

  20.  There has been a good dialogue between government and industry in this area and the results are welcome. In particular, the Agreement holds out the promise of a more co-ordinated approach to fulfilling common technological needs, and of the more efficient use of resources. This is particularly the case regarding the setting up of technology demonstrators and the programmes with flexible geometry ie where participation can be limited to those countries with a genuine contribution to make. In this respect, the commitment in Article 34 to replace "juste retour" is welcome, though industry remains unclear how a system of global return will work in practice.

  21.  Overall, this part of the Agreement should provide a positive basis for co-operation between the six nations, and thereby enhance the work being done in the UK between government and industry to improve efficiency in the use of R&T resources. If it is not possible to agree a way forward for European research within the Western European Armaments Group via the EUROPA MoU, then the working group associated with this Agreement is likely to play a key role in taking forward defence R&T with the UK's key European partners.

Treatment of Technical Information

  22.  The working group in this area has consulted with industry in detail. The result has been the setting down of some useful principles in the Agreement. Industry is generally positive about what has been achieved, though a great deal more work is needed to bring these provisions into practical application.

Harmonisation of Military Requirements

  23.  This is the area which, for understandable reasons, industry has been least involved in the detailed dialogue. The provisions set down in the agreement are far-reaching and broadly to be welcomed, especially the reference to a common dialogue with industry in Article 45. But their implementation will require considerable political will and the sorting out of a number of relationships with other institutions, for example, will the body envisaged in Article 48(2) be a development of the existing OCCAR organisation, or a separate body? Harmonisation of military requirements is generally recognised as a potentially important stimulus to further industrial rationalisation, but so far only a very limited amount has been achieved in practice.

Protection of Commercially Sensitive Information

  24.  Industry welcomes the recognition given by the participating nations here, and in the treatment of technical information, of the commercial value and market sensitivity of much the information they will be transferring and holding. However, the adoption of the basis for the NATO Agreement on Communication of Technical Information for Defence Purposes and its further adaptation, would have meant industry would have been working from an existing regime that it understood well.

Final Provisions

  25.  It is noted that Article 56 provides for accession of further nations to the Agreement only where the existing nations are unanimous in accepting them. Industry generally applauds the actions of those nations that have taken the initiative that has led to this Agreement. But there are risks in alienating other European nations, which include some key customers for their industries, if the Agreement becomes a closed shop on a long-term basis. Industry would advise the governments to keep this issue under review.


 
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