Examination of Witnesses (Questions 1
WEDNESDAY 10 JANUARY 2001
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
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 insignificantand this is significantwe 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
(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 duplicationhence,
enhanced efficiency and more competitivenesswhich will
lead to a stronger and more competitive defence industry.
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
(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 knowcertainly not in the last three
yearswe have never refused a single one. To the extent
that we can broaden those licences, we can reduce the burden on
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 industryit is quite difficult to define
these cases as some companies are diversifiedto defence
industrial activity as we can make it work because that is going
to give the greatest competitive advantage to industry if we do
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.
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.