TUESDAY 9 NOVEMBER 1999

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

  60. We still have got eight of them in the UK. Is that unusual then in your experience?
  (Major General Sharman) As I said, in our experience, as far as we are aware, it is the first default for 25 years.

  61. So you are saying that military contracts are unusually safe?
  (Major General Sharman) I am saying they are safer than commercial ones, yes.

  62. Is that reflected in the premiums?
  (Major General Sharman) I personally do not know.
  (Mr Scallon) No, because the buyer is the government of the country concerned, and the premium is the same as if it was the government buying civil goods. The risk as perceived by ECGD is the same. I do not think they factor the defence nature of the goods into their premium.

  63. It would not necessarily be the defence nature of the goods, but it might be the identity of the buyer.
  (Mr Scallon) The buyer, of course, is MoD in the country in question, but the borrower or the guarantor is always the ministry of finance or the central bank, ie the heart of government controlling the purse strings. So whether it was a civil or a military purchase, it is the same, what the bankers would call, obligor for the debt.

  64. Would you expect therefore your premiums to be lower than they would be for normal commercial business?
  (Mr Scallon) No.
  (Major General Sharman) No.
  (Mr Scallon) No, because, as I say, the obligor, the central bank or the ministry of finance, is the same party whether it is a civil or military purchase.

  65. But in your experience there really is not effectively a default rate except where you get an unusual situation like we had with Indonesia?
  (Major General Sharman) Yes.

  66. And there are no other examples which you can think of, apart from that one?
  (Major General Sharman) Not that we are aware of, no. That is on fairly sound advice. I understood that the complaint of Saferworld and Campaign Against the Arms Trade was that defence got an unfair share of what ECGD gave out. Again, our experience is that ECGD work on a first come, first served basis, and defence gets no particular favour and it has amounted to about 25 per cent on average over the last ten years although it does vary enormously. Last year, because of the collapse of the Far Eastern market, defence happened to get rather a high proportion of ECGD cover made available to it, but only two years before it was only 14 per cent, so it does vary a lot depending on the nature of the market and what is going on there.

  67. Saferworld quote figures from the Centre for Defence Economics.
  (Major General Sharman) Yes, but these are figures for cover which is provided. They may well object to cover being provided for countries like Algeria, but that is a totally different issue and is one that is dealt with under the Strategic Export Controls. Since all the exports we are talking about also have to have a licence, then the rigorous application of the licence procedures should ensure that is taken care of. I must say that the lobby groups you have referred to are identified by us as being happy to see the entire defence industry go out of business, and clearly it is in their interests to try and hammer away at organisations like ECGD, because that would all help in that process.

  68. But we do get ourselves in a bit of a fix at times, do we not, on the rather simplistic basis that our enemy's enemy is our friend? In the case of, say, Iraq, in the 1980s it was like pouring money down a sewer, we never got anything back. You say there are not defaults on payments, but I do not think that is the case with Iraq, is it?
  (Major General Sharman) We did not export to Iraq other than we were .01 per cent of the total exports to Iraq over the period involved.

  69. We have figures here, again from this source whose focus you would cast doubt on, which say that defaults on loans for arms exported to Iraq in the 1980s have cost around £600 million of public money.
  (Major General Sharman) As I understand it, they are not figures which ECGD would acknowledge.

  70. We will take it up with the Minister, but what you are telling us is that on the supply of arms to Iraq in the 1980s all the arms were paid for?
  (Major General Sharman) For a start, I said we did not sell arms, we did sell a very small proportion of defence equipment to Iraq but they were uniforms and communications systems, and as I understand it in very, very small quantities, and I am not aware, although I am happy to be corrected, of a default position through ECGD cover.

  71. We will take this up.
  (Mr Scallon) Could I make the point that if the Indonesians had to reschedule debt because they were unable to service the debt, it was a debt in favour of both civil and military purchases? They were not trying to renege on one or the other, they were forced to do a global rescheduling of their debt.

  72. Following on from your last remark about these lobby groups, you say in your evidence there has been a "deliberate campaign of disinformation" by these pressure groups. Some other people who have submitted evidence have said there is a lack of publicly available information about ECGD. Do you think it would help to clarify the relationship between ECGD and yourselves if there was actually more information in the public domain about what they do?
  (Major General Sharman) Yes, we have no difficulty with that principle at all as long as, and in line with, our input to the strategic export control debate, concerns about exposing commercially confidential information to our competitors were not breached That is an issue to be debated, but certainly the more information made available the better.

  73. Is not the problem though that most of the information in your field you would probably regard as commercially confidential?
  (Major General Sharman) No, what companies are concerned about is the value and quantity of individual contracts which they have entered into which immediately exposes to a competitor, for example, how much cheaper you were than he was or whatever. The Ministry of Defence itself does not expose the outcome, to the companies which competed for its business, what the winner paid, and that is a very proper and reasonable thing to require. In terms of information being exposed about individual countries' cover and debts, we have no difficulty with that.

  74. Some of these pressure groups suggest that there is actually a subsidy, that ECGD effectively is giving a subsidy to defence exports. You are clearly saying that is false.
  (Major General Sharman) Yes.

  75. What do you think can be done to contradict that impression?
  (Major General Sharman) They say there is a subsidy for the whole of the defence industry, and when I challenge them about it they come up with figures which amount, rather conveniently, to the entire defence spending of the procurement arm of the Ministry of Defence. The only conclusion I can come to is they are conveniently suggesting that if the MoD buys helicopters from GKN Westland somehow the amount it paid for those goods is a subsidy to the defence industry, which patently it is not. So I have enormous difficulty with some pressure groups—not all but some of them.

  76. Can you explain why coverage is provided for less percentage of the value of defence contracts than for other sectors?
  (Major General Sharman) I am not aware of the figures for sectors other than the totality of defence business. I do not know sector by sector what the figures are.

  77. Put it this way, in your evidence you state, "in many ways defence companies are treated less favourably than other sectors with coverage being provided for less percentage of the value of the contract."
  (Major General Sharman) Between the different parts of the defence industry?

  78. Yes.
  (Major General Sharman) I will give one explanation and then others may comment. For example, vehicles appears to have a particularly high proportion and I suspect, in fact I am sure, that is because of the nature of that market. If you sell four-tonne trucks, you sell them in large quantities, you deliver them, it is cash on delivery, generally speaking, and of course countries which buy that sort of product are more likely to be in the high risk, from a credit point of view end of the business. Naval vessels tend to be built "pay as you construct" and then only a proportion remains to be paid and in fact the vessel is not delivered until the deal is done. I think that is an easy explanation, there is simply no need for credit, but I may be being simplistic.
  (Mr Scallon) I think perhaps you are addressing the question of what percentage of the contract value is financed and over what period. Was that the flavour of the question?

  79. Yes, if you can answer it that way.
  (Mr Scallon) I am sure ECGD can tell you better than I can, but if I am right in saying that they prefer to see only 80 per cent of the contract financed as opposed to civil goods which tend to be financed up to 85 per cent, and they prefer a maximum duration of the credit of five years rather than seven, eight or ten years, I would draw the conclusion that they expect the life of the goods to be shorter in the military domain. That is a first point. As a second point, because it is what you might call non-productive expenditure by the purchaser, they want to see more cash on the table.