Select Committee on Foreign Affairs Minutes of Evidence


Examination of Witnesses (Questions 60 - 79)

WEDNESDAY 25 APRIL 2001

MAJOR GENERAL ALAN SHARMAN, MR BRINLEY SALZMANN, MR FAROUK SAEED AND MR MIKE MCLAUGHLIN

  60. Can we mention he also manages Thales Defence Limited. Is that right?  (Mr Saeed) I am the Commercial Services Manager and I have responsibility for export licensing within the sensors division of Thales.  (Major General Sharman) Mike McLaughlin is from Rolls-Royce.  (Mr McLaughlin) A Government Relations Executive with Rolls-Royce.

  61. Thank you very much indeed for coming. I wonder if I might begin. When the original 1998 White Paper proposals came out to extend controls to intangible transfers there was a minor furore from the industry and the DTI were told that they ought to bring some new proposals forward and further consultations should take place. Are you happier with the provisions in the draft Bill on the intangibles issue than you were originally when the White Paper came out?  (Major General Sharman) In general we understand and agree with the extension to cover intangibles, since clearly anything that would be controllable, were it in hard copy should similarly be controlled. In the end the key will be the definition of precisely what that covers—the devil always being in the detail in these things. It may be difficult for individuals to do business on a day-to-day basis and know whether inadvertently or otherwise they are breaking the rules, and therefore it depends on the scope of them. We have particular concerns about the impact on multinational companies. Many defence companies, as you know, now are multinational, so dealings naturally on a day-to-day basis within the same company are across boundaries. It would not be difficult to imagine that you could have an unlicensed conversation between, say, Rolls-Royce in Derby and Buckingham Gate in London, yet if it happened over the Channel you might suddenly find you needed to consider whether you needed a licence because the other part of your company is abroad.

  62. When you made that point to the DTI how did they respond to it? Did they say that the present Bill as drafted would not catch that type of exchange?  (Major General Sharman) We have not, in many areas of this, been able to get down to specifics.  (Mr Salzmann) Of course, the inclusion of telephone conversations is entirely new. That was not in the White Paper originally, which confined itself to fax and e-mail transmissions. That is a new aspect which was not in the White Paper. It is certainly something which we are raising and we are going to raise again in response to this document. I think the DTI is certainly looking at the lessons learned from the introduction of the controls on dual use goods on September 28 last year. Our interpretation is that it is probably too soon, really, to gauge what the impact is on industry and industry's operations in the short-term since those regulations have been introduced. A much longer time is needed to assess that properly.

  63. That does lead me on to the second point I would like to raise. Do you, generally speaking, agree with the Regulatory Impact Assessment proposals in the document that say that it is going to have only a modest impact in regulatory terms? They base it on the evidence of the existing dual technology. Do you agree with that or not?  (Major General Sharman) No, we think it has been under-estimated. Firstly, the load on the DTI because I think, at least initially, there will be a lot of pressure from people—not necessarily people involved in defence, you will recall academics had contributions to make last time—who want to know whether or not they are required to comply. So that will be uncertain. Again, I suppose that the extent and how effectively it works will have to depend, because many of these things do, on the goodwill of people dealing with each other. What I would say, perhaps, as a specific industry comment is that industry already guards its intellectual property pretty carefully, and so it is not careless with its technology nor transfers it easily. So that might counter the difficulty, other than the one, as I have said, of multinationals.  (Mr McLaughlin) We are still wrestling with compliance following the introduction of the licensing of intangibles in an EU dual use context. A global company like Rolls-Royce has no visibility at this stage of quite what the scale of the policing effort will be if it were to come in for much broader ranging products. That is the significant issue for us.

  64. Has your company had experience of the European Directive?  (Mr McLaughlin) Yes. Since September last year. To be honest, we are still wrestling with it in terms of what it means, and trying to identify what is the precise scope is — it is not an easy task.

  65. They produce an "order of" do they not, of what impact it would have. Do you think it is going to be wildly out, or do you just not know?  (Major General Sharman) Like so many of these things the real burden is the hidden one of people worrying, wondering and spending time deciding whether or not what they are trying to do does or does not fall into the category that would need to be declared. I think there is a great hidden burden. No doubt, after a period of time, once it is clear what ministers and officials really want to happen, it will settle down to something manageable.

  66. Mr Saeed, I wonder if your company has had any experience with intangible transfers?  (Mr Saeed) Yes.

  67. Do you do hundreds a year? What sort of proportion of transfers takes place in a company like yours?  (Mr Saeed) At the moment, because all our products are military products they are therefore licensed and we use the OGEL to export documentation, etc. In support of what Alan said, I can think of a situation where we have a research establishment both in the UK and in France, and currently the information is exchanged between the two under the OGEL, but what is proposed in the new Bill is an individual licence would be necessary. We have some concerns as to how we will control—

  68. Why would the Open Licence procedure not just cover you for that?  (Mr Saeed) It may well do. Perhaps under the draft Bill there is the possibility that having enshrined it in legislation an OGEL would be issued which would enable us to pass the information backwards and forwards.

  69. I read very strongly into the provisions in the consultation paper that that is exactly the way the department is going to go. It is going to issue these open licences to cover these perfectly innocent transactions.  (Mr Saeed) That will certainly be a way forward for my situation.

  70. Unless there is any comment you would like to make on the Regulatory Impact Assessment?  (Mr McLaughlin) I would just endorse what Farouk has said. In the context of a global company, unlike Thales, Rolls-Royce's defence business, for example, is less than 20 per cent of the whole, so it is only part of our business, but the international nature of a global company in terms of technology acquisition and technology development is moving towards centres of excellence in different locations. Therefore, the requirement to move technology backwards and forwards is increasing for any global company.

  71. We have the Secretary of State before us this afternoon, so we shall, I can assure you, pursue this.  (Mr McLaughlin) The implication of what I have said, of course, is that if it is not an open licensing system, the administrative effort and cost will be very significant.

  Chairman: May we turn to the issue of technical assistance, because controls on technical assistance are going to be the subject of consultation.

Mr Viggers

  72. This is one area where the Government has specifically said it is open to consultation and representation. No doubt you have considered this. Following the June 2000 EU Joint Action, what are your current reactions to the consultation procedure? Have you made representations to the Government already? What are the main features of your concern?  (Major General Sharman) We have not, and this is an area where, really, the consultation opportunity we have had so far has not been enough. As you know, we have got until 25 May and it has been difficult, with proposals like this which have not been part of previous mainstream discussion, to have formed a judgment. Brinley might have had some responses from companies.  (Mr Salzmann) Comments which we have had have expressed concerns that item 4.2 of the draft Bill on page 49 seems to require a new category of licence which is equivalent to the United States' Technical Assistance Agreement. Certainly UK companies, based on their experience of trying to deal with TAAs, find that they are extremely complex with a considerable amount of additional work required by the companies. Also, it is not clear from the draft Bill as to whether this licence will work at a company or a country level. Certainly in the American example TAAs can work at either. So under US regulations, if a similar system was imposed in the UK, any non-UK citizen could not have access to TAA information, even if he works for the British company and is security cleared to high levels, without further approval. We have got serious concerns as to whether the British Government is planning to take its plans and its proposals as far as the Americans have done with the TAA.

  73. Have you asked the Department for clarification and have you been satisfied with their response?  (Mr Salzmann) We have not asked yet. As Alan Sharman has said, we have really only gone out to industry trying to get comments from industry. So we will be raising this with the DTI when we have completed our consultations and have had enough input from our member companies.  (Mr McLaughlin) It would certainly be part, I would suspect, of a number of individual companies' responses too, because the implication of this proposed legislation is that if we are indeed moving towards an American style technical assistance regime, then the internal management of that TAA regime, if it in any way resembles the US model, is actually very difficult. It has all sorts of implications not least for issues such as European employment law. For example, if we were to get a TAA granted by the US such that a technology package came over to UK, it is granted by company name and is limited to UK nationals. So we have to start making arrangements to make sure that we comply with those stipulations and requirements. That is why companies, generally, I think, would have concerns at any move towards the US Technical Assistance Agreement model, which is what we are actually talking about.

  74. Are you, as an association and as individual companies, satisfied for this issue to be handled under an European umbrella, or would you prefer to see it handled under a British national umbrella?  (Major General Sharman) I think our position on almost all things related to the Bill is that multinational action—because that then represents less of a threat to UK industry's competitiveness—is always going to be a better solution generally. At least an EU if not an international approach is always better, in principle. Obviously, case-by-case that may not always be so.  (Mr McLaughlin) May I also highlight the fact that technical assistance does not happen in many locations in isolation. Again, perhaps an illustration by example—albeit a worst case example—will illustrate my point. If we were required because of, let us say, a UK national embargo to withdraw technical assistance from, for example, Indonesia we would need to withdraw the people who are there on military support. That would leave a company like Rolls Royce with half-a-dozen people in a country supporting the civil airline and supporting the national energy company and power generation projects. So any military consequence would, for the company, have potentially a much broader implication in terms of broader customer relations. With that example, albeit in different guises, the customer in all three cases is the same: the Indonesian Government.

Chairman

  75. We are going into a slightly separate point. You can pursue the second point but can I just clarify for one moment? I suspect, do you not, that the provisions you have been referring to and which concern you, ie that you are going to have a US version, is one of the prices of getting the ITAR arrangements? Is it a price worth paying?  (Mr McLaughlin) I am not sure that I am qualified. Clearly the ITAR arrangements on which DESO has been leading is a question better answered by the Director General of DESO or someone from the Ministry of Defence. There has been an industry consultation through the ITAR waiver process. I think—and I stress I am speaking personally, though I guess also on behalf of Rolls-Royce—I have a problem with rationalising, in the particular context of the discussion in this room in the last hour or so, the extra-territorial dimensions that keep raising themselves in the context of this Committee's inquiry, with the reluctance of the UK Government to accept extra-territorial imposition under the ITAR discussion label. They do not seem to sit very comfortably with me, and I think the issue of extra«territoriality has much broader implications than perhaps are generally realised at the moment. We have, to some extent, a dichotomy.

  76. It would not be reasonable for me to suggest that this Bill will, in the way it is drafted, facilitate ITAR exemption in that sense? It provides a number of assurances that the United States have been seeking. Is that right?  (Major General Sharman) In general terms that is true, yes.

  77. This technical assistance is certainly one of them.  (Mr McLaughlin) In general terms I think that is true.

Mr Viggers

  78. Mr McLaughlin touched on the point I was working towards. Would you expect to be able to offer on-going technical assistance to a customer in an embargoed destination just because it was not expressly prohibited? I presume, from your previous answer, you would look at each contract and work out which parts of it need to be struck out.  (Mr McLaughlin) I guess, as I have identified myself as company specific, the first thing I ought to say is that decisions like that will be taken at a board level and not by me. I think I can answer the question anyway. The expectation would be, if you stick with the example that I used, that even were we required as a result of some embargo imposition to withdraw technical assistance to the Indonesians in the military arena, we would look to continue it in support of their national civil airline and in support of the power generation projects that we as a company are involved in there. I have to say that that is a company specific response, but I guess it is not untypical of companies whose sole interest is not defence. My opening comment was to impress upon you all, if I may, that defence interests do not happen in isolation for many companies; there are implications beyond the defence arena.

Chairman

  79. Mr Viggers is pursuing more the point at paragraph 47 on page 14 of the consultation document. Views are invited about these new powers of technical assistance. If you look at the last sentence—views are sought. May we draw you out on this specific point?  (Major General Sharman) Clearly, industry fully respects the position on embargoed countries. As a principle, generally speaking, the Government will be resolving that by revoking licences, and Pakistan is a classic example at the moment. Indeed, there was earlier reference to Israel and I can assure you that the officials who control and manage licences under the current system are reacting quite quickly. Industry may or may not suffer but recognises that, suddenly, licences are being turned down, and often the Government will not declare an official moratorium, so to speak, but imposes one. In fact, one of the hopes we have of the actual legislation is that perhaps they will be obliged to be rather more transparent about their—

  Chairman: We will come on to that, I think. It came as something of a surprise that technical assistance is not caught by embargoes, according to this paragraph.  (Major General Sharman) Generally speaking, technical assistance is part of a package for which licensing is required anyway. So I can see that within the context of trafficking and brokering it may be relevant, but we are a little confused and not quite sure whether this is something new or not.

  Chairman: That makes two of us. Perhaps that is one thing we will see if we can get unconfused by the Secretary of State this afternoon. May we move on to brokering.


 
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