TUESDAY 9 NOVEMBER 1999

MAJOR GENERAL ALAN SHARMAN, MR JOHN MCGOWAN MR ROBERT SCALLON AND MR GARY BOLTON

  44. Thank you very much, gentlemen. Major General Sharman, could you introduce your colleagues and then we will start?

  (Major General Sharman) I am Alan Sharman, Director General of the DMA. My colleagues are, first of all, on my right, John McGowan, who is the Strategic Planning Director of GKN Westland Limited. On his right, Robert Scallon, who is the Export Finance Director of Thomson-CSF plc, which is the UK arm of the French-owned global company. Gary Bolton, on my left, is a Director of Global Technical Ltd which is a very small company, currently ineligible for ECGD cover generally. We have tried to bring a cross-section of a large company, a global company, a small company and myself to bat the general questions. I have some opening comments if you would welcome them, otherwise obviously we can answer the questions.

  45. We have had evidence from you. We usually try to discourage that because we try to deal with the business from the evidence we have received. Perhaps we could start off—and this may well lead into what you were going to say anyway—by asking how you see the role of the ECGD in the market place alongside members of your organisations or, for that matter, not alongside, companies like Mr Bolton's?
  (Major General Sharman) ECGD is very important. Exports are now 40 per cent of the defence turnover and clearly some of the markets into which defence industry exports are high risk in market capitalisation and cover terms, so it is quite difficult for private sector cover to become available. Nonetheless, the experience is that the cover has been provided by ECGD very effectively and often very innovatively. As we understand it, it actually has not proved to be a bad risk for ECGD; certainly defence has proved to be less of a risk than other sectors. We think it has a very good record but it is crucially important for the totality of business, particularly because of the nature of ECGD and of defence exports which are very much government-to-government driven, that the finance needs to be of a fairly sophisticated nature. Perhaps Mr McGowan, representing probably the largest user of ECGD recently, could add to that?
  (Mr McGowan) I am going to speak mainly about GKN Westland Helicopters, which is a UK-based exporting company, which has a turnover of about £1 billion per annum and about 4,000 employees, but most of all what we do is made by somebody else, so we have a very big supply base. The helicopter company is essentially the UK's only prime contractor, designer, builder and supporter of helicopters. We use ECGD in three ways—political risk, for credit and for letters of credit and unfair bond calling. In most of those categories we can actually get cover from the private sector as well and we do, we do seek cover from the private sector and sometimes take it. But one of the particularly unique points about ECGD is the length of time and the value of the contracts that ECGD is able to cover. You will appreciate that from the point of sale to the last letter of credit on a helicopter prime contract for an overseas country, we are talking about three, four, five years typically. Generally speaking in the private market we can only get cover for three years. It simply does not cover a great deal of the risks that we incur. We are talking usually about quite large contracts as well. We know that our competitors in France, with Coface, in Germany, with Hermes, and in the United States, in different ways are able to cover those sorts of periods with those sorts of values. Without ECGD the private sector does not, apparently, cover what we need. One thing to say is our business is cyclical. At the moment GKN helicopter company has a very large order book, it is about £3 billion, but only about £500 million or £600 million of that is actually for export. That is not very typical but that happens to be the way the cycle of new products has gone at the present time. We are investing heavily in one of our products at the moment for the export market. We have sold—it was just recently in the Press—to Malaysia a number of aircrafts, Superlynx, which are naval helicopters. This is a new build standard in which we have invested a great deal of money in new electronics for the aircraft, in new fuselage and in new engines. We expect that to sell very widely in the future in the Middle East and in the Far East, and those are the countries that we are targeting for the export market. It begins a typical cycle of going into export, but will only happen with ECGD cover for the value and for the time periods we are talking about. We know our competitors will be there and it is very important to us that we should sell into those markets. That benefits the UK in a number of ways, direct jobs through the work that is done in the UK, and secondly, in the economy in general, of course, in the places where we do manufacture, which is very wide, and thirdly, the UK MoD has a very large fleet of the same helicopter, which it wants to extend the life of and update. The avionics, the engines and the fuselage are being considered at the moment by the MoD as a very cost effective way of updating and extending the life of the fleet of aircraft they currently have. It benefits, in a sense, everyone concerned, provided we can get the cover to insure ourselves against these political and letter of credit and bond risks.

  46. We are conducting this inquiry because the DTI are doing something similar behind closed doors. We wonder whether you could, perhaps, give us your view of what you would see as the outcome of the DTI inquiry? Do you think ECGD should carry on in the public sector? Do you think it matters if it is in the public sector or the private sector division? What do you see as the outcome that you would least want to have, if I can put it that way?
  (Major General Sharman) The outcome we would least want to have? Perhaps the outcome we would most want to have, I think, is something remarkably close to the status quo, with possibly an extension of it—Mr Bolton can comment—possibly to give support, with thresholds reduced, to make it available to smaller companies. I think the comment that Mr McGowan made, and we would make, is our perception is that the private sector would not accept these risks. In spite of my earlier comment that ECGD pays it way is perhaps not a margin the private sector would accept. We believe it should remain under government control/ownership. We could debate all day the potential of a PPP arrangement, and so on, but we would need to see what that really meant in detail before we could comment on that. Mr Scallon has, perhaps, a comment to make because of his link with the French experience.
  (Mr Scallon) I think one has to look at it in international terms and what other countries are doing as well. Going back to that point about PPP, some of the equivalent agencies to ECGD are owned privately but they nonetheless receive government support and guarantees when the contracts are in the national interest. ECGD could consider a move towards the private sector but I do not think it would do away completely with HMG's support. Another thing I would like to say is, to reiterate what my colleague just said, the long term attitude of ECGD is important. Capital goods contracts take a long time to put together and a long time to implement and the commercial market does take a much shorter approach. Without that long term approach, a readiness to take political risk and so on in certain countries, it would be very difficult for a capital goods manufacturer to operate because they cannot get that support in the commercial sector, which has a much shorter view.

  47. I just wanted to go back to what Mr Sharman said about possible extension to SMEs, is it really feasible to pursue that rather than have a cascade down from larger companies? It would still mean heavy up front costs and long time scales involved, do you really think there should be an extension to smaller or medium enterprises or some mechanism for getting them more involved?
  (Major General Sharman) Firstly, I accept that there would be much greater risk and uncertainty so there would have to be consideration on a case by case basis. Of course today's SMEs could hopefully be tomorrow's giant corporations. I think there is a balance to be struck here, and where the threshold should be placed I am not absolutely certain. I recognise it is not as straightforward but certainly something that we would like to debate and consider is where that should be placed. It could vary from potential customer to potential customer and product to product.
  (Mr Bolton) Basically my experience of my first contact with ECGD, was the sum involved was not large enough to be considered so I was put on to the private sector. They were not interested in considering my potential order, they were more concerned in providing cover for the year for every type of order I have. I am not interested in that because there are countries I would not give credit to, I would only deal with on a cash basis. I would prefer it to be on a case by case basis and push the costs on to the client. They really failed completely. We did not get an order and it was back to the drawing board.

  48. You would like to be able to be covered by ECGD?
  (Mr Bolton) We would like to have some sort of cover. I think ECGD seems to be the way forward. I accept it would be on a case by case basis because there is a risk with small companies. I think that would help us a lot.
  (Major General Sharman) Some of the small companies do export a niche product which does not fall naturally into the cascading down from a major platform—low level equipment, hand held equipment and so on. What, I suppose, would be possible, although it might be resource demanding for ECGD, would be, perhaps, to pull together a number of small companies' efforts and give cover to a package of support. I could envisage that from our own experience and some of our special interest groups where companies with comparable and complementary products work together. We have a very good example in a subgroup within the DMA called NBC UK, which make respirators and masks, hand held detectors and so on. They found that actually they are more effective if they go and market together than if they try and do it apart and compete with each other. I could imagine ECGD having the flexibility to cover a package like that.

  49. Mr Bolton, can you tell us the kind of sums that you were talking about, which seem not to reach the glass ceiling, as it were? What does your business do? Global Technical covers a multitude of activities, one would imagine.
  (Mr Bolton) Basically the main push we have now is a new type of drugs and explosives detection system. We had a potential order for £60,000 for a number of units, that would have kept me going for a couple of years, but because the only way forward for funding was through letters of credit that were discounted by the bank it got extremely complicated and that is not what the client wanted. It is a relatively small amount and, okay, I accept that there are ceilings with that amount of work that have to be involved in getting to that stage. Small amounts are what keep us in business for a long time and help us expand our market. Because most of it is export it is extremely expensive, so an order of that size would help us market a much wider area and therefore generate more income.

  50. Mr Bolton, do you think it would be helpful if the big boys were able to help and maybe put some security in there? As they are getting benefit from ECGD, do you think there could be something worked out with the big manufacturers? Could I also put this to Mr Scallon, do you think Thomson have an advantage from being global because if you do not get the backing here you can always say, "Let's go to the French Government" or you can go wherever? You have the best of all worlds, you know that you can whip across the Channel or wherever to make sure you will always get a guarantee and it gives you an unfair advantage?
  (Mr Scallon) You will not, of course, always get the guarantees you want everywhere, but it is quite possible France or Germany would be available in terms of cover when ECGD was not, or vice versa. Obviously a multinational, if credit is an issue, will seek to place the business where it gets the cover, to the extent manufacturing ability is there, of course.

  51. So you can play off one government against another to the benefit of the company and at the expense of other British companies?
  (Mr Scallon) Yes. It is logical, is it not?
  (Major General Sharman) The trouble is that production usually follows the cover, so it is quite probable that the French in doing that would insist that the product was made in one of their French manufacturing facilities rather than here, so the export would effectively be lost to the UK.

  52. But the answer is yes?
  (Major General Sharman) Yes.

  53. Some people have suggested that the cost of meeting claims for ECGD support of defence exports is higher than in other areas, and there is some support for this in the evidence. Saferworld have estimated that the cost of support of defence exports from 1984-85 to 1995-96 was £239 million a year, and CAAT claim that military guarantees for Jordan were £253 million, £88 million for Algeria, £46 million for Egypt. Does this line up with your own experience? Do you think defence exports do have a higher default rate than others?
  (Major General Sharman) A higher default rate?

  54. Yes.
  (Major General Sharman) They do not have a default rate at all. In fact our advice is that the only default in 25 years is the latest default by Indonesia, and even that is being rescheduled so that it will not be a default[3].

  55. So how do you explain these figures which are quoted in ECGD 32 and ECGD 26, the cost of military guarantees?
  (Major General Sharman) That is not my information. Are those figures from ECGD themselves?

  56. Sorry, they are submissions from CAAT and Saferworld.
  (Mr Scallon) Are they figures of ECGD's exposure to that country? If they are, that does not represent a loss, that represents the guarantees they have issued and hopefully the loans will be repaid.

  57. CAAT are talking about claims for military guarantees from Jordan, Algeria and Egypt.
  (Major General Sharman) That is the level of cover which has been provided, not that they have defaulted.

  58. So you are saying there are not defaults?
  (Major General Sharman) There are not any, no[4].

  59. There was obviously a problem with Indonesia with the Hawk jets, was there not?
  (Major General Sharman) Yes.

4   Ibid. Back