Examination of Witnesses (Questions 60
WEDNESDAY 25 APRIL 2001
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 coversthe 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 peoplenot necessarily people involved
in defence, you will recall academics had contributions to make
last timewho 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)
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.
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 actionbecause that then represents less of
a threat to UK industry's competitivenessis 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
examplealbeit a worst case examplewill 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.
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 thinkand I stress I am speaking personally, though I
guess also on behalf of Rolls-RoyceI 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
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.
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 sentenceviews 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.