INTRODUCTION

  The DMA is grateful for the opportunity to comment upon the Government Review of the aims, objectives, role and status of the Export Credits Guarantee Department. The activities and support given by the ECGD to British Industry play a vital role in assisting it to compete in the global export market. We are sure that other Industrial representative bodies, and individual companies, will reflect this essential role in their own submissions to the review. For the British Defence Industry, the vital nature of ECGD support is emphasised by the increasing importance of exports for the continued maintenance of a viable national defence industrial base in this country.

THE BRITISH DEFENCE INDUSTRY

  As a percentage of GDP, the UK has the World's second largest defence industrial base, currently comprising c11, 140 privately-owned, commercially operated companies (figure from the last MoD(UK) Defence Contractors List) employing some 355,000 people (figure from the 1999 UK Defence Statistics). The Defence Industry employs c10 per cent of the UK's total manufacturing industrial workforce and accounts for c.11 per cent of the country's industrial manufacturing output. The Defence Sector accounts for some 50 per cent of both the aerospace and shipbuilding industrial manufacturing that takes place in the UK, and some 40 per cent of the electronics industry.

  Since 1980 the British Defence Industry has completed a major restructuring, which has seen the loss of over 300,000 jobs. As a result, it is now well placed to compete in the increasingly competitive defence export market, both for the supply of new equipment and for the upgrading of existing material of all types.

  The highly diverse Defence Industry enjoys a key position in the UK's manufacturing industry; with many British companies in the forefront of Western high technology development, production and innovation. A broad product range of equipment is offered which encompasses the complete gamut of material requirements, from high profile platform systems such as aircraft, warships and armoured fighting vehicles, through major subsystems, including communications, radars, propulsion systems, munitions and support services, to basic equipment, eg clothing and footwear. The UK's Global reputation for technical and qualitative excellence is well known in many of these fields. The UK especially demonstrates great strength in the high technology sub-systems sphere, where it has a particularly strong record in most sectors. In consequence, a considerable proportion of defence export contracts won each year have been for subsystems, components, spares, etc and there are very few major Western high technology programmes which do not have some level of British subcontractor participation.

  The primary role of the highly diverse UK Defence Industry is to meet the requirements of the British Armed Forces. This role is paramount, and is the fundamental raison d'etre for the maintenance of the Defence Industry. Many countries have learnt that reliance upon foreign sources of supply to meet their defence equipment needs undermines their national security interests. As a result, an increasing number of nations have been seeking to enhance their own indigenous defence industrial capabilities in order to protect their national security. Historical examples of this include the UK, itself, whose Royal Navy was reliant upon optical range-finding systems supplied from German companies in the early years of the Twentieth Century, only to find that this source of supply was no longer available to them from August 1914, and whose Army tried, unsuccessfully, to purchase artillery ammunition from Belgium in 1990, for use in Operation Desert Storm.

  The importance of the Defence Industry has been clearly recognised by the UK Government, with the Secretary of State for Foreign & Commonwealth Affairs stating, on 28 July 1997: "The Government is committed to the maintenance of a strong defence industry, which is a Strategic part of our industrial base, as well as of our defence effort."

THE GROWING IMPORTANCE OF EXPORTS

  The over-riding raison d'etre for the UK Defence Industry is, always has been, and always will be, the supply of the equipment and services needed by the British Armed Forces to ensure the protection of the country's national security interests. However, exports are becoming increasingly vital for the continued maintenance of a viable defence industrial base in the UK. The Industry cannot be sustained by reliance upon procurement by the Ministry of Defence (UK) alone. Due to the high technology and cost of a large proportion of the Defence Industry's output, it is essential to lengthen production runs to reduce unit costs and, therefore, it is vital to export.

  The British Defence Industry has a long and successful history of doing business around the World and providing the equipment required by both the UK's own Armed Forces, as well as those of its overseas customers. The British Defence Industry currently exports some 40 per cent (c.£6.685 billion in 1997) of its output. The Defence Sector is one of British Industry's great success stories—in recent years the UK has repeatedly taken over 20 per cent of the World's annual defence export market, a figure that no other British Industrial sector can match. In 1996-98 the UK's Defence export performance was even more impressive, with Britain taking 25-26 per cent of the total Global market. The UK's performance is particularly impressive when it is realised that there are a large number of countries, which are major defence material importers, to whom Her Majesty's Government refuses to allow the UK Defence Industry to sell equipment. Furthermore, Britain does not have a Government subsidised Foreign Military Sales-type programme, as a number of the UK's major competitors do.

  The benefit of these defence exports is felt not just by the British companies concerned, but also by UK Industry as a whole, as they can serve as a catalyst for national economic and technological development. Exports also help to defray the UK's own Research and Development costs and the MoD (UK) has estimated that defence exports, through extended production runs, reduced unit costs and the Commercial Exploitation Levy, save some £350-£400 million per annum from the UK's Defence Budget.

  Today over a third (c.130,000) of the UK's defence industrial jobs are export-related and over a third of production output is for export. The above employment figures do not take account of the additional jobs which are dependent upon the spending of those who are employed in the Defence Industry.

  Whilst the global defence market has been in steady decline since the mid-1980s, it is still lucrative and valuable financially (in 1998 being worth an estimated US$39 billion), whilst also having important intrinsic strategic and political implications. The benefits for the companies involved and for the wider British economy, are substantial and also protect the UK's national interest through the maintenance of our indigenous manufacturing capability and British political influence around the World. It must also be stated that companies often fund a considerable portion of their R&D activities (developing the equipment needed by the British Armed Forces) from export-generated income. Thus, exports help to keep the UK at the cutting edge of high technological development, giving our Armed Forces a technological advantage.

  Worldwide, the Defence industrial sector, despite some downsizing and rationalisation in recent years, still has considerable excess capacity. Competition in the ever lucrative defence market is getting ever more intense, with increasing numbers of competitors vying for decreasing numbers of potential business opportunities. With most Western Defence Budgets being cut, many defence companies, especially in the USA, which have previously been able to rely upon their own domestic markets for their business are now being forced to look abroad for new business. In addition, in recent years a number of new competitor nations (eg South Africa) have been able to emerge on the World market, whilst a growing feature of defence exporting has been the need to foster collaboration, co-production and technology transfer. Any advantage that can be given to British companies to help them to compete with foreign competitors must be welcomed. We believe that the provison of financial underwriting services, as offered by ECGD, gives UK firms just such an essential advantage.

  The value of defence exports to the nation has already been highlighted, not just in terms of the contribution to GDP and trade balance, but also in the employment created and maintained in this country, which would otherwise be lost, and the political significance and influence that such sales can give the UK in major customer nations. That explains why so many Governments around the World are very keen and supportive of their own Defence Industries' efforts to promote and pursue potential export sales. If the British Defence Industry's efforts to promote and pursue potential export sales. If the British Defences Industry's export activities were to be curtailed, it would be likely that large sections of the Industry would wither and die, with the UK losing many areas of indigenous defence industrial capability and having to become reliant upon meeting these from foreign sources of supply. Meanwhile, the costs to the Minsitry of Defence (UK), and, thus, the British tax payer, of the UK-sourced equipment that is required by the British Armed Forces would increase.

PUBLIC PERCEPTION

  In our view the British Public has been misled by a deliberate campaign of disinformation by pressure groups with regard to the relationship between ECGD and UK defence exporters.

  We welcome the opportunity for this subject to be aired and discussed openly in an informed debate so that responsible influences and decision makers can be made aware of the extent of the disinformation. A good example of this was a recent article in a major British broadsheet newspaper on the issue of ECGD support for the British Defence Industry. To illustrate its author's arguments and views, the article included a graph "clearly" demonstrating the considerable growth in the percentage of ECGD cover given to defence exporters. The graph prematurely stopped at 1993-94, rather than including more recent figures, which were readily available. These would have undermined and invalidated the author's arguments by illustrating a strong downturn in the cover given to the Defence sector in the following years.

  ECGD support is frequently portrayed by some "anti-arms trade" pressure groups as being akin to a British tax payers' subsidy to defence exporters—this is patently untrue. There is no Government subsidy involved. The ECGD does not lose money, and has certainly not made a loss since a major re-organisation in 1991. The premium payments received from exporters are such to allow ECGD to make regular surpluses which contribute to the funds available to Her Majesty's Government. Thus, ECGD provides the support necessary for exports to take place which in themselves contribute to the national economy and GDP, whilst also making an annual surplus into the bargain. It would seem that everyone, from the companies and customers involved, through to the national economy and Treasury wins.

  Another perception is that ECGD cover is almost entirely to the benefit of very large British companies, and that small and medium sized enterprises (SMEs) gain very little, if anything, from it. This is quite wrong. Whilst, naturally, in financial terms, the lion's share (c 70 per cent) of ECGD cover is provided for major, very expensive projects, which, by their very nature, will involve large prime contractors, it must also be pointed out that these programmes will involve large numbers of lower-tier suppliers to the primes involved. Many prime contractors nowadays are integrators of complete systems rather than manufacturers, with parts and components provided by a multitude of suppliers, who, in their turn, have sub-suppliers. The importance, size and nature of the supply chain must always be kept in mind when considering major, large-scale projects. Many of the suppliers at the second, third and fourth tiers will not necessarily consider themselves to be defence contractors, as such, but may well include a number of firms from the civil sector. The increasing importance of commercial-off-the-shelf equipment in the defence sector is further accentuating this. Thus, even the very smallest companies, including many in the civil sector, will, perhaps unbeknown to them, gain indirect benefit from ECGD support being given to very large defence projects, and it is not just the large primes directly and immediately involved who gain from this.

ECGD TREATMENT OF DEFENCE AND OTHER INDUSTRIAL SECTORS

  To our knowledge, the British Defence Industry is not treated as a separate and special case from other Industrial sectors in the allocation of ECGD funding. Thus, the Defence Industry is not subsidised in comparison to other Industrial sectors. It is a fundamental principle that ECGD does not discriminate between applications relating to defence exports as opposed to those for civil exports, in terms of the amount of available funding. ECGD practices a strict "first come-first served" policy. In many ways defence companies are treated less favourably, with coverage being provided for less per cent of the value of the contract for a shorter time period. The allocation of funding support provided to the Defence sector is highly variable. This is easily demonstrated in the table below:

LEVEL OF ECGD COVER PROVIDED FOR DEFENCE BUSINESS

  The significant increase in the figure for 1998-99 can be readily explained by the fact that we understand that two very large defence contracts were being covered in 1998-99, coupled with the decline in civil export business around the World as a result of the economic downturn in the Far East since the summer of 1997. This does not necessarily indicate a trend, but is simply be a one-off anomaly.

  In some years a significant number of major defence contracts may be signed where ECGD support is required and where it can be made available. For example, the figures for 1992-93, 1993-94 and 1998-99 clearly show a large percentage of defence business. By contrast, in many other years, the number and/or size of contracts covered may be (much) smaller. Thus, it can clearly be seen that ECGD is not a private fund used for the benefit of the UK Defence Industry, as some would like to perceive it to be.

IMPORTANCE OF ECGD COVER TO UK DEFENCE EXPORTS

  Below is a table illustrating the percentage of British Defence Exports which have been dependent upon being provided with ECGD cover.

(1) Figures for Calendar years (January to December) from "The UK Defence Statistics" for export orders placed

(2) Figures for Financial Years (April to March) from ECGD

  The above table demonstrates the vital importance of ECGD cover in assisting the British Defence Industry to achieve a large proportion of export sales. This is even more evident when one examines the figures for particular countries or regions. ECGD provides essential cover for more "risky" markets. Whilst in 1998-99 ECGD covered a small percentage of visible British exports per annum, and 28.1 per cent for defence exports globally, the figure is much higher for some regions and nations. We estimate that for some countries the proportion of defence exports which are only made possible by being given ECGD support could well be 60 per cent plus. In the ECGD's Annual Report and Trading Accounts 1997-98 there is a breakdown on page 19 of support for the defence sector which clearly demonstrates the regional variation for support given, and also that for different equipment sectors.

  From the above figures, and examining those contained in the UK Defence Statistics as well as those in the DTI's study on The Value of the Defence Industry to the UK Economy, it is quite clear that, whilst some equipment sectors are only slightly, but still significantly, dependent on ECGD support, the export activities and sales of others (especially vehicles) would be severely affected, if not almost completely wiped out, if ECGD was no longer able to support them.

COMPARISON WITH OTHER NATIONS

  Comparison with the support available in other countries is very difficult and far from being straightforward. However, comparison with federal and other forms of financial assistance afforded to defence companies in Europe, the USA, and elsewhere, in contrast to that available to British companies does reveal that UK Industry is at a competitive disadvantage, which ECGD goes only some way towards counterbalancing.

  The UK is probably the only major defence equipment exporter which does not provide some kind of direct government subsidy to its Defence Industry.

  In France, the Government still at present retains ownership of some 70 per cent or so of the Defence Industry, which makes it easier to justify keeping afloat companies which, in a strict commercial environment, would almost certainly have collapsed many years ago.

  In Germany, support from the Lande (local authorities) is used to assist not only defence, but also exporters in other sectors. The Germany Government aid agency (KFW) also supports defence export sales with long-term, cheap loan (eg the sale of warships to Turkey).

  In both Italy and Spain the principle of subsidising companies (and jobs) is followed in order to make defence exports more competitive.

  The Americans have traditionally supported defence exports by means of long-term and subsidised loans, through the Foreign Military Finance (FMF) programme, which is part of their Government-led Foreign Military Sales (FMS) initiative. Whilst many loans were given for purely political reasons during the Cold War, these were fairly well spread in terms of recipient nations, and many poor countries in Africa and Latin America benefitted. With the end of the Cold War, the emphasis has shifted to selling second-hand US material at very cheap prices. Certainly, the USA does not seem to be attempting to get a market price for this equipment, but is apparently attempting to use cheap sales as a political and commercial instrument (ie to secure a major place in the market, and stay there with follow-on sales).

  Most, if not all, of our major trading partners (and rivals) have established strong export credit agencies to provide medium and long-term cover for business with developing markets, in recognition of the paucity of private sector alternative sources of such cover.

IF ECGD COVER WAS NOT AVAILABLE TO THE UK DEFENCE INDUSTRY

  The potential consequences of the non-availability of ECGD cover to the activities, and survival, of the British Defence Industry could be considerable—this is, presumably, why "anti-arms trade" pressure groups endeavour to make such an important issue out of the ECGD cover being provided to the Defence sector. British Industry would no longer be able to compete on anything like an equal basis with its rivals, who enjoy considerably more Governmental support from their own nations. There would be a possibility, with the increasing rationalisation of the Defence Industrial sector and the resulting creation of large multi-national companies, as well as the trend towards the establishment of local licensed production facilities in customer countries, that such firms would be tempted to switch production away from the UK to other nations in which they are active, whose Governments offer greater support.

  Whilst it is argued by some that much of the ECGD's activities can be taken up by the private sector, we are not convinced by this argument. Companies' experiences, when ECGD cover has not been made available, is that the private sector will almost invariably refuse to provide most medium and long term cover sought in developing markets. ECGD predominantly deals with exactly this type of business, for which private sector cover cannot be obtained. For the UK to make a unilateral decision to undermine the operations of its own ECGD would seriously disadvantage British Industry's competitive position.

RECOMMENDATIONS

  We would strongly support the continuation of the ECGD's activities, in very similar format to those currently undertaken. We would suggest, for consideration, the following:

—  that the mimium threshold value for deals to receive cover be re-assessed, with a view to its being reduced to a lower level that might allow many SMEs to gain direct benefit from ECGD cover;

—  developing further the introduction of multi-lateral and bilateral export credits agreements with other export credit agencies around the World;

—  coverage be extended to include projects in other OECD nations, especially for SMEs.

CONCLUSION

  It is clear that, contrary to popular belief, no preference is given to UK defence companies in the provision of ECGD funding. The "first come—first served" principle is the over-riding consideration. British companies are the only major defence equipment exporters who do not benefit from direct government subsidies. ECGD support is vital in counterbalancing this and is assisting UK Industry in its export efforts.

  The UK Defence Industry has enjoyed considerable sales success in recent years, enabling it to retain its capabilties at a time when the UK's own Armed Forces have been reducing their expenditure and procurement programmes. Exports have helped to cushion the Defence Industry from the worst of the potential impact of the downturn in MoD(UK) spending. This has protected a considerably number of jobs, and defence industrial capabilities, which would otherwise have been lost, to the detriment not just of the economy, but also national security, as the UK would have become dependent on foreign sources of supply.

  We strongly urge the Government to continue to allow the ECGD to provide the essential support and assistance needed by UK Industry to enhance its competitiveness in its export activities, both in the civil and defence sectors.

October 1999