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Space Sector Report

1. This is a report for the House of Commons Committee on Exiting the European Union following the motion passed at the Opposition Day debate on 1 November, which called on the Government to provide the Committee with impact assessments arising from the sectoral analysis it has conducted with regards to the list of 58 sectors referred to in the answer of 26 June 2017 to Question 239.

2. As the Government has already made clear, it is not the case that 58 sectoral impact assessments exist. The Government’s sectoral analysis is a wide mix of qualitative and quantitative analysis contained in a range of documents developed at different times since the referendum. This report brings together information about the sector in a way that is accessible and informative. Some reports aggregate some sectors in order to either avoid repetition of information or because of the strong interlinkages between some of these sectors.

3. This report covers: a description of the sector, the current EU regulatory regime,

existing frameworks for how trade is facilitated between countries in this sector, and sector views. It does not contain commercially-, market- or negotiation-sensitive information.

Description of sector

4. The global space economy market is valued at between £155 billion and £190 billion, and it is estimated to grow to £400 billion by 2030.1 The UK space sector has trebled in size in real terms since 2000 (see Figure 1). With a turnover of £13.7billion (2014/15), the UK currently captures between 6.3% and 7.7% of the global market.

1 There are two leading measures of the global space economy: the OECD’s Space Economy at a Glance 2014 and The Space Foundation’s The Space Report 2014. These organisations valued global space activity in 2013 at $256bn and $314bn respectively. Given industry expectations for the long-run trend of 5% growth in the global space sector to continue to 2030, the anticipated size of the global space economy in 2030 is $587bn (OECD methodology) or $720bn (Space Foundation). At current exchange rates this implies a sector size of £450bn - £550bn. The figure of £400bn which has been used in publications such as the Space Innovation and Growth Strategy 2015 update report is based on pre-Brexit exchange rates.

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Figure 1: UK Space Sector Turnover Growth 1999/00 – 2014/152

Note: 2015/16 forecasted based on survey respondents’ forecasts and analysis of annual reports.

5. The UK’s Critical National Infrastructure uses the space sector for defence, the emergency services, environmental monitoring, flood response and other essential functions of the state (Figure 2). Consequently, events that could jeopardise the functioning of UK space systems appear on the UK National Risk Register.

2 Source: London Economics (2016), Size & Health of the UK Space Industry 2016

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Figure 2: Space Sector’s Influence on Critical National Infrastructures3

6. Space is an export-focused sector, and its manufacturing supply chains are typically integrated across EU-borders and flexible. The sector’s export share of 36% is almost 30% higher than the UK’s average.4

7. The space economy’s productivity is almost three times the UK average, generating

£133,233 of GVA per employee.5

8. Space employs a highly skilled and international labour force. Education qualifications (mostly STEM) are higher than for any other UK sector (Figure 3 below). Non-UK nationals are estimated to constitute 11% of the UK workforce.6

3 Source: London Economics (2015), Case for Space 4 London Economics (2016), Size & Health of the UK Space Industry 2016 5 Ibid 6 Based on a UKspace survey of space companies during 2017.

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9. The Research & Development intensity of the sector is equal to 8.1% of GVA. This is a higher intensity than sectors such as programming and telecoms, but lower than the pharmaceuticals market. Compared with the UK average, the space industry spends 6.5 times more on R&D in value terms.7

Figure 3: Qualifications in the space economy compared with other sectors8

10. Governments play a role in the space sector. For example, the Ministry of Defence uses its Skynet communications satellites to provide global encrypted communications to its forces and those of NATO partners.

Broad Model of the Sector and Sub-Sectors

11. The space sector is an ecosystem of businesses and academia that all rely on space-based technologies and data one way or another (i.e. their business model would fail if space-data or space-based services were not available). In this analysis, the space sector is understood to mean both the manufacture of spacecraft and products associated with this, together with companies offering services and products which rely on space-based data or services. These are often referred to as the ‘upstream’ and ‘downstream’ elements of the space sector.

12. International collaboration helps overcome the technical challenges and scale involved in developing space programmes.

13. The UK space sector can be split into 4 broad sub-sectors: space manufacturing (including launchers to place spacecraft in orbit);

• satellite operators;

7 London Economics (2016), Size & Health of the UK Space Industry 2016 8 Source: London Economics (2015), Case for Space

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• satellite applications and services; and • ancillary services.

14. Satellite applications and services account for the majority of the sector’s turnover

(74%), followed by space operations (15%), space manufacturing (8%) and ancillary services (3%).9

15. For the space manufacturing subsector, a company acting as the ‘prime’ contractor typically has responsibility for the design and assembly of complete spacecraft systems (e.g. for telecommunications or Earth observation satellites). These companies are typically large or at least mid-sized. Many are multi-national companies with a parent company based in the EU. The UK has particular strengths in the manufacture of large telecommunications and weather satellites (around 25% of the world’s telecoms satellites are substantially built in the UK) and small surveillance satellites.10 In addition, the UK supports a number of large European scientific and interplanetary space missions. Customers are both institutional (e.g. European Space Agency which is not part of the European Union) and purely commercial (e.g. telecommunications operators). The sector remains highly dependent on institutional buyers, but this is shifting and most of the sector’s future growth is projected to come from commercial demand.

16. Beneath the prime contractors, a range of subcontractors are involved in the design, assembly and manufacture of major subsystems and mission control systems (e.g. satellite structures, propulsion subsystems, software and payloads), or in the production of components and subassemblies to feed into these. These firms are often small, and range from specialised and generalist engineering firms and software houses, to universities and research institutes, to multinationals and their spin-offs.

17. Space manufacturing is often bespoke or involves very limited production runs. It is not unusual to have 13 or 14 levels of sub-contracting in a complex satellite or space project. This entails a complex supply chain with significant cross-border transfers of goods, data and skilled professionals within and between companies (see Figure 4 for an illustration of the Galileo satellite production process).

18. A new market is emerging in the increasingly large but cheap satellite constellations (several hundred spacecraft for one space system). Prime contractors are starting to explore how they can diversify their supply chains by working with companies more used to high-volume manufacturing (e.g. automotive, aerospace) in anticipation of these new market opportunities. Several opportunities seem likely for the UK sector. The Government has introduced a Bill into Parliament to enable launch from the UK and has made recent investments in the Harwell Campus in Oxfordshire, including £99 million for a National Satellite Testing Facility to facilitate the build of bigger and more technologically advanced satellites and remove the need for UK companies to use test facilities located abroad.

9 London Economics (2016), Size & Health of the UK Space Industry 2016 10 RCUK/UKSA Satellites and Commercial Applications of space http://www.rcuk.ac.uk/documents/documents/rcuk-space-timeline-web-pdf/

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Figure 4: Supply Chain for Europe’s Global Satellite Navigation System (Galileo)11

11 Source: Surrey Satellite Technology Ltd

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19. The UK satellite operations subsector covers largely commercial companies which own and operate satellites. Revenues from operators include those from fixed and mobile satellite telecommunications services, and commercial remote sensing operators (e.g. Earth observation satellites). These actors service governmental and commercial customers largely outside the space sector (e.g. providing bandwidth and imagery).

20. Beneath these operators a wide range of ground infrastructure equipment is necessary to support them (e.g. antennae, network control and data archive and processing centres).

21. The satellite applications and service subsector covers a wide range of firms for

which the use of satellite data is an essential part of their business model. It makes up the bulk (74%) of the UK space sector. For example, it covers direct-to-home satellite television providers, satnav consumer equipment and value-added services, mobile communications, data handling, banking and utilities management. Many firms here are large. However, small firms (including start-ups and inward investors) are increasingly driving much of the growth in the sector as cheap (often free) satellite data is being used to develop an array of new services, particularly focused on location services or imagery-based analytics.

22. The space sector has a role in providing services that underpin basic societal functions such as banking, power supply, utility management, communications, TV and broadband, food supply and agriculture, flood management and defence. The UK has made investments to facilitate the exploitation of data and services from space systems, for example the Satellite Applications Catapult at Harwell.

23. Finally, the ancillary services subsector includes financial, legal, insurance,

brokerage, research and consultancy services for the wider space sector. This covers a wide range of firms of different sizes.

24. It is important to note two unusual definitional features of the space economy: first,

there is overlap between the space sector and other sectors; second, data generated by satellites can be used to establish entirely new businesses that do not link back commercially to the satellite operator (e.g. profitable location-based gaming that relies on freely available GPS location data).

25. The Government’s most recent Size and Health survey of the space sector, gives an

indication of the composition of the sector. Some 29% of the 171 companies covered were micro enterprises (<10 employees), 16% small (10-49), 26% medium (50-249) and 29% large (250+). The value and employment of the subsectors is set out below.

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Table 1: Direct GVA and employment by sub-sector (2014/15)12

£m No. employees

Manufacturing 520 6,841

Operations 653 3,235

Applications 3,676 26,711

Ancillary services 284 1,735

Total 5,133 38,522

26. Growth in the UK space sector is underpinned by public funding for science, with each £1 of public investment on average resulting in UK economic benefits of over £7.13

27. Public funding comes from the EU’s space programmes (Copernicus, Galileo, EGNOS and space elements of Horizon 2020), UK investments through our membership of the European Space Agency; Eumetsat (a membership organisation of national weather forecasters that is also independent of the EU); and, national funding through the UK Space Agency. The UK’s domestic infrastructure in place, such as the Science and Technology Facilities Council facilities at Harwell, allows UK firms to compete for large international contracts, while attracting inward investment.

28. The technical challenge of space missions creates advances in technology or know-

how which can be applied more widely and commercialised. ‘Spillovers’ include medical advances (e.g. non-invasive monitoring systems, MRI processing software for detection of diseases) and improvements in industrial productivity (e.g. non-invasive identification of defective items).

29. Space is a global industry which is reflected in the ownership of UK-based

companies.

12 Source: London Economics (2016), Size & Health of the UK Space Industry 2016 13 London Economics (2015), Return from Public Space Investments

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Level of Employment in the UK 30. The UK space sector directly employs over 38,500 employees. Patterns of

employment are significantly more geographically distributed than the reported GVA above.

Table 2: 2014/15 employment14

Number of employees

England 31,041

Wales 370

Scotland 7,033

Northern Ireland 77

Total 38,521

Skills 31. Employees in the space sector are on average the highest qualified by sector in the

UK, with three out of four space sector employees holding a higher education qualification. Each direct UK space sector job supports another two employees in the supply chain and supporting sectors. Total estimated Type II employment (including indirect and induced jobs) is more than 115,000 jobs.

32. Together with its highly skilled workforce, the sector’s low volume, highly specialised

production means that the movement of skilled business people within and between companies is an essential part of the sector’s business model. Major companies in the UK space sector have a multi-national structure with business units and teams spread around Europe. The sector’s trade association, UK Space, estimates that 11% of UK space sector staff are non-UK nationals.15

14 Source: London Economics, Size & Health of the UK Space Industry 2016 15 Based on a UKspace survey of space companies during 2017.

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33. There is a significant skills shortage in the UK space sector. The UK Space Agency has a programme of activity to draw in more professionals to the sector. Meeting the sector’s 2030 target would necessitate the creation of 80,000 new skilled jobs with a corresponding demand on the supply of STEM graduates and world-leading scientists.16

Pattern of Trade

34. The UK space sector is export-intensive, with around 36% of turnover in the sector coming from exports, almost 30% more than the export share of the UK as a whole (28%).17

35. Europe is the sector’s largest export market generating 49% of the sector’s export

revenue, with Asia-Pacific and North America making up 35% of the sector’s exports between them. The table below provides a full breakdown by region. These figures are dominated by satellite applications and services, since they make up 74% of total revenue. 94% of space components exports go to Europe.18

36. Evidence on imports is less statistically robust as it is limited to a sample of 75 firms

who provided data in the most recent space survey. For these 75 companies with turnover of £1.2bn in 2012/13, imports were estimated at £186m or 16% of turnover.19 Of the imports of goods, according to an EU study on the space sector20, 90% of UK imports of space products in 2012 were from within the EU, reflecting the integrated nature of the EU manufacturing sub-sector, although it does not provide a breakdown by source country/ region.21

16 London Economics (2016), Size & Health of the UK Space Industry 2016. 17 London Economics (2016), Size & Health of the UK Space Industry 2016 18 ECORYS (2014) Study on the Specificities of the Space Sector and of the European Space Industry International Trade Negotiations and Relevant Commercial Agreements 19 London Economics (2016), Size & Health of the UK Space Industry 2016 20 ECORYS (2014) Study on the Specificities of the Space Sector and of the European Space Industry International Trade Negotiations and Relevant Commercial Agreements 21 Ibid.

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Table 3: 2014/15 export revenues22

Turnover (£m) Percent

Rest of Europe 2,452 49%

Asia-Pacific 798 16%

North America 957 19%

South America 369 7%

Africa and Middle East 398 8%

Undefined 34 0.0%

Total 5,008

37. Foreign Direct Investment (FDI) in the space sector has increased significantly in recent years (Figure 5). Government has played an important role in stimulating this growth, including through substantially larger investments in the European Space Agency, its support for R&D, its creation of the Satellite Applications Catapult, and through creating an attractive wider investment climate.

38. The graph below shows the increase in FDI events (in the form of greenfield

investment, and mergers & acquisitions) for the last 50 years by decade. While the growth has been dramatic, this disguises the high levels of recent FDI activity. UKTI estimates that there will be 10 FDI events in 2016/17 alone, demonstrating the attractiveness of the UK for investment as well as the growth of SMEs, particularly in downstream applications.

39. R&D activities in the sector account for 8.1% of GVA - a higher intensity than IT

programming and telecoms, much higher than the UK average (1.2 %) but less than the R&D intensive pharmaceutical sector (29.4%).23 Government investment in civil space equates to 4.19% of total government R&D investment.

22 Source: London Economics (2015), Case for Space 23 London Economics (2016) Size & Health of the UK Space Industry

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Figure 5: Space-Related FDI by Decade24

National and Regional Footprint of the Sector

40. The South East (Hertfordshire, Oxfordshire, Surrey and Hampshire), London and Scotland account for approximately two thirds of space employment, although there are other important clusters of space activity across most of the UK. Figure 6 sets out the breakdown by region.

41. The ‘UK Space Gateway’ in Harwell, Oxfordshire is an important space cluster which

is attracting national and international SMEs and large space companies. A number of public organisations such as the UK Space Agency, the European Space Agency, the Satellite Applications Catapult, and RAL Space also have a presence here.

42. This cluster has grown rapidly over the past seven years to just under 70

organisations employing just over 700 staff. Approximately a third of these organisations are inward investors, of which over half originate from the EU.

24 Source: London Economics (2015), Size & Health of the UK Space Industry 2015

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Figure 6: Employment in the UK Space Sector and Regional Breakdown25

43. London has strengths in the satellite data-using applications sector. The financial and insurance services sectors focussed on the space industry are located in London.

44. In Scotland, there are several universities, a number of small and large companies,

and a Science and Technologies Facilities Council institute, with significant space interests.

45. The National Space Policy commits Government to developing new space clusters,

working with Local Enterprise Partnerships (LEPs) and Devolved Administrations.26 The UK Space Agency and Satellite Applications Catapult have engaged with the Devolved Administrations and LEPs across the breadth of England and a number of these are now building upon these engagements with their own investments to grow their nascent local space sectors.

46. There is a growing interest in how satellite applications can support local

specialisations across the UK. The Satellite Applications Catapult (in partnership with the UK Space Agency) has established regional centres in England (south west, south coast, east Midlands and north east) and in Scotland, and Fellows in Wales and Northern Ireland to develop local clusters and help companies access local and national expertise and facilities in space technology.

25 Source: London Economics, Size and Health of the UK space sector, 2016 26 Government report: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/484865/NSP_-_Final.pdf

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47. Space policy is not a devolved matter. EU legislation that governs the Space sector applies in general to Gibraltar, barring its being outside the customs union and the VAT area, but does not apply to the other Overseas Territories or Crown Dependencies. A sensor station for the Galileo space programme is sited on the Falklands Islands.

Historical Trends and Future Prospects

48. The UK space sector is a high growth, high value-added sector. According to Figure 7, it has trebled in size since 2000, with a compound annual growth rate of over 8% during the last decade, and similar trends for GVA and employment.

Figure 7: Gross Turnover Since 2000 27

49. The space sector used to be entirely government supported, based on defence objectives, more recently evolving into a more commercial sector as the wider benefits of space-technologies and services became apparent (e.g. telecoms and broadcast). In the last five years, new entrepreneurs from outside the space sector have entered the market, increasing the speed of innovation and delivering significant decreases in cost. The range of entirely commercial markets in the space sector is increasing significantly in telecoms, broadband, television, mapping, crop management and navigation.

27 Source: London Economics, Size & Health of the UK Space Industry 2016

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50. By 2030 the global market is estimated to double to £400bn revenues p/a with a continuing trend towards cheaper satellites with reusable launch and in-orbit servicing (e.g. refuelling) also bringing down costs and opening up new markets. Space is undergoing its own transformation (Space 4.0) in line with Industry 4.0. The emergence of ‘new space’ will continue, with increasing numbers of small private commercial companies, less reliant on government support and focused on less well-established lines of business. These will include commercial cargo services, small satellites (a UK manufacturing strength, set to be enhanced by the UK spaceport) and mega constellations.

51. The unprecedented amounts of data generated from Earth Observation, navigation and telecommunications satellites is used for a wide array of new services and downstream ‘big data’ and Internet of Things applications. Benefits will arise in disaster relief, understanding climate change, security, food security, sustainable development, ecosystem protection and management and overseas development.

52. In Earth observation, the downstream market potential of the EU’s Copernicus

programme alone is estimated to be €1.8bn pa by 2030. Copernicus data will be made freely available but specialist IT infrastructure are needed to maximise the utility of such large volumes of data.

53. In satellite navigation and timing, the number of devices using space data to provide

locations information or route directions will double to 7bn by 2019, around one for each person on Earth. The market for satellite navigation services has been growing steadily and is expected to be worth €250bn p/a by 2022. Around 6-7% of the European Union economy is dependent on the availability of global navigation satellite signals, amounting to €980bn per annum.28

54. International collaboration, including through the inter-governmental European Space

Agency, will remain an important element for the UK space sector due to the high cost and global focus of space projects. Space-based services and technologies support the UK’s Critical National Infrastructure (Figure 2). Government departments (particularly MoD, DEFRA and Cabinet Office) are increasingly using Earth Observation data, and space-derived data has been identified as a driver of efficiencies and resource savings across government departments. The expansion in commercial activity in space also presents Government with significant challenges. In particular, Government authorises the launch and operation of UK controlled satellites and accepts unlimited liability for damage which occurs to other spacecraft or to objects on the ground in the event of a failure.

55. UK scientists in many fields are also benefitting from the reliable supply of high volumes of high quality data, including UK-led work to measure losses of ice from the Antarctic ice-cap; seismic risks in the world’s major tectonic zones; and, climate modelling.

28 European Global Navigation Satellite Systems Agency Market Report 2015

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56. Despite the growth in the commercial market, there will continue to be a role for government bilaterally and through international collaboration.

The current EU regulatory regime

57. Space became an explicit EU competence in the Lisbon Treaty. One of the EU’s largest space programmes (Galileo and EGNOS) was initiated much earlier under a trans-European Networks legal basis. The space programmes are established through EU Regulations synchronised with the EU budget period (currently 2014-2020) that set the budget and objectives. Specific adjustments have been made to the EU procurement rules to allow the Commission to contract for space programmes in a way that reflects the peculiarities of the sector. Some security elements of these EU space programmes are restricted to EU Member States (e.g. the Copernicus security and emergency management services, Galileo’s Public Regulated Service, the right to manufacture specific receivers for Galileo signals) creating markets exclusively for EU companies.

58. The technical and financial aspects of major space projects mean that collaboration at the European level is a feature of the space sector. Institutional support (domestic, EU and European Space Agency) is frequently needed to support technological innovation or to establish new systems and infrastructure.

59. EU activity on space has always had an explicit civil focus for reasons of Treaty

competence, even though the systems developed have clear utility to both the civil and the defence sectors.

60. The EU has allocated around €12bn on various space initiatives and projects

between 2014-2020:

a. Galileo and EGNOS - €7bn29 b. Copernicus space element – €3.4bn30 c. Horizon 2020 space element - €1.5bn

61. The UK space sector receives EU funds through the following routes:

29 Regulation (EU) No 1285/2013 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 11 December 2013 on the implementation and exploitation of European satellite navigation systems and repealing Council Regulation (EC) No 876/2002 and Regulation (EC) No 683/2008 of the European Parliament and of the Council (Article 9). 30 Regulation (EU) No 377/2014 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 3 April 2014 establishing the Copernicus Programme and repealing Regulation (EU) No 911/2010 (Article 8)

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i. Grants. UK companies and research institutes have successfully bid for around 9-13% of the available H2020 budget awarded so far in 2014 and 2015. Grants have funded research on a wide range of issues from space science, space exploration, technological innovation and the development of commercial services and products based on space technology. Horizon 2020 grants are also used to develop technology that will form the basis for future evolutions of the EU space systems Galileo, EGNOS and Copernicus. Horizon 2020 grants are also used to develop the European Space Surveillance and Tracking capability with around €150m expenditure forecast in the budget from 2014-2020. The UK is part of a 5-nation consortium currently influencing direction and benefiting from these grants.

ii. Procurement. The EU’s space programmes are procured directly by the

European Commission through competitive procurement processes (they use procurement agents on their behalf for some of this). €3.5bn of contracts to design, build, operate and replenish EU space programmes are out to tender at present. UK firms currently hold Copernicus data processing contracts providing data from the satellites to run the Copernicus Services. These contracts are worth €23m to 2020. The European Centre for Medium-Range Weather Forecasts operates the Copernicus Service Climate and Atmospheric Monitoring System from its offices in Reading on behalf of the EC, handling service budgets in excess of €60m p/a. Over the next three years, the European Commission is expected to release invitations to tender totalling €165m for running the Copernicus Climate Change Service. Beyond 2020, up to €5bn could be spent on contracts for next generation of Copernicus satellites.

iii. Loans. Space companies are able to access European Investment Bank loans.

62. The EU is also an export market for the UK sector; a standard-setter; a source of

imports and skilled professionals; a facilitator of the free flow of personal data; a customer for space projects and systems; and a facilitator of R&D collaboration.

63. EU frameworks and rules that establish free market access for goods and services

are relevant to the sector. Manufacturers benefit from free trade within the EU for low-cost movement of parts and people to enable the sector’s mobile workforce to follow space projects around Europe (see the Galileo supply chain in figure 4).

64. Rules that facilitate and guarantee the free transfer of personal data within Europe

play a part in the current business model for the sector, where telecommunications data crosses between the UK and the EU for operational reasons.31 Large volumes of Earth observation data are archived in South Wales for the Copernicus Earth observation system. Data is frequently downloaded in one EU country and processed or used in another.

31 Personal Data transfers to nations outside of the EEA are restricted, http://ec.europa.eu/justice/data-protection/international-transfers/index_en.htm

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65. The UK is also a member of the European Space Agency (ESA) which is not part of the European Union. The table below sets out the differences between the ESA and the EU.

Table 4: Differences between the European Space Agency and EU

European Space Agency European Union

Focus Space activities (research, science, commercial support, exploration, research and development).

Wide ranging – full range of issues set out in the Treaty.

Objectives To deliver a strong European space industry. Focus on the peaceful uses of space.

Many – as set out in the Treaties and various policies. Space established as an explicit EU competence in the Lisbon Treaty.

Budget arrangements

Small core of mandatory elements (basic research, facilities, salaries etc) with a wide range of optional programmes designed to meet the needs of member states. Very flexible.

Programmes are funded from within the EU budget. EU Member States cannot decide to stop funding a particular programme.

Membership 22 European States all of which are EU Member States except for Switzerland and Norway. Additional EU Member States on course to join.

28 European States with accession states.

Procurement Specialist rules – invested funds are earmarked for industry from the investing member state. This reflects the focus on growing industrial capability in Europe.

Free and open procurement. Some space procurements are limited to EU Member States on security grounds.

Legislation Cannot establish law. Extensive body of law.

66. ESA has established standards for its suppliers for equipment and products for use

on space missions. These are increasingly used by other space faring nations in their own procurements.

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Sector-Specific Rules

67. The EU has not established internal market rules that directly apply to the space

sector (there was an attempt to do so in 2015 but it was withdrawn under pressure from Member States, including the UK). However, some space services do fall within the scope and benefit from EU regulatory frameworks; for example, the Telecommunications Directive, the Audio-Visual Directive, and broadcast and personal data transfer rules.

Trade Rules for Non-EU Countries

68. In addition to the rules and standards set out above, non-EU countries trade with the EU in accordance with WTO rules and, where relevant, EU Free Trade Agreement (FTA) commitments. Tariffs particularly affect the upstream ‘space manufacturing’ sector. The EU Most Favoured Nation tariffs for ‘telecommunications’ and ‘other’ satellites are 3.2% and 4.2% respectively, and the tariff for launchers is also 4.2%. Parts for the aforementioned items are lower at 0% for telecommunications satellites and 1.7% for other satellites and launchers. EU tariffs on intermediate goods or inputs are also significant, although these are not space sector specific; for example, batteries, turbines and valves. Any goods imported under tariff preferences provided for by a Free Trade Agreement are likely to need to comply with preferential Rules of Origin.

69. Trade is also affected by a series of Non-Tariff Measures (NTMs). For goods, this

includes compliance with EU technical standards and dual use controls, as well as the normal EU customs rules and procedure. In terms of procurement, in some cases aspects of the EU’s own space programmes are reserved for EU industry due to security concerns.

70. Services trade – particularly affecting ‘satellite applications and services’ and ‘space

operators’ and ‘ancillary services’ – is determined by EU member states’ regulations, including restrictions on the establishment of commercial presence (affecting FDI) and the movement of business people (affecting inter alia intra-corporate transferees).

International Rules and Standards

71. A number of international rules and standards apply to the space sector. There are five main UN Treaties, four of which place international legal obligations on the UK and other countries with respect to activity in outer space.

1. The "Outer Space Treaty" (Principles Governing the Activities of States in the Exploration and Use of Outer Space, including the Moon and Other Celestial Bodies)32

32 http://www.unoosa.org/oosa/en/ourwork/spacelaw/treaties/introouterspacetreaty.html

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2. The "Rescue Agreement" (Rescue of Astronauts, the Return of Astronauts and the Return of Objects Launched into Outer Space)33

3. The "Liability Convention" (International Liability for Damage Caused by Space Objects)34

4. The "Registration Convention" (Registration of Objects Launched into Outer Space)35

5. The "Moon Agreement" (Activities of States on the Moon and Other Celestial Bodies) 36(UK not ratified)

72. The UK develops its position in these UN bodies through its own legal and policy frameworks. Often these are in partnership with other Europeans, but none are subject to EU rules or formal EU coordination.

73. There are also voluntary international technology control regimes, such as the

Wassenaar Arrangement and the Missile Technology Control Regime, to which the UK and other EU Member States belong, and which apply to some space technologies.

74. The International Traffic in Arms Regulations (ITAR), operated by the USA, affects

space export activity, since much of the space sector has military users as well as civil users (it is ‘dual-use’).37 EU companies have to comply with these requirements to use certain US sourced products, many of which are components for satellites, which has an impact on the manufacturing sub-sector. The use of non-ITAR technology is not controlled.

75. The key set of rules and regulations in satellite telecoms (the most commercial

market) are set by access to spectrum which is managed through the World Radiocommunications Conference. At this international gathering at the International Telecommunication Union in Geneva, Switzerland, terrestrial interests compete with satellite interests for valuable spectrum. The EU takes part in the meeting, but national agencies nominate their own policy objectives.

76. Standards and requirements for Earth observation data are set in various international bodies where the UK is represented and is influential.

33 http://www.unoosa.org/oosa/en/ourwork/spacelaw/treaties/introrescueagreement.html 34 http://www.unoosa.org/oosa/en/ourwork/spacelaw/treaties/introliability-convention.html 35 http://www.unoosa.org/oosa/en/ourwork/spacelaw/treaties/introregistration-convention.html 36 http://www.unoosa.org/oosa/en/ourwork/spacelaw/treaties/intromoon-agreement.html 37 Under ITAR regulations, US firms are required to secure US State Department approval to trade in products covered by ITAR.

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Existing frameworks for how trade is facilitated between countries in this sector

77. The arrangements described in this section are examples of existing arrangements between countries. They should not be taken to represent the options being considered by the Government for the future economic relationship between the UK and the EU. The Government has been clear that it is seeking pragmatic and innovative solutions to issues related to the future deep and special partnership that we want with the EU.

78. International agreements in manufactured goods, services, access to public

procurement markets and collaboration on scientific research are relevant to the space sector. Non-EU states have negotiated agreements with the EU on space related matters, including participation in EU space programmes.

International Agreements Galileo and EGNOS Satellite Navigation Programmes

79. Agreements have been reached covering collaboration on space related matters. For Galileo, the EU has Cooperation Agreements on satellite navigation with countries including China, Korea, Israel, Morocco, Norway, Switzerland, Ukraine and USA. Other agreements exist covering more extensive participation in the EU space programmes. Details of these can be found below:

o Switzerland has a Cooperation Agreement on the European Satellite

Navigation Programmes to participate in parts of the Galileo and EGNOS programmes. The agreement sets out a series of principles of cooperation, including a principle of unrestricted trade in European satellite navigations goods in the EU and Switzerland. It grants Switzerland certain rights in the programmes.

o Cooperation agreements with the EU on aspects of the programme were

signed with Korea (2006) and Ukraine (2013) covering co-operative activities in the areas of scientific research and training, industrial cooperation, trade and market development, standards, certification and regulatory measures, regional and local augmentations.

o Norway participates in elements of the programme. Norwegian companies

are able to compete for contracts and Norway hosts parts of the system infrastructure on its territory. Participation in the programme is granted through the EEA agreement and a separate Cooperation Agreement on Satellite Navigation. Norway are currently negotiating access to PRS (the secure signal).

o The United States and the EU are beginning negotiations to allow the US

access to the Public Regulated Service.

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Copernicus Earth Observation Programme

80. Norway and Iceland have an agreement with the EU providing for participation in the programme and access to data and services, including the right for their industries and institutions to bid for contracts. They participate fully in the EU programme committees, but without the right to vote. As above, these agreements include financial contributions by Norway and Iceland, provided for by the EEA Agreement.

81. The USA and Australia have signed cooperation agreements with the EU on a ‘no

exchange of funds’ basis. Both countries provide contributions in the form of mirror sites to store and distribute data in their regions. In the case of the USA, there is also a reciprocal open data agreement on Earth observation data. Australia’s agreement enables fast access to Copernicus satellite data through the establishment of a regional data access and analysis hub.

Free Trade Agreements (Manufacturing Sub-Sector) Customs

82. There are many customs facilitation arrangements in international agreements. These include the EU’s agreements with a number of third countries, such as Canada, Korea, and Switzerland. These agreements differ in the depth and scope of customs facilitation offered. Examples of customs facilitations include: simplifying customs procedures, advance electronic submission and processing of information before physical arrival of goods, and mutual recognition of inspections and documents certifying compliance with the other parties’ rules.

Tariffs

83. In the absence of a preferential trade agreement, goods imported into the EU from non-EU countries must pay a tariff. Tariffs are custom duties levied on imported goods. Under WTO Most Favoured Nation (MFN), a country’s tariff schedule must be consistent for all countries it trades with, except those where a preferential trade agreement exists. EU MFN tariff rates vary depending on the good.

84. Tariffs particularly affect the upstream ‘space manufacturing’ sub-sector. Tariffs

include those levied on final satellite products, and those levied on component parts of satellites. These are often not specific to the space sector, and include a variety of intermediary goods such as pressure-reducing valves, batteries, inertial navigation systems, and radar apparatus among many others.

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Rules of Origin

85. The EU includes rules of origin in all of its FTAs, which are restrictions on the originating content of products that exporters must comply with to gain tariff preferences. These rules typically reflect both the supply chains of both the EU and its FTA partner. Many of the EU’s rules of origin arrangements are based on the Regional Convention on Pan-Euro-Mediterranean Preferential Rules of Origin, which includes provisions that allow producers to treat content from some third countries as if it comes from their own country. Several arrangements aim to reduce the administrative requirements associated with origin certification, including the EU’s Registered Exporter (REX) system, which lets businesses register for self-certification of origin using an online system, avoiding paper certificates.

Sector views [This information was provided by the Government to the Committee, but the Committee has decided not to publish this section]

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Annex: Stakeholder Engagement on European Union Exit (EU Exit) in the Department for Business, Energy and Industrial Strategy

[This information was provided by the Government to the Committee, but the Committee has decided not to publish this section]