House of Commons - Defence

Select Committee on Defence First Report

FIRST REPORT

The Defence Committee has agreed to the following Report:—

THE SIX-NATION FRAMEWORK AGREEMENT

1. After issuing a general statement of intent in December 1997, the Defence Ministers of six European countries —France, Germany, Italy, Spain, Sweden and the UK—signed a formal Letter of Intent on 6 July 1998 to develop measures designed to facilitate defence industry restructuring in Europe. That initiative was driven by the need to maintain European industry's relative competitiveness in the face of significant industry restructuring in the US and shrinking global defence expenditures.[8] They set up working groups to examine each of the six main areas where the governments sought to remove some of the barriers to restructuring. On 27 July 2000, at the Farnborough Air Show, they signed a proposed treaty entitled Framework Agreement concerning Measures to Facilitate the Restructuring and Operation of the European Defence Industry, which consolidated the results of those six working groups. The government presented that Framework Agreement[9] to Parliament, prior to ratification, on 1 November 2000.

2. The Government's Explanatory Memorandum, accompanying the Framework Agreement, summarises its key features in each of the six areas covered in the following words:

Security of Supply. The parties are committed not to hinder unnecessarily the supply of defence material to the other parties; to consult on any merger or acquisition of defence companies that may threaten security of supply; and to work together on: providing supplies from national stocks, the priority and allocation of supplies and reconstitution of supply facilities.

Exports Procedures. The Framework Agreement commits participating nations to apply simplified export licensing arrangements to transfers made in the course of joint development and production programmes, and to transfers for each others' national military requirements; and to develop lists of permitted export destinations for jointly produced military goods on a consensual, project-by-project basis. Export licensing decisions will continue to be taken according to the principles of the EU Code of Conduct on Arms Exports. The proposed arrangements will not abrogate existing national export controls.

Security of Classified Information. New simplified security provisions will be introduced for exchanges of classified information[10] between countries, or their defence industries, that do not undermine the security of that information.

Treatment of Technical Information. The Framework Agreement directs the parties to harmonise their contracting processes for the disclosure, transfer, use and ownership of technical information to facilitate the restructuring and subsequent operation of the European defence industry.

Research and Technology. Co-ordination of joint research activities will be fostered to increase the advanced knowledge base and thus encourage technological development and innovation.

Harmonisation of Military Requirements. The parties are committed to further work on improving harmonisation of military requirements—an essential prerequisite to better equipment co-operation. It is envisaged this will lead to starting the process earlier through co-operative equipment planning to identify and formulate common military requirements with our partners, rather than attempt to harmonise already mature 'national' requirements.[11]

3. We had covered much of this ground in our inquiry—conducted jointly with the Trade and Industry Committee—into Aspects of Defence Procurement and Industrial Policy in July 1998.[12] In our Report we noted the signing of the 1998 Letter of Intent earlier that same month, and recommended continued determined action on the various measures it covered. We urged that 'in order to maintain momentum, binding agreements must wherever possible replace the looser understandings contained in the Letter of Intent, as soon as practicable.'[13] We also identified a number of potential stumbling blocks which might have continued to lie in the path of progress towards further rationalisation, including the unenforceability of the 'intent' of the six European countries to reduce some of the key constraints on firms rationalising.[14]

4. The Framework Agreement Treaty[15] enters into force once the first two countries have ratified it. Given the continued military and industrial importance of the issues addressed by the Framework Agreement, we decided to conduct this brief inquiry into the aims and implications of each of its main themes. Accordingly, we tabled EDM 1130 on 8 November, under the Ponsonby Rule, seeking a deferral of the Treaty's UK ratification until we had had the opportunity to examine it.[16] Our practice is to examine all significant defence-related treaties, and we have used this procedure on a number of occasions already during this Parliament.[17] Indeed, the Procedure Committee recently commended—

We were disappointed therefore when the Campaign Against the Arms Trade presumed that our inquiry was prompted only by their lobbying.[19] Another group (BASIC) was better informed.[20]

5. We invited written evidence from the Department, industry, arms control groups and other organisations. We are grateful for their responses. We took oral evidence on 10 January from MoD officials (one of whom, Mr David Gould, was to be the UK representative on the Framework Agreement's Executive Committee).[21]

Security of Supply

6. The key aim of the Framework Agreement is to remove barriers to defence industrial rationalisations which cross national boundaries. However, if countries relinquish technological capabilities previously under their direct control or influence, they will need assurances that they can still obtain the supplies they need, particularly—

... in a wide range of future contingencies ... to ensure that the new industrial environment does not prejudice national security interests.[

We have examined questions of security of supply on several occasions. In our inquiry into the proposed closure of Royal Ordnance Factory Bishopton, for example, we examined the complex relationship between ammunition reserve stockholding, the security of supplies from other countries in times of crisis, and value for money.[23] Concerns about security of supply are not just theoretical, or a covert form of support for protectionism. In the last Parliament, our predecessor Committee had cause to criticise Belgium for failing to supply tank ammunition for the UK's Gulf War effort.[24] While most foreign suppliers have proved reliable in past crises, a single failure is unacceptable when operationally critical items are involved.

7. The MoD told us that while the 1998 Letter of Intent outlined a strategy for achieving security of supply, the Framework Agreement now reflected this in legally binding provisions.[25] Practical measures are still to be developed, however, and the six nations are examining a variety of methods to foster security of supply. These include, we were told, legally binding agreements, specific contractual conditions and option licences, which are likely to be underpinned by a memorandum of understanding.[26] For the moment, the Framework Agreement is mainly confined to commitments to speedy consultations to resolve any difficulties over supplies.[27] The Agreement's wording also appears to provide ample opportunities for individual signatories to retain some capabilities within their control—and thereby undermine the rationale for industrial rationalisation. Thus, while the Framework Agreement commits the signatories not to hinder the supply of defence articles and services produced, assembled or supported in their territory to the other parties (regardless of whether such transfers are linked to co-operative armaments programmes),[28] such transfers will remain subject to national export and licensing procedures.[29] The Framework Agreement also gives each country a general exemption clause where, although recognising that companies will be free to distribute industrial capabilities 'according to economic logic', the parties—

8. Individual countries—including the UK—will wish to protect capabilities vital to their national security. From the UK's perspective, the MoD told us that—

The question remains, however, whether other countries will interpret 'national security' on different criteria—a concern raised by the Defence Industries Council [32] and others in industry. Where security of supply is used as a justification for retaining capacity within a national boundary, rather than creating a dependency across national boundaries, the result may be that capacity is underloaded and inefficient.[33] To discourage nations abusing the spirit of this part of the Framework Agreement,[34] before the formation of a transnational defence company each nation would be required to define which of the prospective company's activities it considers to be of sufficient strategic importance to have to be retained on its own territory.[35] The consequence of this prior-notification procedure, we would hope, would be that the industry of those countries which are over-protective of their patch would be sidestepped when transnational companies were established.

9. The UK follows a more open policy in sourcing its defence equipment than many other European nations with significant defence industries. This, the MoD argues, allows it to get access to technology (including technology from outside Europe) more quickly and on a broader basis. In our inquiry in 1998 we expressed our concerns that trans-national European rationalisation might be hampered and distorted because of continued public ownership of defence industries in particular countries.[36] During our current inquiry, industry witnesses told us that countries with defence industries still largely in state ownership have expressed support for transnational co-operation, but have still insisted on protecting national assets 'even when the economic case is questionable.'[37] Our MoD witnesses considered that public ownership in other countries was still 'an inhibiting factor'.[38] If some countries continue to interpret 'national security' very widely to suit their own industrial convenience, restricting the opportunities for a wider, genuinely open market, the benefits of having transnational companies will be reduced.[39] As was clear to our industry witnesses, it will be the willingness of governments to open up their defence markets to competition that will determine whether the industrial objectives of the Framework Agreement are achieved.[40]

10. The main value of the Framework Agreement in seeking to ensure security of supply will be by providing a means to apply political pressure to those countries not following the spirit of the Agreement. As our MoD witnesses put it —

The Framework Agreement says that the parties shall not hinder the supply of defence articles and defence services produced, assembled or supported on their territory to the other parties. That is a pretty powerful undertaking. ... if a country did hinder supply to another one of the six nations, that would be a pretty serious thing. It would destroy an awful lot of trust which presumably they would have spent some time trying to build up. It would also affect the commercial judgment of companies working in their country because they will say, "If this country is going to behave like this when there is a treaty obligation not to, we need to think twice about where we invest in the future." There is a lot of indirect sanction in here, but ... legal redress for a short term defence supply problem is not the answer. Ultimately, it comes down to trust. I think the treaty helps us create trust.[42]

It is our hope too that the Framework Agreement will create trust between the nations involved, even if that trust is to based on raising the political cost of not living up to it.

Transfers and Exports

11. The Agreement sets out measures intended to facilitate collaborative equipment procurement, and the creation of transnational companies. These include the simplification of arrangements for the cross-border movement of military goods and technologies. These provisions apply both to 'transfers' of items between the parties for approved joint development and production programmes, and the subsequent 'exports' of the resulting military goods to jointly agreed destinations.[43]

12. Transfers between participating partners and their industries will be simplified by the introduction of 'Global Project Licences'. The MoD is confident that these new arrangements will benefit industry considerably, both in terms of assurance of supply and reduced bureaucracy. Industry representatives saw benefits in such simplified procedures.[44] As Global Project Licences will govern transfers between parties, companies will not require separate licences for individual transfers associated with approved collaborative programmes.[45] The Agreement also commits the parties to undertake further work to simplify transfers of sub-systems and components that fall outside approved joint programmes. It also aspires to streamline national licensing procedures for transfers of nationally produced items to other signatory nations.[46]

13. The details of the scope and requirements of Global Project Licences, and how consultation on proposed export destinations will be implemented, are areas still under discussion.[47] The MoD told us, however, that—

14. For exports to third-party countries, the Framework Agreement envisages that the signatories whose firms are involved in manufacturing component parts of a particular piece of assembled equipment will agree beforehand a list of prospective export destinations[49] — a so-called "white list." There would be a different list for each multinational programme. The MoD highlighted the benefits to defence exporters of being able to agree in advance destinations for onward export, therefore providing them with a firmer planning basis.[50]

15. The issue of export controls was the area of the Framework Agreement that prompted most comment from the groups concerned with arms control which submitted evidence to our inquiry. One of their main concerns was that the use of Global Export Licences would mean that only the national export licensing controls of the final exporting country would have to be satisfied.[51] They sensed this could create an incentive to funnel exports through the country with the least restrictive criteria.[52] As a result, best practice on export scrutiny and standards for end-user certificates might be by-passed.[53] The MoD told us that the provisions on exports reflect the parties' 'understanding' that permitted destinations for jointly developed and produced military goods will be agreed by all the participants in the programme, and not solely by the final exporting partner.[54] These arrangements, the MoD witnesses believed, will not dilute existing national export controls[55] because each country will have to approve the common export lists,[56] which, since all six nations are EU members, will continue to be determined within the ambit of the EU Code of Conduct on Arms Exports.[57] But national export policies will also apply.[58] It might be argued therefore that controls will represent the highest common factor, rather than the lowest common denominator, of export control standards. Indeed, in giving evidence recently on the 1999 Annual Report on Strategic Export Controls the Foreign Secretary assured a joint meeting of four select committees that—

Individual countries, furthermore, will retain their rights to refuse to transfer components destined for exports to which they object.[60] The MoD also believed that the new system's approach of consensus decision making would be more visible than present arrangements (to the parties at least) at the early stages of equipment programmes.[61] Where a particular country had reservations at the outset of a programme about a potential export destination, it would be able to decline to be part of the Framework Agreement's provisions for that particular programme without jeopardising its stake in other collaborative ventures.[62]

16. The Framework Agreement stipulates that destination countries may be removed from 'white lists' by consensus (if there were significant changes in the internal security of a potential recipient), or by the objection of just one party.[63] But a concern of some groups was that, once transnational firms had compiled agreed export lists (before embarking on a project), their governments would find it politically very difficult subsequently to refuse export licence applications. As a result, white lists might in effect become a fast-track licensing system which would make proper scrutiny more difficult.[64] This may or may not prove to be the case—it is for individual governments to justify their own actions (or inactions) in allowing exports. The Foreign Secretary believed, however, that as far as the UK was concerned, it would be unlikely to be on its own in seeking the removal of a country from an existing list because Sweden and Germany had particularly 'rigorous' export criteria.[65] In any event, the lists will be relatively short and will include only those countries envisaged as realistic markets by the supplying companies.[66]

17. The MoD assured us that once they determined to oppose an export, individual countries would be able to bar export destinations from white lists—

This raises a separate question, however, about the criteria by which a country will be regarded as a participant in a programme and thereby able to veto particular export destinations. The benefits for industry sought by the Framework Agreement would be undermined if individual partner countries were able to wield disproportionate influence over exports of equipment for which their industry had produced only minor components. When we put this to the MoD witnesses, they argued that the value and importance attached by the parties to the Agreement, and the political commitment that goes with that, would prevent such abuse. Minor partners, for example, will recognise that if they want to use disproportionate weight —

18. Concern was also expressed in evidence to us about the implications for accountability for exports under the new arrangements; in particular that export destination lists and Global Export Licences might not have to be recorded in the UK's Annual Report on Strategic Exports.[69] MoD witnesses told us that licences for transfers and exports from the UK would be covered in the Annual Report. However, discussions were continuing on the appropriate level of transparency to be given to export destination lists.[70] The MoD envisages that for the United Kingdom at least the process would be the same as before, and that the Framework Agreement would not reduce transparency.[71] The Foreign Secretary gave a similar assurance when he gave evidence to the quadripartite committee examining strategic export controls.[72]