House of Commons

Defence Committee

The impact on UK Defence of the proposed merger of BAE Systems and EADS

Written Evidence

Only those submissions written specifically for the Committee for the inquiry into The impact on UK Defence of the proposed merger of BAE Systems and EADS and accepted as written evidence are included.

List of written evidence

1. The Rt. Hon. Sir Geoffrey Pattie

2. Robert Page

3. Professor Philip Lawrence

4. Prospect

5. Professor Trevor Taylor, Royal United Services Institute

6. Royal Aeronautical Society

7. Campaign Against Arms Trade

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Written evidence from The Rt. Hon. Sir Geoffrey Pattie

Introduction As a Defence Minister in the period 1979 to 1984 I had many dealings with the then British Aerospace, but it was when I was moved to the Department of Trade and Industry (as it then was) and had civil aviation in my portfolio that I had more exposure to the leading companies in France and Germany. I had Ministerial oversight for the UK involvement in Airbus and we spent a lot of time and effort trying to get Airbus to produce a set of accounts. Such papers although a sine quo non to British eyes – especially government eyes – were a lower priority to our French and German colleagues for whom Airbus was an instrument of government policy in both countries. One can only admire the bipartisan consistency of France and Germany in Airbus, particularly when compared to the UK going into Airbus, coming out and then going back in. This merger may well be good for BAE Systems and its shareholders, but whether it is good news for UK Plc. in terms of capability and the industrial base in the UK, will depend entirely on a new working relationship between the governments of France, Germany and the UK. The Challenge I was a member of the Ministerial Team which put the golden share into the privatised British Aerospace and it was put in in case there should be a proposed change of ownership which might not be in the national interest. Where the BAE Systems/EADS proposed merger is concerned, four governments and a myriad of regulatory authorities will have a say, and there is currently no shortage of expert analysis of the complexities of the proposal. The nub of the problem in my view is the future relationship between the governments of the UK, France and Germany. I say this not to underestimate the importance of the US market, far from it, but I contend that if the US wants, or is content for, this proposal to proceed, they have many ways of meeting their own concerns. As the Chairman of GEC Marconi from 1990 to 1999, until we were taken over by British Aerospace, I recall that we had several companies in the US and there were no UK nationals on any of the company boards. The Danger If the British government restricts its involvement to an assessment of whether this proposed merger is “a good thing” this will not be good enough. City analysts will no doubt say that given recent trends BAE Systems should only be entitled to a 30 per cent share of the new structure and not the 40 per cent on offer. This could well be a situation where the national interests of HMG and the interests of BAE shareholders may diverge.

It is an established fact that labour laws are different in the UK from those on the continent. A pan European company will find it easier to lay off people in the UK than the continent. This can lead to a gradual hollowing out of the UK company as redundancies take hold, research is done on the continent, and assembly becomes the order of the day in the UK. The industrial supply chain is crucially important to the UK. For all the importance of BAE Systems, it is the several tiers of smaller companies who supply them who are the lifeblood of the UK economy. Innovation and speed of response are the hall marks of the small and medium enterprises. The key word for SMEs is access, in terms of ease of access and costs of access. SMEs will argue that they need to be competitive, which is as it should be. They will also point out that bidding into an enterprise where BAE Systems is a minority shareholder will gradually put them at a disadvantage. The key word is gradually. This process is subtle but it can be decisive. The number of must win contracts will increase and the real damage is that once a contract is lost for a new emerging technology there may not be another chance for that technology to be sustained in country and that there is therefore a gradual erosion of capability which is very hard to reverse. The Solution This paper is not meant to be anti-French or anti-German. I simply recognise that they operate according to a different philosophy to the UK and that their leading aerospace companies have a de facto if not de jure client relationship with their governments. This is a fact and there is no point pretending otherwise. The French and German governments should divest their shareholdings in EADS and have their positions safeguarded by a golden share similar to that held by HMG. The three governments will then be on the same footing in relation to the new behemoth. But that will not be enough. HMG will have to work the golden share probably through a new supervisory board structure but certainly to a level of detail that addresses the problems outlined above. If we stay in the directors’ box cheering on our boys they will be systematically “stuffed” by the people who know how to play this game to their own advantage. We have to be in, if not the technical area, then, at least be prominent and equal members of the coaching staff. The British position on this kind of issue is an interesting amalgam. We have an inherent wish to resist the way they do things on the continent, which is fair enough; we have a desire to let the free-market operate and shareholders decide, which is fair enough; and we have a strong feeling of wanting to be nice to our American cousins for intelligence and nuclear reasons; which is also fair enough.

This amalgam is the institutional ambivalence which has been at the centre of our affairs since the Second World War. We cannot change the others or the way they think. We have to change. If I look for encouragement I find some in our successes in the 2012 Olympics. Years ago our part-time athletes trained behind the gasworks and found themselves competing against sergeants in the Czech Army who were fulltime athletes. Success came through targeted investment and support to our athletes over several years. In order to do this in aerospace we would need a label such as “British Innovation”, it does not matter what it is called, as long as it is not “industrial policy” because then we will be back into the sterility of “picking winners”. Such a label would then be the banner for a co-ordinated HMG industry approach to supplying our Armed Forces, achieving results in export markets, and working well with our European and American partners. This will pose problems for HMG. It will require a degree of supervisory expertise and sector knowledge not readily available in government, and it will almost certainly cost more money to participate in joint programmes where there is support from other governments. This will also call for clarification of the strategy in the “National Security Through Technology” White Paper of February 2012 which seems to have at its core the incompatible aims of export achievements and off-the-shelf purchase. It can be done. I had the challenge of taking through a Cabinet Committee chaired by Prime Minister Thatcher a sizeable amount of launch aid for the Airbus 330 and 340 programmes. It was an exciting meeting but the funding was approved, and the Exchequer was repaid several times over from sales of the aircraft. The Americans were furious, conveniently forgetting that their Boeing civil aircraft in the early days were funded off the back of large US military programmes. We still have tremendous skills in this country but they have to be monitored and sustained. If they are not sustained, market forces as exploited by our European allies will ensure their demise. 4 October 2012

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Written evidence from Robert Page Potential for the acquisition of BAE Systems by Rolls-Royce I attach a copy of my recent letter to the Financial Times dealing with the proposed merger of BAE Systems and EADS, which they were kind enough to publish on 18 September 2012. As indicated in the letter, I believe that the acquisition of BAE Systems by Rolls-Royce would be a much better arrangement, and has a compelling commercial logic in the longer term. I would suggest that, given the manifest advantages of such an arrangement compared to the proposed merger of BAE Systems and EADS, the Committee may wish to consider what exactly is impeding a Rolls-Royce/BAE transaction and what scope there may be for encouraging it. A consideration of these issues, I believe, falls within the scope of those matters which the Committee is concerned to examine, set out in the notice announcing the above inquiry, issued on 26 September 2012. Information on the individual making this submission I hold shares in both BAE Systems and Rolls-Royce in modest ‘private investor’ amounts, rather more of the latter than the former. I have no other links with either company, beyond a continuing interest in the future of the UK manufacturing and technology base, including defence industries.

Sir, BAE Systems having shown its hand (Lex, September 24), I would suggest that there may now exist a historic opportunity for the acquisition of BAE, by Rolls-Royce, at a minimal premium. If it is true that Rolls, traditionally a supporter of UK manufacturing, has so far rebuffed BAE, perhaps it should reconsider. A combined Rolls/BAE entity would have much of the diversification that BAE seeks, with a market capitalisation broadly comparable to a combined BAE/EADS entity.

For Rolls the benefit may be longer-term, but ultimately the defence procurement cycle will turn up again, albeit I suspect more rapidly that it took for Rolls to emerge from the taxpayer-funded rescue of the early 1970s, to be the world-beater it is today. Whatever the complications of such a deal in the US, they can hardly be greater than those associated with BAE joining a dysfunctional, partly state-controlled EADS. The commercial logic of a Rolls/BAE tie-up could be compelling in a longer-term view.

4 October 2012

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Written evidence from Professor Philip Lawrence FRAeS FRSA Epigram

“ … the defence industry has evolved. The defence sector has not been immune to the forces of globalisation and inter-dependence that have characterised the wider world economy over the past thirty years: far from it defence companies are now transnational… Nowhere is this more true than in the UK, which has for the last fifteen years operated one of the most open defence markets in the world. Exposing UK defence suppliers to the rigours of competition has reaped huge benefits ... We do not seek to restrict the scope for international cooperation and competition… we cannot afford to maintain a complete cradle to grave industrial base in all areas” (Defence Industrial Strategy, UK MOD 2005). 1 General Issues

1.1 Interdependence

Sovereign independence in defence strategy and procurement is a myth. Even the UK’s submarine-based nuclear deterrent requires missiles and other technology supplied by a third party. For more than 40 years key air-defence platforms, such as Jaguar, Tornado and Typhoon, have been the result of international collaboration. Such collaborations are messy and often sub-optimal in a business sense, but the cost of going it alone on major projects has been impossible for over 40 years, not only in Europe, but also now for the United States, who required international partners on JSF. Across Europe a plethora of small, nationally-based projects for platforms, such as Fighters and Transport aircraft, would be disastrous financially and cause huge inter-operability problems within the Western Alliance. 1.2 Post- Cold War Aerospace/Defence Consolidation

After the end of the Cold War the United States was fairly quick in consolidating its defence industrial base at the behest of the DoD. Three giant companies emerged, Boeing, Lockheed Martin and Raytheon. Such companies appeared to pose a huge competitive threat to the European defence sector.

Why Europe Needed to Consolidate: Defence Turnoverof US Companies Vs European Companies (1997)

Exhibit 1 The effects of US defence consolidation in the 1990s

1.3 Industry Consolidation

At the end of the 1990s Europe tried to follow America’s lead and the French, German, British and Italian governments jointly declared that Europe must amalgamate its aerospace industry to remain competitive with the U.S. giants. But the proposal was not realised, as BAE purchased Marconi Electronic Systems to form BAE SYSTEMS and Aerospatiale, DaimlerChrysler Aerospace, Matra and CASA integrated to create EADS in 1999. The result of this process was that BAE SYSTEMS strengthened its position in the United States and reduced its revenue dependence on the Saudi Al Yamamah fighter contract, but at the same time was marginalised within Airbus and lost its lead position on Eurofighter Typhoon. After the Marconi acquisition BAE’s UK sales were just 17% of its total revenue, with 24% coming from the U.S. and 34% from the Middle East. Market reaction was hostile and BAE SYSTEMS’ share price tumbled. Initial market reaction is clearly not always a good guide to the long-term success of a merger or acquisition. UK commentators were slow to see the potential of EADS and hostile to the joint CEO arrangements which then prevailed. But after the merger process EADS possessed 80% of Airbus, 44% of Eurofighter, owned the largest helicopter business in the world and was the global number 2 in space and missiles.

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Exhibit 2 Global Aerospace Defence Groups after 1990s Consolidation

1.3.1 BAE SYSTEMS Exits Airbus

BAE SYSTEMS sold its 20% share in Airbus in 2006, seeking to consolidate its position in the United States and avoid the high costs of investment into future Airbus programmes. It is worth remembering that 2006 was something of an annus horriblis for Airbus, with a major crisis and a big cost overrun on the A380 programme. It was undoubtedly not the right time to correctly judge Airbus’s future sales and overall potential. In hindsight BAE’s selling of its share in Airbus can be seen as a strategic error, albeit an understandable one, as the long promised bonanza in large commercial aircraft had yet to emerge. But post-2006 Airbus prospered, riding through the financial crisis of 2007/08 and actually benefitting from

the fact that airlines were compelled to buy newer, more fuel efficient aircraft because of rising fuel prices and increasing environmental regulation. 2 BAE SYSTEMS and EADS

2.1 BAE SYSTEMS

BAE SYSTEMS turnover stands at £19.3bn and today it employs around 93,000 individuals across its globally dispersed businesses. Its strongest geographical markets are the United States, the United Kingdom and the Middle East. But it also has a significant footprint in Australia and India. Although clearly successful in Electronic Systems and Cyber and Intelligence, the bulk of the group’s earnings (around 75%) come from the three platform and services businesses. In many respects this is troubling as post JSF and post the UK carrier the procurement of new defence platforms will be severely diminished. So far export sales from the £18bn Typhoon programme have been modest and the failure to win the Indian US$11bn MMRCA competition for 126 aircraft was a major disappointment. In the past these large platform programmes have been the bread and butter of the UK defence sector and have created many thousands of well paid and high skilled jobs at plants such as Warton and Salmsbury. But today many commentators believe that a new manned fighter programme is unlikely and that future platforms will be far cheaper Uninhabited Aerial Vehicles (UAVs). The lack of a major future aerial platform programme casts a large shadow over the UK defence/aerospace sector. Taking figures from the SBAC and ADS annual reports we can see that since 1990 direct employment in UK aerospace has halved, while in France and Germany, largely because of Airbus work, Cold War job levels have been maintained. In order to reverse this process in the UK a major structural change in the sector is required.

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Exhibit 3 UK Aerospace Employment 1990-2011

2.2 BAE SYSTEMS in the UK

BAE SYSTEMS is a key part of the UK’s industrial base. Annual sales of the group to UK customers are around £3.9bn or 20% of turnover. Annual spending on the company’s 7,500 UK suppliers is £4bn. BAE employs some 35,000 staff in the UK. According to the Financial Times, the value of sales

emanating from the UK is £6.8bn (much of which is exported).1 The highest concentrations of employment are in Warton/Salmsbury (9500), Barrow-in-Furness (5,400) and Portsmouth, (5,000). Employment at Barrow and Portsmouth is based on ship and submarine building and services. Neither of these sites will be affected by the proposed merger, but in partnership with EADS it is quite possible that the UK may win additional maritime work in Europe. What is clear is that post the current carrier and Type 45 destroyer contracts there is bound to be contraction at these sites. Similarly, if Eurofighter Typhoon fails to win further export orders job reductions in at the sites in the North West of England are inevitable. In 2011 BAE began negotiations with its trades’ unions on a proposal to cut 3,000 mainly military aircraft jobs. 2 2.2.1 BAE SYSTEMS and the UK Market Although BAE SYSTEMS is vital to the UK’s defence industrial base it must be understood that its success as a company depends on overseas businesses and sales. BAE SYSTEMS cannot be kept in existence and made prosperous through the vehicle of UK defence procurement spending. AS BAE SYSTEMS executives have often pointed out the company’s home market is one of the most open in the world. In this home market BAE is competing with agile, capable and skilled prime companies including; Boeing, Northrop Grumman, Lockheed Co, EADS, Thales, General Dynamics and Finnmeccanica. The relatively open UK defence market has thus meant that BAE SYSTEMS has had to be active in overseas markets, especially that of the United States. In the UK there is no longer a monopsony customer, nor a monopoly supplier. Today’s defence markets are more open and in many cases global. Amongst other things this means:

• The use of a global supply chain; • Global strategic alliances and partnerships; • Joint ventures and co-development programmes for major platforms and systems (e.g. Typhoon); • International sharing and co-funding of R&D; • Dealing with complex technology transfer and IPR issues; • Procurements geared to Alliance inter-operability; • Trans-national co-ordination of strategy and requirements; • Partnering with competitors; competing with Partners; • De-nationalisation of the defence industrial base.

In this context the proposed merger does not seem threatening to UK interests and the UK government needs to recognise that we cannot sustain an independent and sovereign defence-industrial base. With declining UK defence spending any solely indigenous industrial assets can only shrink in size. 2.3 EADS EADS is now a huge company which has nearly tripled in size since its creation in 1999. In 2011 annual sales were just under £40bn. EADS’s commitment to the UK was underlined in 2004, when a UK subsidiary was created with headquarters in the Strand, London. EADS’s major UK business is the Airbus UK wing design and manufacturing enterprise based at Bristol and Broughton in North Wales. This business also handles the design and integration of landing gear and fuel systems. Employment at the two sites is around 10,000 permanent and temporary staff. But in addition Airbus works with strategic 1 Financial Times, p. 19. (03/10/12) 2 BBC News, (28/09/11).

partners, such as Rolls-Royce, Messier-Dowty and Morson, who employ some 23,500 individuals on Airbus supported work.3 Another 65,000 indirect and induced jobs are supported by Airbus and its strategic partners in the supply chain and wider economy. As well as Airbus related employment EADS employs another 7,000 people in its Astrium, Cassidium, Eurocoptor and Paradigm UK businesses. It is also a 37.5% partner in the MBDA missile project, which employs 3,700 individuals in the UK. 2.3.1 EADS and Airbus The Airbus part of the EADS group is booming, despite the troubled state of the world economy. In 2011 Airbus took orders for 1,419 aircraft and delivered 534. Both were a record, with the delivery figures showing the 10th consecutive annual increase. The total value of net orders last year was a staggering £88bn and the total value of the Airbus backlog is now approaching £400bn. After more than 40 years of continuous investment and product development an extended period of huge commercial success beckons. Over the next two decades Airbus should secure more than US$2 trillion worth of aircraft orders at current prices. If it maintains its current market share of 65% that figure will be closer to US$2.6 trillion. The proposed merger offers a UK prime company the chance to share in this sales bonanza and to secure and enhance job numbers on the civil side of the business. In response to those suggesting that French and German political interests in EADS will lead to the export of British jobs it should be emphasized that EADS has honoured all its Airbus job related commitments, despite the fact that BAE exited from Airbus in 2006. Since 2000 EADS has invested around £2bn at the Airbus site in Broughton and shows no signs of any UK exit strategy. 3 Benefits of the BAE/EADS Merger 3.1 Generic Benefits The businesses of EADS and BAE SYSTEMS are complementary, with only minor areas of overlap. The initial stages of all large mergers are difficult, but in the mid-term the new group would demonstrate scope economies, scale economies and synergy. Scope economies come from the process of cross-product learning where technologies in one product area can be used on other products. In the new group defence to civil spin-off will be possible and civil to defence spin-on. In the past U.S. companies have been very adept at using technology paid for by the DoD in civilian products, for example composite capability learned on the B2 bomber programme and then applied to the Boeing B777. In Europe spin-on from civilian programmes has been vital on projects such as A400M and the A330 Airtanker platform. BAE SYSTEMS strength is in defence systems and systems integration. Its defence focused business is complementary to the civil aircraft business. BAE is not active in the rotary market, as EADS is absent in the marine sector. There is some duplication of capability between the two companies in electronic warfare, surveillance systems, advanced electronics and cyber intelligence. However, the integration of these businesses should lead to scope economies and significantly greater capability. This should allow the new group to challenge more effectively in the U.S. market. 3.1.1 R&D Savings In the merged group huge savings should be possible in R&D with the elimination of duplication. BAE would benefit more fully from the huge EU Framework Programmes for aeronautics and the technology developed through large French and German nation programmes, where there has been much greater investment than in the UK. This could be very beneficial on a new UAV project which may well emerge as the successor vehicle to Typhoon. In the field of cyber warfare the UK, like other Western countries, face enormous challenges from hostile states and “hactivist” groups who seek to disrupt vital services and 3 Analysis by Aerospace Research Centre, (UWE, Bristol, 2009).

infrastructure. The combined R&D capability of EADS and BAE in this area would provide the very best monitoring, surveillance and cyber interdiction capabilities. 3.1.2 Global Presence Today firms such as BAE SYSTEMS and EADS operate on a global platform. Deals have to be struck with the governments of new superpowers, such as China and India. As a merged group the two companies would have truly global reach and more bargaining power derived from greater financial resources and increase technological capability. Such a grouping has profound implications for the power and capability of the Western Alliance as a whole. The company would be a visible symbol of European power projection and would be able to compete more effectively with the big U.S. players. 3.2 Benefits for the UK BAE SYSTEMS is a successful and healthy business with a global footprint. Yet, as a company that concentrates on defence, it confronts the problem of shrinking Western defence budgets, even in the United States, which must soon cut its US$ 1 trillion budget deficit. Conversely, the civil side of aerospace is booming. The proposed merger would return a significant slice of Airbus to UK ownership and guarantee tens of thousands of UK jobs. Traditionally the UK’s percentage of Airbus work has been around 20%, post merger it can only be assumed that UK workshare would grow. With shrinking national defence budgets, defence firms, which typically spend around 12% - 15% of turnover on R&D, must now seek the benefits of international and transnational R&D funding. A tie up between BAE and EADS will increase UK access to European technology and vice-versa. Technology transfer between the UK and Europe is typically easier than that between the UK and the U.S. Even as a level one partner on JSF the UK is not allowed access to all JSF technology. EADS is already a key supplier to UK MOD on the heavy-lift A400M programme and the Airtanker project. It is thus experienced and capable regarding MOD PE’s way of doing business and its processes. As a major partner on Eurofighter Typhoon EADS is already collaborating on a major UK programme with BAE. 3.3 UK Jobs A number of Conservative Party MPs have voiced concerns over the potential loss of UK jobs if BAE SYSTEMS merges with the pan-European EADS. This is a bogus scenario. What is certain is that if defence budgets continue to fall and if new major platform projects are not forthcoming sites like Warton will inevitably see job cuts. The status quo can only show a continuing gradual decline in the aerospace/ defence workforce of the UK. 3.3.1 Eurofighter Employment

Eurofighter Typhoon represents the most important military programme in Europe at the current time, supporting around 100,000 direct and indirect jobs in the 4 partner countries. 4 BAE SYSTEMS has a 37.5% share of the programme linked to a UK commitment to buy 232 aircraft in 3 tranches. However, in the wake of the financial crisis the UK agreed with its partners that tranche 3 would be split in two, with a separate A and B component. Total sales from the original order were set at 620, but this is likely to reduce to 472, with an additional 87 sold to Saudi Arabia and Austria. The new plans for tranche 3 will mean that Britain has ordered only 16 of its originally planned 88 Tranche 3 Eurofighters. Moreover, 4 See K. Hartley, The Industrial and Economic Benefits of Eurofighter Typhoon, (York University, 2008).

official statements indicate that the Tranche 3A agreement absolves Britain of the need to place any further Eurofighter orders.5 Some trade reports suggest that 48 of the proposed Tranche 3 aircraft will go to Saudi Arabia. If correct this means that all of Saudi Arabia’s 72 planes will have been siphoned off from British orders. If no more orders are received Eurofighter GMBH has said that production will stop in 2015. Moreover, in the UK the RAF is planning to withdraw all tranche 1 aircraft from service in 2019.

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Series Production Rates without ExportFrame Contract: 620 aircraft Options: 90

Exhibit 4 Original Typhoon Order and Production Schedule

It is therefore clear from current plans that jobs linked to Eurofighter Typhoon will be under major threat in the second half of the decade as production ends and in-service numbers decline. For those suggesting that the proposed merger is a threat to UK jobs there is a need to spell out how the job reductions linked to the run down of Eurofighter can be averted. Under the current status of BAE as a stand alone entity these cuts are inevitable. 4 The Political Dimension 4.1 Foreign Interference There is a certain irony in the fact that some UK politicians are angst ridden about German and French shareholding on EADS. In fact the Western state that places the most restrictions on its defence industry partners is the United States. With the U.S. technology transfer is difficult as is the matter of export licences. It is also air to say that any U.S. industrial partner is hostage to the contours of U.S. foreign policy. Even BAE has expressed it doubts. Back in 2006, Chairman Dick Olver remarked, ‘the US and the UK defence partnership has yet to produce a coherent response to the phenomenon of globalisation”. Lord Digby Jones, former Director of the CBI was more forthright:

The Americans claim they are free and in favour of lifting trade barriers, but the reality is that they are huge hypocrites. …The Americans say they are our friends, but they treat us as aliens. We fought shoulder-to-shoulder with them in Iraq, but we are treated like the rest of the Europeans, as some sort of aliens, (Digby Jones, 22 January 2006)

This view of Digby-Jones may be overstated, but the U.S. does place severe restrictions on industrial 5 Defence Industry Daily, (06/08/2012)

partners. The U.S. uses the framework below to regulate technology transfer. Exhibit 5 U.S. Export & Technology Transfer Control Framework The purpose of this frame work is to:

• To restrict the military capability of potential adversaries; • To prevent the proliferation of WMD; • To prevent terrorism; • To fulfil international and UN obligations; • To limit the potential of foreign competitors.

Following a declaration of principles agreement signed in 2000 between the U.S. and the UK, it was expected that trans-Atlantic tensions over defence collaboration would decline. But this did not occur, former Foreign Secretary Jack Straw expressed “severe disappointment” that the U.S. has not given the UK an ITAR waiver on unclassified information. Meanwhile UK partners on JSF have continued to be dissatisfied with the technology transfer arrangements as Individual Technology Assistance Agreements (TAAs) have had to be negotiated throughout the programme. Former Head of the European Defence Agency, Nick Whitney, commented, ‘I do find it disturbing that European defence technology flows freely to the United States, while US technology does not flow the other way’.

Mechanism US Government Department

Covering

International Traffic in Arms Regulations ITAR

State Military items, space-related technology and research

Export Administration Regulations EAR

Commerce Dual-use (military and commercial) goods, technology and software

Office of Foreign Assets Control OFAC

Treasury Trade sanctions and embargoes with selected countries

4.2 The European Dimension After 4 decades of collaboration, from the Jaguar fast jet to Typhoon, intra-European co-operation has shown that partners are happy to share technology and permit variations in foreign policy, while still working on common defence projects. The idea of our alliance partners hobbling UK defence policy is meaningless. Inside Airbus technology has flown freely between the partners and trans-national commitments regarding jobs have been honoured. On military programmes the principle of “juste retour” has been followed, with industrial workshare and jobs proportional to the national off-takes of the partner governments. These arrangements have always been followed scrupulously, as they are now on Typhoon. The European bogeyman stealing UK jobs is also a myth. The problem in the UK has been lack of interest in manufacturing. Regarding European capability a decade ago the then CEO of Northrop Grumman, Kent Cresa, made these comments in a speech at the Institut Francais de Relations Internationale in Paris:

My experience working with European firms has pointed to the fact that their technological ability meets ours in many areas and in some cases surpasses it... [yet] in addition to the normal pressures that exist for protecting domestic suppliers and jobs, European companies face barriers in the U.S. built with security, classification and export control hurdles.

5 Summary In this submission I have tried to argue that the proposed tie up between BAE SYSTEMS and EADS will be beneficial for both companies, for the UK and for Europe. While BAE remains a successful and dynamic business there is no doubt that it faces shrinking defence markets and that cuts in plant, equipment and workforce will be necessary in the coming years as procurement budgets decline. A large stake in the civil aircraft market would be a major boost to the company. And now is clearly the right time to re-enter the civil market as a huge boom unfolds over the next two decades. Similarly, in terms of balance, EADS has long sought to be less dependent on the civil aviation sector and to enhance its defence portfolio and be a credible supplier to the U.S. market. The two firms are highly complementary and synergies, scope and scale economies would follow the merger. A merged group would have the following desirable characteristics:

• A genuine pan-European global company; • Ensuring UK and European leadership in many sectors of the global aerospace/defence

market; • A global presence through strategic partnerships and shared equity investments • Significant investment in key partner countries; • Offering the global market world class defence products and services; • Ensuring the open flow of technology between key EADS/BAE stakeholders, but supporting

UN and EU arms export and control regimes; • Partnering and competing with US defence firms as an equal; • Approaching the US market from a position of technology leadership, based on pan-European

R&D and acquisition of technology. October 2012

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Written evidence from Prospect

Prospect evidence

1. Prospect is the trade union for professionals, engineers, scientists and managers. We represent 700 members across various lines of business in BAE Systems, mainly in surface ships, and land (weapons, vehicles and ordnance) but with a growing interest in air domain and submarines and limited membership in shared services and specialist areas such as INSYTE.

2. The proposed merger between BAE and EADS continues a period of uncertainty that has gripped the company for several years, and in particular, following the publication of the Strategic Defence and Security Review (SDSR). The SDSR had a particularly destabilising effect across the company in the areas where Prospect organises. This period of reduced demand and uncertainty is likely to continue whatever the outcome of the merger. Although BAE is the leading defence manufacturer in the UK, and will continue to employ over 30,000 people in defence related work, BAE has already made substantial changes in the UK. Recent developments have been driven by cuts in the UK defence market and have resulted in the loss of capabilities and skilled jobs.

3. Prospect concerns include:

i. In the Land domain, vehicle manufacture is due to close at Newcastle in 2013. New manufacturing work is destined to be undertaken in Sweden. Whilst the recent MoD contract for the Viking vehicle regeneration has already been allocated to BAE's Swedish plant.

ii. In the Air domain, BAE will eventually benefit from F35 orders but these have been reduced in the last year, and losing the India contract was a big set-back for future Typhoon orders.

iii. The work in weapons is limited to barrel and sub assembly work for the M777 artillery gun; BAE would hope to win the ship weapons contract for the Class 26 ship.

iv. In munitions and ordnance BAE signed 15 year manufacturing contract with the MoD in 2007. However there are concerns about the future of this contract.

v. In surface ships the government have said that it is BAE’s decision where they build the Class 26 ship, which has placed uncertainty over BAE’s naval yards, in particular Portsmouth.

vi. Restructuring within BAE has already moved key management capabilities and functions to the US.

4. It is welcome that the government has taken a firm stance on retaining existing defence work within the UK; however, the government’s golden (special) share in BAE has done little to defend or retain UK sovereign capabilities in recent years. The relatively recent move to an ‘off the shelf’ procurement policy can only weaken the position of BAE as the main Prime Contractor to the MOD. The future of warship-building in all existing yards is extremely vulnerable, the decision to relocate land vehicles work to Sweden has already been taken and thousands of jobs have been lost across the company followed the publication of the SDSR. The retention of UK jobs relies on a consistent supply of work from UK defence contracts. The government needs to review its strategic direction to ensure that key skills are retained within BAE.

3

5. A key part of the retention of the UK industrial base is the development and design of new products. Retention of high value engineering skills is critical in ensuring that the UK defence sector is able to innovate. These skills add value to the company and enable new lines of work to be developed, and they trickle down through the supply chain, as staff trained by the big companies move to, or even start-up, SMEs. However, when design skills are lost they cannot be replaced. Prospect is concerned that BAE has already lost design capabilities in land vehicles and that further capabilities could be lost if the UK defence sector shrinks further.

6. The merger is a response by BAE to the declining defence market. The deal is complex and we welcome the active role that the government has taken in the negotiations. However the deal will not resolve the underlying problems for the UK defence sector. Securing defence jobs and retaining high value engineering skills at BAE requires an active defence industrial policy. If successful the merger could place UK lines of business at a disadvantage unless such a policy is developed and the UK’s sovereign interests are clearly outlined by the UK government.

7. Prospect would urge the Defence Committee to press the government to clarify how the SDSR will need to be reviewed to safeguard the UK’s strategic interests at BAE.

9 October 2012

Written evidence from Professor Trevor Taylor, Royal United Services Institute 

1. The volume of press and governmental attention that this proposal has created is a clear indicator of its multi‐dimensional significance for the economies, defence and political relations of the many states involved.   

2. However, the British Government is not well‐placed to adopt any kind of stance on the issue: the implicit message from the National Security Through Technology White Paper, published this year, is that the government has little interest in defence industrial structures. Although the document was explicitly a successor and response to the Defence Industrial Strategy of 2005, the term industry was not even part of the title of the 2012 document. The document does not even appear to have taken into account the possibility of a re‐structuring of the sort under scrutiny today. In some ways there are parallels with the situation in 1985 when Mrs Thatcher’s government, again eschewing any idea of industrial policy, found itself quite unprepared to deal with an unexpected but major defence re‐structuring proposal, in that case the de facto takeover of Westland by Sikorsky.  The term defence industrial base is well established in the United States1 but, for the former Procurement Minister Peter Luff it is ‘a term that makes my heart sink’.  

3. The British Government in general and the MoD in particular cannot easily complain about the BAE Systems choice to give up its independence since Whitehall and Abbey Wood do not appear to have viewed or treated it as a strategic national asset and a vehicle for UK influence, but rather as a problem stemming from its monopoly status in several areas. A number of procurement choices have made clear that the Government does not wish to use BAE Systems as a supplier of land systems, despite the company’s investments in the land sector in Sweden, South Africa and of course the USA. This author would assert that governments have a great influence on the structure and number of the defence enterprises that serve them, not just because of policy moves, but mainly through the level and shape of their spending choices. The BAES move towards EADS is significantly a reflection of the present and prospects for defence in the UK (as well as the buoyancy of the civil aerospace market).  

4. There has been much talk about the desire of the French and German governments to maintain their influence on any new merged company.  It cannot be overlooked, however, that the enormous success that is today Airbus, with a parent company with a cash‐strong balance sheet, an order book for almost 12000 aircraft, and a range of high technology aircraft built with advanced manufacturing techniques, is present because of sustained vision and commitment to the civil aircraft sector by the French and German governments since the mid‐1960s. Rolls Royce 

                                                            1 See, as a small sample of references, the Department of Commerce, http://www.bis.doc.gov/defenseindustrialbaseprograms/index.htm; Department of Homeland Security, http://www.dhs.gov/xlibrary/assets/nipp‐ssp‐defense‐industrial‐base.pdf; Department of Defense, http://www.acq.osd.mil/mibp/  

did not prioritise an engine for the first Airbus plane, the A300B, and the British government lacked the confidence and determination to back the project. It pulled out of the Airbus government consortium in 1969. Only the private expertise and commitment of Hawker‐Siddeley meant British industry stayed involved, particularly with the wing technology. With such a history of successful French and German government involvement, it is understandable that Berlin and Paris would not wish to give it up completely. However it is also true that most shares in a ‘BEADS’ (used here for brevity) structure would be owned by private investors: should shareholding governments ever press for actions that would be clearly against the medium and long‐term commercial interests of the organisation, the private shareholders would likely respond by moving their investments causing the share price to fall.  Shareholding governments too are under constraints and of course the UK Government has the option of buying a modest number of shares in the new firm: this seems unlikely on ideological grounds but legally there would seem to be no obstacle.   

5. Clearly the operation and governance of a merged BAE Systems and EADS will be a complicated matter with many details to be worked out. But the two firms have many existing links through major and long‐standing collaborative projects and many of today’s defence businesses in the UK already have a multinational nature and face issues of political direction and government regulation and sponsorship. How much influence does the Italian government exercise over Finmeccanica and thus the future of the helicopter and airborne radar capabilities in the UK? To what extent are Lockheed Martin, General Dynamics and Lockheed‐Martin’s British businesses free to go against political direction from Washington? Thales, which inter alia is very important in sonar technology in the UK, is obviously French and to what extent can the results of British research funds spent with Thales UK be used for the benefit of Thales businesses in other states? The creation of a ‘BEADS’ would simply add another company to the existing list about which difficult questions can be asked: The whole area of how governments act as sponsors, regulators and customers of multinational defence businesses contains many unknowns, some of which may be answered only on an ad hoc basis as specific dilemmas arise. In itself, a BAE Systems merger with EADS will not create a new category of problems.   

6. However, it must be recognised that special provision will have to be made with regard to the BAE Systems submarine design, development and production capabilities located mainly but not exclusively in Barrow, certainly if the UK maintains its commitment to replace its Vanguard class submarines with a new generation of boats. Given the ring‐fencing of French nuclear ballistic missile activities within Aerospatiale/EADS, this should not prove too difficult.  

7. Talk of American fears regarding the US‐based businesses of BAE Systems should be viewed with caution.  The United States already has very rigorous law‐based systems in place in the US to ensure that the BAE Systems’ firms in the US cannot move their technology out of the country without appropriate government permission. British BAE Systems staff who visit the US have been known to speak anecdotally about having been treated as spies when they have met with their American company colleagues. It would be intriguing to ask the leaders of Lockheed‐

Martin, General Dynamics and other US firms if they would invest in the UK if they had to operate in this country under the same restrictions that BAE Systems, Rolls Royce and others must tolerate in the US.  Viewed from the perspective of the politics of the market, a reasonable prediction would be that the major defence businesses in the US will decide if the proposed merger will create a more effective competitor in their markets. If they judge that it will, they are likely to lobby the US Government and to use any convenient argument against the change. This is a commercial and then a political question for the US, not a matter of increased national security risk.  

8. The deal can be expected to go through, eventually! Apart from the commercial logic that can be discerned, as well as the lack of implications for competition, the reasoning behind this is that it is hard to envisage that any party would wish to be identifiable as having prevented the merger. Should the initiative meet rejection, the senior executives of both companies would probably feel the need to leave, causing damage to the management strength and share prices of each. Also it is arguable that, should the proposal fail, a return to the status quo ante looks unlikely and there would be even more uncertainty than would be created by a union. With so many parties involved, hard bargaining is inevitable, and there is no certainty that the 10 October deadline for a clear announcement to the market will be met, but by the beginning of 2013 things can be expected to be settled. 

2 October 2012 

BAE 006 Written evidence from the Royal Aeronautical Society

Introduction 1. The Royal Aeronautical Society is the learned society for the aerospace and aviation community.

It has over 17,000 members world-wide. The work of the Society is supported by a number of Specialist Groups, including an Air Power Group. It also has a Corporate Partners’ scheme linking it to aerospace and aviation companies. The Society’s submission relates primarily to the aerospace implications of the merger, but does consider some of the broader structural and procurement issues.

Commercial benefits of the merger 2. In theory, a merger of BAE SYSTEMS (BAES) and EADS makes sound commercial sense. It

would create a balanced, European owned equivalent to Boeing, with interests in most of the major defence and civil aerospace markets. For BAES it would provide access to the countercyclical civil market at a time when defence spending in Europe and the US is falling and when competition in other global defence markets is increasing. BAES would also re-enter the European space business through EADS-Astrium as well as rotor-craft through EADS-Eurocopter. EADS would gain access to a more balanced portfolio of defence capabilities, especially in electronic systems, land and naval platforms, although with only a limited avionics business, the new company would not be fully vertically integrated.

3. It would also afford EADS immediate access to the US defence market through BAES North America, although as we will discuss below, this would be subject to very stringent conditions. Nevertheless, it would complement EADS recent decision to locate an Airbus factory in Alabama and strengthen Airbus Military’s position in future competitions for Pentagon contracts.

4. BAES and EADS are already partners in core UK defence programmes: notably the Typhoon and

through the jointly owned MBDA guided weapons company. A merger should simplify export procedures and marketing. In the short term, there is unlikely to be any significant change in the pattern of the worksharing or sub contract allocations to BAES suppliers. BAES may in the future be better placed to win business from Airbus, which may or may not be at the expense of existing UK suppliers.

Political interference in the new company 5. However, the ability readily to re-enter or to gain access to new markets and sectors through a

merger should not be overstated, at least in the short term. The experience of similar mergers in the UK, Europe and the US suggests that any rationalisation of activities and deriving economies of scale or scope are likely to be protracted.

6. In this case, national political interests will be a factor in future corporate decision making,

especially where employment and perceived vital national technological assets are concerned. From a UK perspective, the short term additional threat to employment at BAES is likely to be limited. Conversely, the UK would have a more direct role in business developments at Astrium UK and Airbus UK. Much, however, will depend on the exact role of French, German and

Spanish government shareholding rights in the new company. Dilution of public shareholding would allow the new company greater freedom to formulate policy on strictly commercial criteria: additional government safeguards would have the potential to harm UK interests unless matched by comparable safeguards acquired by HMG.

US attitudes 7. A key issue will of course be the reaction of the US government to the merger. BAES is a major

Department of Defence (DoD) contractor, a prime contractor for a number of programmes, and participates in several highly sensitive sectors of US defence. BAES is already subject to a Special Security Agreement that places constraints on non-US citizens working in the United States on DoD contracts and on the allocation of senior management roles in BAES North America. An SSA also places strict limitations on access to factories and technology transfer between BAES North America and the UK. These are over and above ITAR restrictions applied to individual programmes or to the Technology Access Agreements (TAAs) governing the F-35 programme.

8. While both BAES and EADS (UK) have been defined as acceptable companies within the ambit

of the US-UK Defence Trade Treaty, this is unlikely to have an impact on more generalised attitudes to the merger on the part of the US government. EADS is viewed by many in the US political system and defence community as a Franco-German entity. Although it won plaudits for its conduct during and following the USAF tanker transport competition, as well as for bringing jobs to the US though its new Airbus factory, there is still a powerful anti-European lobby in Washington. This has been exacerbated by the long running WTO dispute over civil airliner subsidies.

9. As a minimum, the US government (supported no doubt by powerful Congressional figures) will

demand additional assurances on technology transfer and decision-making authority. It may even require disinvestment of the more sensitive US assets.

10. The F-35 programme is a special case, governed by separate government-to-government

agreements on technology transfer (TAAs). The programme is also managed by Lockheed Martin as prime contractor. A large number of UK firms including BAES and Rolls-Royce and most of the leading UK tier one companies are subcontractors. Many have won contracts as “best athlete” on merit in open competition. It is unlikely that this stage in the programme EADS or any of its suppliers will be able significantly to access F-35 business.

European industrial implications 11. The implications for relations with Europe are more complicated. The merger would be an

important and arguably long overdue step towards rationalisation of the European Defence Industrial Base (EDIB), which might accelerate a similar rationalisation on the demand side. However, there are some unresolved issues. EADS currently has a share in Dassault. In practice, this has had a minimal affect on Dassualt and its ability to compete against the Eurofighter Typhoon or its freedom to act within the French domestic defence industry. BAES has a cooperative agreement with Dassault to develop unmanned systems, currently excluding EADS.

Attempts to draw Dassault more closely into the new company could create issues for the UK if this was to lead to any rationalisation of combat aircraft design and development.

12. However, the BAES-EADS merger is more likely to trigger mergers in France – probably

involving Dassault and Thales, which also has defence interests in the UK, thus increasing competition generally in some European defence market segments. Similarly a BAES-EADS company could join with Dassault to rationalise European unmanned developments. On the other hand, Dassault might decide to go it alone in developing its own UAS technology, especially if it does merge with Thales.

13. The merger would also have an impact on the Italian Finmeccanica. While in the first instance,

this must be a concern for the Italian government, Finmeccanica is a partner in the Typhoon and in the F-35, and has a 25% share in MBDA. It also owns AgustaWestland, which may face increased UK domestic competition from EADS-Eurocopter products (which already often have UK content), although BAES would not add directly to Eurocopter’s technology base.

14. Success or failure of the merger is likely to have a catalytic effect on the EDIB. The speed and

direction of change is unpredictable. HMG cannot afford to be a spectator watching events unfold; it will have to take an active part in encouraging developments to the benefit of the UK. A hands-off approach will be insufficient in what inevitably will be a highly politicised environment.

Relations with the MoD 15. In some respects, the competition question gets to the heart of some of the structural dilemmas

underpinning UK procurement and the likely impact of a BAES-EADS merger on UK weapons acquisition. The UK defence market is already dominated by BAES, holding a monopoly supplier position in a number of sectors. The merger would accentuate this position, for example two military transport aircraft contracts would be satisfied by the joint company or a subsidiary.

16. Taking a positive view, the sheer size of the new company could further encourage the MoD to look beyond BAES as a prime contractor, or as noted above, to have a “domestic” alternative to AgustaWestland. In such cases, the balance of technological or economic benefit to the UK would be difficult easily to assess. On the other hand, the joint company, buoyed by civil sales and other defence business, might choose not to compete for MoD business if the terms were too onerous.

Broader structural implications for the UK defence-aerospace industries 17. Whether the joint company poses a threat to UK sovereign capabilities, or constitutes a challenge

to UK national defence technological interests is hard to predict. Current trends in the global defence market, especially in the US and Europe would suggest that the status quo of UK national, European regional and trans-Atlantic international defence industrial structures will be difficult to sustain, the more so on this side of the Atlantic. Change is inevitable and it is better to be in the vanguard affecting choices than trying to cobble together something from the remnants of rationalisation.

18. As in 1999, when the then British Aerospace bought GEC-Marconi and ended negotiations to

create a pan-European company, BAES’ commercial judgement could be shaping the future for a large part of the UK defence and aerospace industry. After over a decade of building an extensive US footprint – setting a pattern later followed by a large part of the UK defence and aerospace industries, the proposed merger may now signal a retreat from that strategy. Despite the current uncertainties affecting the US defence market, it will remain the largest single integrated market for defence equipment for the foreseeable future. Set against this are the known trends in European defence budgets that point to a decade of falling investment and uncertainty over any new major procurement.

19. There will be UK commercial victims of this change: rationalisation at the top of the chain is

usually magnified further down. In the first instance it is again better to have some claim to ownership and control at the prime contractor level. The “routes to market” argument provided by a domestic prime contractor is a powerful one. Increased size of the new company would also help to provide in the case of BAES some protection for UK technological assets, with a greater capacity to innovate and to commercialise R&D. The risk is that these might be exploited in non-UK locations. In any event HMG should not view this as an opportunity to reduce investment in defence and aerospace technology. As in the case of any multinational enterprise, its management will invest where the environment is most beneficial, and that in large measure will follow public investment in research or infrastructure.

Conclusions 20. The balance of benefit to the UK will depend to a large extent on the political environment within

which the new company will be expected to work. If it is in the British image of commercial autonomy, competitive contracting and “hands off” political governance, assuming the US reaction is contained and losses to the UK are minimised, on balance the merger could be of benefit to the UK. The alternative model would not.

2 October 2012

Written evidence from the Campaign Against Arms Trade 1. The Campaign Against Arms Trade (CAAT) in the UK, established in 1974,

works to end the international arms trade, which has a devastating impact on human rights and security, and damages economic development. CAAT believes that large scale military procurement and arms exports only reinforce a militaristic approach to international problems.

2. As the largest UK-based arms company and exporter of military equipment,

BAE Systems in its current and previous forms has always been a focus for CAAT's research and campaigning. Likewise, EADS and its predecessors have attracted the attention of CAAT's counterparts in continental Europe.

UK and BAE interests are not the same 3. More than two decades after the end of the Cold War, it is generally agreed

that a conventional military threat to the UK itself from another nation state or a coalition of them is unlikely. The 2010 National Security Strategy identified the Tier One threats to the UK as international terrorism, cyber attacks, a major accident or natural hazard (for instance, flooding or a flu pandemic), and international military crisis into which the UK could be drawn.

4. Despite this, lobbying by BAE and the other military companies as well as their

friends in Government, has left the UK committed to heavy expenditure on large items of military equipment including aircraft carriers, fighter aircraft and Trident. These purchases do not address today's security challenges and are questioned even by some within the military.

5. One reason for BAE's effective lobbying efforts is the belief that BAE is

"British" and has the UK's interests at it heart. Large advertisements featuring the union flag encourage this view. The reality is that BAE is a global company with five "home markets" in Australia, India, Saudi Arabia, the UK and the USA. The last-mentioned contributed 47% of the company's global sales in

2011, far the largest proportion. Fewer of the company's employees are based in the UK than in the USA.

6. A merged BAE and EADS might bring greater recognition of the true situation,

that BAE is a company focussed on achieving profits for its global shareholders. It is "British" only when it suits its wider purposes. By ending the false conflation of BAE and "British" interests, UK governments may be better able to concentrate on the real security challenges.

7. This summer the Committees on Arms Export Controls (CAEC), of which your

Committee is part, acknowledged there is an "inherent conflict between strongly promoting arms exports to authoritarian regimes whilst strongly criticising their lack of human rights at the same time." The support given to authoritarian regimes by UK governments through their participation in the sales efforts of the arms companies, particularly those which now form BAE, might be examined more objectively if the link between the company and "British" interests were questioned.

Enjoying Government support 8. Since 1966, the UK's arms exporters have enjoyed the support of a dedicated

Government arms sales unit. This is now the UK Trade and Investment Defence and Security Organisation (UKTI DSO) with approximately 150 staff. CAAT made a Freedom of Information request regarding the meetings of one of UKTI DSO's staff, Alan Malpas, Director of the Africa, Middle East, Central & South West Asia. This revealed a string of contacts with BAE and discussions regarding the company's products, a pattern likely to be replicated in the diaries of many of his colleagues. This is all paid for by the taxpayer.

9. The relationship between the UK government and BAE is particularly important

to the massive Saudi Arabia contracts. These are government-to-government deals with the UK government having a second contract with BAE as prime contractor. The Ministry of Defence Saudi Armed Forces Project within the UK Ministry of Defence has around 200 staff, both military and civil, based in the

UK and Saudi Arabia. The costs are met by by the Saudi government, giving one of the world's most authoritarian regimes a foothold in Whitehall. It is unclear what the impact of a BAE-EADS merger would have on these arrangements.

10. Over the years, BAE has also been a major customer of Export Credits

Guarantee Department (ECGD), now UK Export Finance (UKEF). However in 2008 BAE stopped the cover on its arms deals with Saudi Arabia just before the publication of a highly critical report from the Organisation for Economic Cooperation and Development. The report said that the Serious Fraud Office (SFO) had handed the ECGD evidence of misrepresentations by BAE to the ECGD in connection with the issuance of insurance, but that the ECGD had done nothing about it.

11. While BAE has not, to the best of CAAT's knowledge, made use of UKEF

support more recently, Bob Keen, Head of Government Relations at BAE, told the Business, Innovation and Skills Committee on 1st February 2011: "ECGD support is absolutely essential to BAE Systems in a number of markets."

12. BAE and the other military companies stress the high-tech nature of their work and the benefits of their research and development (R&D) spending. However, this is heavily supported by the taxpayer. BAE's 2011 R&D expenditure was £1,149million, of which just £222 million was funded by the Group (BAE Annual Report 2011, p.110). The other 80% came from its "customers" - governments worldwide funded by their taxpayers.

Employment 13. To justify this Government support, the companies frequently stress the

number of highly skilled jobs they provide. However, this can hide a more cavalier attitude to its workforce as was illustrated at the BAE's Annual General Meeting in May 2012 when BAE workers from Brough on Humberside facing factory closure were repeatedly told that global financial targets and the

"long-term sustainability of the business" were more important than their jobs. This is unlikely to change after a BAE-EADS' merger.

14. The Financial Times, on 2nd September 2009, said: "Spending on defence is

no better at creating jobs than support for other sectors. Defence R&D may produce spin-offs, but so too may R&D with civilian applications." The same point was made more recently, with respect to the BAE-EADS merger and the huge amounts of money going to the arms industry. Matthew Lynn pointed out in MoneyWeek on 21st September 2012 that: "True, it creates jobs. But any form of government spending creates jobs."

15. Governments have chosen to allocate taxpayers‘ money to support arms

exports and production, and, in consequence, jobs in these fields. However the introductory paragraph for a Jane's conference on Energy, Environment, Defence and Security that took place in May 2011 commented: "The defense market worldwide is worth a trillion dollars annually. The energy and environmental market is worth at least eight times this amount. The former is set to contract as governments address the economic realities of the coming decade; the latter is set to expand exponentially, especially in the renewables arena." Ending the support for military exports and the spending on prestige procurement projects would release resources to help other sectors that might be more efficient and innovative, more likely to grow rather than decline, more likely to support secure employment.

A new opportunity 16. BAE's desire to merge with EADS is an acknowledgement of the decline of

military industry, and that the former made a mistake by concentrating its production on arms. The UK government could see the proposed merger as an opportunity to rethink its industrial support and subsidy - to move this from the problematic arms industry towards renewable energy technologies.

17. Dr Sandy Wilson, the President of General Dynamics UK and also Vice

President-Defence of A|D|S told your Committee on 8th September 2010 that:

"... the skills that might be divested of a reducing defence industry do not just sit there waiting to come back. They will be mopped up by other industries that need such skills. We are talking about high-level systems engineering skills, which are often described as hen's teeth. It is an area in which the country generally needs to invest more. You can think of the upsurge in nuclear and alternative energy as being two areas that would mop up those people almost immediately."

18. It is clear that the skills required for renewable technology are very similar to

those in the arms sector, and there is an engineering skills shortage. According to BIS, 13th July 2011, "At present the demand for skilled engineers far exceeds supply."

19. Since climate change and energy security are both major current threats, far

greater than those massive military spending is aimed at addressing, it would seem to be a win-win situation to use the skills of current arms industry workers as well as those seeking employment to tackle these. This needs a redistribution of resources and support.

20. In addition to the economic and environmental benefits, transferring

Government support to the renewal energy sector should bring other benefits to the UK. It will help provide energy security without the current reliance on authoritarian regimes, and remove any motivation for intervention to protect oil supplies. If the UK government does stop courting these the authoritarian rulers as potential arms purchasers, and condemns their human rights abuses, that in turn it likely to lessen the terrorist threat against the UK.

Corruption 21. Both BAE and GPT, a UK subsidiary of EADS, have been the subject of SFO

investigations with regards to corruption. In 2004 the SFO started looking into into BAE Systems' deals with respect to Chile, the Czech Republic, Hungary and Austria, Qatar, Romania, Saudi Arabia, South Africa and Tanzania. The UK government halted the Saudi investigation in December 2006. The formal

end to the other investigations came when the SFO announced a "plea bargain" deal in February 2010. BAE would pay £30million and plead guilty to failing to keep reasonably accurate accounting records in relation to its activities in Tanzania. No action would be taken in respect of the allegations with regards to the other countries.

22. In March 2010 BAE pleaded guilty in the United States District Court in

Washington DC to "conspiring to defraud the US by impairing and impeding its lawful functions, to make false statements about its Foreign Corrupt Practices Act compliance program, and to violate the Arms Export Control Act and International Traffic in Arms Regulations". The company was fined $400 million, one of the largest criminal fines in the history of the US Department of Justice's effort to "combat overseas corruption in international business and enforce US export control laws".

23. The US court documents showed that BAE had provided "substantial benefits"

to an official in Saudi Arabia who was in a position of influence regarding fighter jet contracts. BAE also caused the filing of false applications for export licences for Gripen fighter jets to the Czech Republic and Hungary by failing to disclose a payment of £19million made to an intermediary "with the high probability" that it would be used to influence the tender process in favour of BAE.

24. In August 2012 the SFO announced it was investigating allegations of

corruption regarding Saudi Arabia and GPT which has a project known as SANGCOM, said to be worth £2billion a year. Two former employees, said that payments totalling £14.5million have been made by GPT to two Cayman Islands-registered companies and that these payments were irregular as no actual work was done. The SFO investigation into GPT continues.

October 2012