`(1) The Secretary of State may by order make provision for or in connection with the imposition of controls regulating the licensed production of controlled goods overseas.

(2) In this section ``licensed production'' means production under commercial licence from a United Kingdom person, United Kingdom company or company based in the United Kingdom of that entity's proprietary controlled goods or technology.

(3) An order under this section may make provision in connection with any controls that may be imposed by a directly applicable Community provision on licensed production agreements.

(4) Controls shall be imposed under this section on acts done outside the United Kingdom, but only if they are done by a person who is, or is acting under the control of, a United Kingdom person, United Kingdom company, or company based in the United Kingdom.'.—[Dr. Cable.]

Brought up, and read the First time.

I beg to move, That the Clause be read a Second time.

I think that this is to be the last item of business on the Bill in Committee, and I hope that hon. Members will, unless the Minister's reply is exceptionally convoluted, be able to attend Question Time.

The issue of overseas production is a bigger and more complex problem than that of end use. It requires serious consideration, because many of the problems associated with arms exports are wrapped up in that concept. It is a bigger problem because if production overseas is licensed by an exporting company, the ramifications go far beyond the question of simply diverting supplies. If production occurs overseas, the potency of weapons can be considerably advanced in the production process and in unexpected ways. There is also the possibility of multiplication, with mass production units provided by the supply of British machine tools or underlying technology. Potential proliferation, as well as diversion, is at issue.

Another reason for treating this matter as one of great importance—we heard an eloquent statement about that from the hon. Member for Salisbury yesterday—is the nature of the modern armaments industry, which no longer involves national companies exporting finished products overseas. It is a more complex business, involving subcontracting and alliance arrangements between companies. Increasingly sophisticated developing countries expect, as a matter of course, that provision for local production will be written into the contract. Certainly countries such as China and India take that attitude, but even countries a bit lower down the technological pecking order would normally insist, as part of any agreement, on the capacity to produce locally. If we are to prevent an abuse of that system, adequate provision to cover overseas production will be needed.

Overseas production can present two possible abuses of the regulations. First, if a transformation took place in production—such as enhancing the power of a weapon—we could supply weapons to another country that we would not have supplied had we known what the final product would be. The other is that production units overseas can be used to divert supplies to other countries that we would not want to supply.

To make my discussion a little less abstract, I shall give a couple of examples in which the NGOs that have been monitoring the problem think that serious difficulties have arisen. I am sure that the Minister is familiar with both; they both relate to Turkey, which may be regarded as one of the less problematic countries with which we have to deal as a member of NATO. None the less, Turkey has been at the centre of several controversies in connection with overseas production, one of which was the large-scale production of Land Rovers by a Turkish company called Otokar. Land Rovers are off-the-road vehicles, and are not controversial in themselves, but with a little enhancement they can become potent pieces of cavalry. With the addition of machine guns, night radar and other equipment, they have become effective weapons and have been used in theatres of conflict by countries such as Pakistan. The factions that operate in Afghanistan have used fast-moving Land Rovers as their key weapon. The supply of enhanced Land Rovers from Turkey has resulted in the widespread dissemination of effective weapons to countries that we would not otherwise have wanted to supply—Algeria, for example, and possibly Pakistan, until the recent conflict.

Another issue relating to Turkey is that of a company called Heckler and Koch, which is a subsidiary of Royal Ordnance, which is now a subsidiary of BAE. The Heckler and Koch factory in Turkey was engaged in the mass production of assault rifles and submachine guns. It is widely acknowledged that substantial volumes of armaments from those production installations have gone elsewhere, including Indonesia. We have been through the Indonesia story, but I believe that that is reasonably well documented and not especially controversial.

The Government seem to accept that there is a problem—it is implicit in many of their statements. We must ask ourselves how it should be dealt with and whether the Bill before us is adequate. The Government consulted industry, but we need to establish whether the mechanisms that they propose are sufficient, given that they rely heavily on industry's self-regulation. The policy essentially rests on companies involved in overseas production obtaining guarantees from their counterparts in the other countries. The Government accept the need for direct controls when there are UN embargoes, but there are countries to which we may not want to supply arms that are not subject to such embargoes. As the Government believe that it is necessary to rely on direct controls with direct arms exports, why do they feel that a looser, more self-regulating system is appropriate for overseas production, which is equally serious, and potentially more so?

The new clause would introduce a system similar to that in the United States, which has a more comprehensive system for monitoring and control, as we heard during the discussion on end use. We would like the United Kingdom system to involve the licensing of production for overseas contracts, and to build into its surveillance a condition that would prevent such contracts from being permitted when an application for a direct weapons transfer would have been refused. That would be one condition. Contracts would also not be allowed if the recipient state could not demonstrate sufficient accountability, or if a country were subject to a UN embargo and had a record of breaking embargoes. Those conditions are not covered at present. Our provisions would also take account of any concern that a recipient Government might license the export of equipment to a country to which the United Kingdom would not give a licence. In other words, we propose a framework in which additional conditions would be built into the licensing process from the outset.

My colleagues and I are not simply improvising a tougher regime. It is important that Committee members understand that the spirit of the Amendment reflects that of early reviews in the House.

It is important that Committee members understand that the spirit of the amendment reflects that of early reviews in the House. The Quadripartite Committee felt strongly about the need for firm controls over overseas production—rather firmer controls than those currently built into the legislation. I should like to quote two key passages of the Quadripartite report, which cover the point admirably. It argued that:

``What is required is a system which ensures that the Government knows when a licensed production facility is being set up, and which ensures that the goods produced are not exported to countries or end-users where the UK would not licence them.''

That is precisely what the amendment is designed to achieve. The Committee also believed that

``some statutory powers may be necessary to control licensed production overseas, and recommend that the Bill provide for such powers to be taken in the future under secondary legislation . . .''

That is what we are proposing, and we need a full explanation of the fact that, although the Government recognise that there is a problem, they appear to have settled for a weaker regime than that which has been recommended.

The hon. Member for Twickenham has provoked discussion of this issue. My interest comes about because Redcar, which I represent, contains the port at which the Iraqi supergun was stopped. Many of my constituents are actively engaged in campaigns because of their great concern about the arms trade. Licensed production is the issue that has prompted the most substantial contribution to my postbag since I was elected. I shall, therefore, listen to the Minister's explanation with a genuine desire to report back to the many anxious and interested people in my Constituency.

The Quadripartite report to which the hon. Member for Twickenham referred was not quite as decisive as he suggests. In its recommendation at paragraph 106, after the comma at which he stopped, it said:

``to be used only if a non-statutory regime is shown to have failed.''

It also quoted Lord Scott, who observed:

``I do not believe we will be seeing in this country any claims for damages for breach of undertaking in this sort of area.''

That referred to contractual terms to control re-export that would be readily capable of enforcement. However, the Quadripartite Committee suggested that we need a system in which

``the Government knows when a licensed production facility is being set up, and which ensures that the goods produced are not exported to countries or end-users where the UK would not licence them.''

The Committee acknowledged that it was a difficult area, not only in knowing what was going on and whether anything could be done, but in knowing whether a non-statutory regime was working. Given that the Secretary of State for Trade and Industry can revoke licences if the end user is not as specified, or if new evidence comes to light that the Government has been misled in some way, it would be a foolish company that established production facilities in another country knowing that that might cost it its home base--that possibility would always hang over it. The practicality is important—I am not sure how the Government could possibly enforce that overseas.

I take on board what the hon. Member for Twickenham said and, having read the Quadripartite report, I am sympathetic. I understand why the Committee could not be conclusive. I am inclined to support the Government, because we have not had many cases where the system has broken down, but I shall be interested to hear what the Minister says.

In short, the Government consider the Amendment unnecessary because the Bill already gives us effective powers. It provides for significant control over the practical means by which licensed production arrangements are established and maintained. Such arrangements typically depend on the company in the UK that licenses the manufacture of its products supplying component parts or production technologies to the overseas producer. Where the product is manufactured under licence and has a potential military end use, an export licence will, in most cases, be required before the equipment and technology necessary for the establishment and further operation of the licensed production facility can be supplied.

The Bill provides a new power to control technology transfers, whatever the means involved. That will close a loophole in the export control regime, whereby a licence would not be required to transfer military technology if the transfer took place by fax or e-mail.

Where, in the case of potential military end use, essential components are needed to ensure that licensed production overseas can be maintained, a licence will be required for updating, for building the facility and for supplying the components. We have made it clear in discussions on licensed production overseas that a licence will not be granted for the supply of controlled goods or technologies that are needed for an overseas manufacturing facility where there is a clear risk that the finished products could be used for internal repression or external aggression or where there is an unacceptable risk of diversion to an end user.

The Bill will strengthen and make more comprehensive the UK's capacity to control the supply lines on which licensed production arrangements depend. The important issue is that we are introducing measures to effectively and practically control licensed production overseas. We are likely to be able to hamstring it effectively by refusing licences if there have been substantiated reports of previous diversion or illegal use. I therefore urge the Committee to reject the new Clause.

Much of the argument rests on whether the American system, which applies to about half of all arms exports and overseas production, is better than our own. Perhaps the Minister can explain something. The Government have examined the American model for overseas production and, for whatever reason, have found it lacking. Many of us are trying to respond to constituents' letters on the issue, and there have been exchanges with the Campaign Against Arms Trade. The Minister has helpfully written to me about how he wants to deal with them. He says that the CAAT briefing document contains a number of misleading statements. I am not sure what is misleading and what is wrong. Rather than continuing with an opaque exchange of letters, perhaps the Minister can explain what he thinks is misleading and what is wrong with the argument that has been advanced.

My second question tracks our discussion about end use. Would it be worth the Government's putting a bit of extra effort into ensuring that their regulations were enforced? I am suggesting not that there should be an overbearing bureaucracy, but that the Government should have the powers to check matters. Overseas production is difficult to monitor. I am not arguing that companies that might be innocently involved in the misuse of overseas production should be dragged through the courts in an expensive and elaborate process. All that is required is that the Government have the power to terminate a contract where abuse occurs. The Minister seems satisfied that he can pick up anything inadvertently as a result of knowing something about a company's past records. We are suggesting a mechanism whereby, if something goes wrong—possibly quite innocently—the Government have the power to step in and to stop the licence proceeding any further, after having checked that there is a diversion of use within an overseas production facility. It is difficult to understand why the Government should not want those powers. What is it that the Minister regards as deficient in the American system and on which issue does he want to correct the campaigners?

A number of points have been raised, and I am just referring to the evidence that Lord Scott gave to the Quadripartite Committee, and some of the key questions that he raised on this issue. He asked what the remedy would be for a breach in the case of an overseas company that had broken its undertakings. That company could not be prosecuted effectively in this country, particularly if the Government of another country had been responsible for the breach. We carefully considered Lord Scott's evidence and reached a firm conclusion.

We completely reject the assertions made by the Campaign Against Arms Trade about the gaping hole in the UK export control regime with regard to licensed production. NGOs have given me examples that are not current but go back a long way. Many of us would not disagree with those examples. That is why we believe that the framework will tackle abuses that have been raised with us and that have been substantiated. Other abuses have not been substantiated, which is another matter.

We are attempting to build into the Bill an effective way of controlling licensed production. As the Campaign Against Arms Trade acknowledges, the licensed production arrangements typically depend on the supply of component parts and design of production technology to overseas productions by the UK company that is responsible for manufacturing its products. We therefore have a direct influence on that, because it is highly likely that any transfer of parts or technology comes under the Bill and requires a licence. If evidence of the type produced by the hon. Member for Twickenham were substantiated, the Bill's provisions would allow the Minister to take action and reject that licence, because of the potential military end and diversion of use under discussion.

The Bill has adequate powers, and we should not be required to go further. That is the best way to curb the abuses. I use the word ``curb'' advisedly, because there will always be a battle to eliminate abuses, as other countries with lauded regimes claim. It is therefore important that we have the most practical, effective and tough rules to clamp down on the abuses as far as we can.

The hon. Gentleman is most courteous for giving way, given that I have not been at the proceedings until now, for which I apologise. My hon. Friend the Member for Salisbury knows why I could not be here.

The Minister referred to curbing the abuses. He is giving the public the message that the measure tackles the abuse of defence exporting by British companies and individuals. Before the summer recess, I challenged him to give us some examples of where such abuse was taking place. It is not sufficient to give the impression that abuses are taking place without specifying where that is happening.

I am glad that the hon. Member for Aldershot has come in and made that point. There are abuses. For example, if we receive evidence of diversion, which is an abuse, I and—thanks to the Bill—future Ministers, will be able to exercise powers. The question of who is responsible for that diversion is another matter. It is our job to stop the abuse and illegal diversion of goods so that licensed production overseas is in order. It is those abuses that we act to stamp out, and we make no apology for that. The purpose of the Bill is to ensure that there is a regulated and legal trade in arms and arms technology as approved by the United Nations and to enforce effectively embargoes from the UN, the EU or the UK. There is a lot of merit in what the hon. Member for Aldershot says and he has grasped the key point of the Bill.

I thank the Minister for replying to the hon. Member for Aldershot, who, had he been here previously, would have realised that we had had quite a few examples, some of which were controversial. To be positive about the Minister's response, and to make clear our position in the debate, I would say that the area of disagreement is quite narrow. The Government wish to act to prevent inappropriate overseas production and they appear to be satisfied that they can achieve those objectives if they can prevent licenses from being issued.

We are concerned with an additional point. If overseas production takes place inappropriately, possibly for entirely innocent reasons concerned with the behaviour of overseas parties, the Government should have powers to terminate the licence. It is not clear whether the present legislation provides for that. I would hope that in the course of the progress of the Bill to the Floor of the House that particular problem might be dealt with. On that basis, I beg to ask leave to withdraw the motion.

Motion and Clause, by leave, withdrawn.

Question proposed, That the Chairman do report the Bill, as amended, to the House.

Mr. Benton, on behalf of the Committee, may I thank you for your diligent, firm and fair chairmanship of the Committee? I visited Hudson's Whistle Company recently in my other capacity as a Minister for small businesses. That company supplies the bulk of professional referee whistles in the UK and abroad. I did not have to hand you one of their whistles at any stage, but I hope that Hudson's appreciate the publicity that we are giving them for the excellent work they are doing in the midlands for British exports.

I would also like to thank the Clerks, Hansard, the police, my excellent Bill team and especially, my colleagues for their contributions to this short, important Bill. Expeditiously and informatively, we have touched on and considered in detail all aspects of the Bill and those on which there are differing opinions within the Committee and Parliament. I am grateful to Committee members for their co-operation and I look forward to further deliberations on the Bill before it receives parliamentary and Royal Assent.

Mr. Benton, may I echo the words of the Minister and thank you and the Committee for your kind indulgence in allowing me such an easy passage, after I parachuted in unexpectedly to carry on what was nobly started by my hon. Friend the Member for South-West Hertfordshire (Mr. Page), and also my hon. Friend the Member for North Wiltshire, who has been translated elsewhere. May I also add the attendants to my long list of well deserved compliments? They gave us the runaround, in the best sense of the word, in helping us to carry out our duties.

I look forward to continuing our discussions on the Floor of the House when we may hear from hon. Members who did not have the privilege to be members of the Committee. The issue contained in the Bill is important. We said from the start that the Opposition would not oppose the Bill in principle. The Committee has scrutinised it well. I am sorry that we have not won on all our points, but we have had a useful and constructive Committee.

May I add a few further words in the same spirit, Mr. Benton? I thank you and the staff for the businesslike and efficient conduct of business. We have had a minimum of time-wasting interventions. The business has been dealt with quickly, but all points have been thoroughly aired. We have had few Divisions and I suspect that the attendants may be worrying about their future employment if that practice continues, but I am sure that we can remedy that when we discuss other legislation. I thank all concerned for their conduct.

I thank the Minister and the hon. Members for Salisbury and for Twickenham for their kind remarks. I, too, thank Committee members for their courtesy. It has been a very interesting Committee, and I wish all concerned every future success in deliberations on the Bill. I thank the learned Clerks, Hansard and the attendants.

Question put and agreed to.

Bill, as amended, to be reported.

Committee rose at twenty-one minutes past Eleven o'clock.