EC Sets New Guidelines for Defence Contracts

December 8, 2006 // Published as a news service by IHS

The European Commission (EC) provided member states of the European Union (EU) with new guidelines on when defence contracts can be exempt from EU rules requiring competitive bidding. The EC sees these guidelines, which are set out in an "interpretative communication," as a necessary first step towards greater competitiveness, openness and efficiency in EU defence markets.

In addition, the EC is currently assessing the impact of a possible new directive that would offer new, more flexible rules addressing the specific features of defence procurement. These initiatives were first outlined in December 2005 and are based on responses to a green paper on how to open defence procurement to greater transparency and efficiency (see IP/05/1534).

Charlie McCreevy, EC commissioner for internal market and services, said, "These guidelines should improve the way current EU law on defence procurement is applied. The next step is to propose new legislation that will increase competition, deliver better value for money to taxpayers in the procurement of defence equipment and give the European defence industry a much-needed boost."

Vice president Günter Verheugen, EC commissioner for enterprise and industry, said, "This is a first step towards more open and fair markets for defence procurement. Creating a European defence equipment market is necessary for the flexibility and competitiveness the defence industry has long been striving for. This is an industry which is of essential importance for growth and jobs."

About the interpretative communication
Article 296 of the EC Treaty gives member states the possibility to derogate from internal market rules on public procurement when this is necessary for the protection of their "essential security interests." The interpretative communication aims to prevent possible misinterpretation and misuse of the Article 296 exemption in the field of defence procurement. In particular, it explains the principles of the exemption, and clarifies the conditions for its use in the light of European Court of Justice case law.

The communication is a non-legislative measure and does not modify the existing legal framework. It only concerns defence procurement by national authorities inside the EU and does not deal with defence contracts with third countries, which continue to be governed by WTO rules and, in particular, by the Government Procurement Agreement (GPA).

Background
Defence procurement accounts for a large share of public procurement in the EU. The combined defence budgets of EU member states are worth about €170 billion, which includes more than €80 billion for procurement in general and €30 for the acquisition of new equipment in particular. However, the majority of defence contracts are exempt from EU rules and are instead awarded on the basis of national procurement rules, which differ widely throughout the EU. This can limit market access for non-national suppliers, creating extra costs and inefficiencies that have a negative impact on the competitiveness of Europe's defence industry.

The extensive use of Article 296 in the field of defence procurement is incompatible with the EC Treaty and European Court of Justice case law, which clearly states that exemptions must be limited to exceptional and clearly defined cases.

According to the green paper consultation of 2004/2005, member states use the exemption extensively mainly for two reasons. First, the field of application and the condition for the use of Article 296 are not clearly defined. The interpretative communication copes with this problem. In addition, current EU public procurement rules are considered ill-suited to many defence contracts, since they do not take into account some special features of those contracts. As a result, many member states are reluctant to use the EU rules for defence equipment, even if the conditions for the application of Article 296 are not met. A new directive adapted to the specifics of the defence sector could solve this problem and make it easier for member states to use the exemption under Article 296 in a restrictive way.

More information is available at:
- the EU web page on Defence Procurement
- MEMO/06/468

Source: European Commission.