EC Proposes Legislation to Enhance Openness of European Defence Market

December 6, 2007 // Published as a news service by IHS

The rules of this proposed directive were adapted to the specificities of such procurements, which are often particularly complex and sensitive.

With this new directive, European Union (EU) member states will have at their disposal European Community rules that they can use without risk to their security interests. This should enhance transparency and openness of defence markets between EU member states and facilitate cross-border procurement.

Up until now, the vast majority of defence procurement contracts have been exempted from the rules of the single market on the basis of Article 296 of the treaty establishing the EU. This practice stands in contrast to the case law of the European Court of Justice and hampers the openness of defence markets between member states.

Issue
European Community procurement rules apply also in defence and security. However, member states can exempt contracts in these fields if this is necessary for the protection of their essential security interests. The legal basis for this exemption is Article 296 of the EU treaty (for defence) and Article 14 of the current procurement directive (for security).

According to the European Court of justice, the use of these exemptions must be limited to exceptional cases. In practice, however, many member states have used them extensively to exempt almost all defence and sensitive security procurement from internal market rules.

One of the reasons for this practice is the lack of European Community rules suited to the specificities of defence and sensitive security contracts - namely, complexity (which calls for flexibility) and special requirements for security of supply and security of information. Since the rules of the current directive have been developed for non-military and non-sensitive procurement, they do not sufficiently take these features into account.

As a consequence, most defence and sensitive security equipment is procured on the basis of uncoordinated national rules, which differ greatly in terms of publication, tendering procedures, selection and award criteria, etc. This regulatory patchwork is a major obstacle on the way towards a common European defence equipment market and opens the door to non-compliance with the treaty principles. Lack of transparency and discrimination of suppliers from other member states leads to a lack of openness in defence markets, with negative effects for all stakeholders.

Proposed measure
The new directive will apply to the procurement of arms, munitions and war material, as well as related works and services. At the same time, member states can also use it for certain particularly sensitive non-military procurements in areas, such as protection against terrorism, where contracts often have similar features to defence contracts.

The new directive will contain a number of innovations tailored to the specificities of such procurement cases. Awarding authorities may, in particular, use the negotiated procedure with prior publication as a standard procedure, which gives them flexibility to negotiate all details of the contract. They may also require from candidates specific clauses for security of information (in order to ensure the confidentiality of sensitive information) and for security of supply (in order to ensure on-time delivery).

Member states will still have the possibility to use Article 296 to exempt defence and security procurement contracts that are so sensitive that even the new rules do not satisfy their security needs. In most cases, however, member states should be able to use the new directive without any risk for their security. This has several advantages:

• The use of Article 296 can be limited to truly exceptional cases, as stipulated by the treaty and the court. This will enhance legal certainty for awarding authorities.
• National procurement rules will be coordinated, which streamlines the regulatory patchwork in these fields and reduces industries' administrative costs.
• The principles of the treaty - in particular, transparency, non-discrimination and openness - will be implemented in defence and security markets. This will improve the efficiency of defence spending and lead to better value for money spent.

Background
The defence procurement directive is the logical follow-up to the interpretative communication on the application of Article 296 of the treaty, which was adopted in December 2006 (see IP/06/1703). This communication clarifies the conditions for the use of Article 296 and gives guidance to awarding authorities for their assessment of whether defence contracts can be exempted from community rules or not.

At the same time, the defence procurement directive is complementary with the Code of Conduct administered by the European Defence Agency. The code, which has been operational since 2005, aims at enhancing transparency for defence procurement contracts that are exempted from community rules on the basis of Article 296.

The proposal for a defence procurement directive has been developed in close consultation with all stakeholders. Since 2003, many meetings in different multilateral and bilateral formats have been held to involve defence industries and member states in the process. A wide consultation was also launched in 2004 through a green paper, the findings of which were published in 2005.

This enabled the EC to understand the needs and the specificities of the market and to put forward a proposal that can count on the support of a broad majority of member states and industries. The European Parliament is also supporting the initiative (see the report adopted in 2005 by the plenary on the basis of the "Wuermeling" report).

Questions and Answers

Why does the EC deal with defence, which is an area of competence for member states?
The EC fully respects member states' prerogatives in the field of defence. At the same time, however, the EC has the duty to ensure compliance with the treaty and the court's case law, which have important implications for defence procurement.

According to the European Court of Justice, the use of Article 296 of the treaty, which allows member states under certain conditions to exempt defence contracts from community rules, must be limited to exceptional cases. The new directive will make it easier for member states to comply with this.

Since the new rules take into account the specificities of defence, national awarding authorities will be able to apply them to the majority of their defence procurement contracts. The use of Article 296 will still be possible, but less often necessary. This will enhance legal certainty for all stakeholders.

At the same time, the procurement directive contributes to the progressive establishment of a European Defence Equipment Market (EDEM). Member states are clearly in the lead in this endeavour, but the EC can help them via community instruments to make the regulatory framework for defence more efficient.

The new directive will do this in the area of procurement. Streamlining the current patchwork of national rules and regulations, it will enhance the transparency and openness of defence markets between member states. The EC has prepared its proposal in close cooperation with member states, who recognise the added value of the procurement initiative.

What are the main innovations of the new directive?
The new directive is tailor-made to the specificities of defence and security procurement contracts - namely, complexity and sensitivity. To cope with these specificities, the new directive offers in particular three new elements:

• The negotiated procedure with publication can be used without restriction. This gives contracting authorities the flexibility to negotiate with suppliers in detail on all features of complex procurement contracts.
• Specific provisions on security of information are included, which ensure that sensitive information will remain protected against unauthorised access.
• Special clauses on security of supply will make sure that armed forces will be delivered on time, in particular in times of crisis or armed conflict. On top of that come specific provisions for research and cooperative projects, which are particularly important in the defence sector. All this makes the new directive a perfectly suited instrument for the procurement of defence and sensitive security equipment.

Will the new directive cover all procurement contracts awarded in the field of security and defence?
The new directive will cover only specific contracts in the fields of security and defence, to which the current public procurement directive is ill-suited. These contracts concern, in particular, the procurement of military equipment (such as arms, munitions and war material) and security equipment that is especially sensitive and has similar features to defence equipment.

Procurement of non-sensitive and non-military equipment remains covered by the current public procurement directive (directive 2004/18/EC), even if it is procured by awarding authorities in the field of defence and security.

At the same time, the new directive, like 2004/18, will apply subject to Article 296, which means that member states can still exempt defence and security contracts if this is necessary for the protection of their essential security interests.

Which contracts will come under the new directive and which under Article 296?
The new directive will apply to arms, munitions and war material, subject to Article 296. This means that, in principle, all military equipment that is on the list of 1958 comes under the new directive.

Only in cases where the rules of the new directive are not sufficient to safeguard member states' essential security interests, can member states use Article 296 to exempt the procurement of such equipment from the directive.

Whether this is the case or not must be assessed on a case-by-case basis. The criteria for this assessment have been explained in the interpretative communication of December 2006 and remain valid.

What impact will the directive have on arms trade with third countries?
The new directive will not change the situation for arms trade with third countries, which remain governed by World Trade Organisation rules and, in particular, the Government Procurement Agreement (GPA).

It remains the decision of member states whether or not to open competition to non-EU suppliers, in compliance with the GPA. Awarding authorities will still be free to invite EU companies exclusively or to include non-EU companies.

Does the directive lead to a "Buy European" policy?
The objective of the EC's initiative is not to introduce a "Buy European" policy, but to foster transparency and openness of defence markets between member states. Intra-European competition has, indeed, proven to be the best means to improve the competitiveness of Europe's defence industry.

The directive will set rules on how to procure defence equipment, but not determine which equipment should be procured. This is the decision of the member states. The proposal, therefore, does not contain a "Buy European" clause.

Why does the defence directive apply also to security?
The emergence of transnational and asymmetric security threats has blurred the dividing line between external and internal, military and non-military security. Today, armed forces and (non-military) security forces often work closely together - for example, to protect borders or during crisis management operations. Therefore, they increasingly use equipment that must be interoperable and that is often based on the same technology.

At the same time, the protection against threats, such as terrorism or organised crime, often necessitates the use of sensitive equipment and access to confidential information. For all these reasons, non-military procurement can be as sensitive as military procurement and require the same security safeguards during the award process.

A majority of member states, therefore, suggested making the new directive also applicable to sensitive security procurement, if it has the same specificities as defence procurement. The EC shares this analysis and followed this recommendation. The focus of the initiative, however, remains on defence.

What is the relationship between the directive and the Code of Conduct of the European Defence Agency?
The two instruments have the same objective - to enhance openness of defence markets between member states - but they differ in scope and nature. The defence directive is a "first pillar" instrument, which sets legally binding EU (secondary) law and coordinates national procurement rules. It covers the procurement of arms munitions and war material, as well as sensitive non-military security procurements.

The Code of Conduct, by contrast, is non-binding political agreement that includes a set of general principles for defence (not security) procurement. Member states may apply these principles to the award of defence contracts that are exempted from community rules on the basis of Article 296. The code, therefore, comes into play only in cases where the directive does not apply.

Does the directive deal with offsets?
Offsets are a complex issue. They are politically controversial, economically questionable and legally problematic.

Offsets usually entail discrimination by their very nature and therefore stand in direct contrast to the EU treaty. Consequently, the procurement directive can neither allow nor regulate them. On the other hand, offset practices differ so much that any attempt to forbid them explicitly in the directive would face serious definition problems. It is, therefore, preferable to leave it up to member states to make sure that possible offset requirements stay in line with the rules of the directive and the treaty.

This is particularly important since offsets, especially civil offsets, are legally problematic also when they are required for contracts that are exempted under Article 296. For all these reasons, offsets represent an issue that goes beyond the directive and must be dealt with in a broader context.

Source: European Commission.