EC Proposes Legislation to Simplify European Defence Industry

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

Currently, the circulation of defence-related products within the internal market is constrained by a web of heterogeneous and disproportionate national licensing procedures.

By streamlining those procedures, the new EC proposal should help make European defence industries more competitive and improve conditions for participation by small and medium-sized enterprises (SMEs) in armament development and production.

The new legislation should also enable member states to meet military needs at lower costs and enhance the security of supply for public procurement and industrial cooperation.

To preserve the overall protection level of security interests, the facilitation of intra-EU transfers will be complemented by mutual confidence-building measures, notably guarantees for the protection of national security in the case of re-exportation to third countries.

Issue
Licensing rules, which have to be complied with by defence companies wishing to exchange even components between subsidiaries within the EU, significantly differ from one member state to another in terms of scope, competent authorities, procedures and timing. Furthermore, they typically do not establish any distinction between transfers to another member state and exports to third countries (an intra-community transfer of a defence-related product commonly follows the same procedural requirements as the same export to any third country).

This patchwork of licensing schemes not only imposes a significant administrative burden on companies, but also induces long lead times - up to several months. The corresponding administrative burden on companies and administrations and the indirect impact^[1] have been estimated, respectively, at €433 million per year and €2.73 billion per year.

This burden is clearly out of proportion with actual control needs. Indeed, license applications for intra-European Community transfers are hardly ever rejected. While around 11,500 licences for such transfers are annually issued, not a single request has been formally denied since 2003.

By improving conditions for commercial exchanges between European defence industries, the proposal will pave the way for increasing industrial cooperation and optimising supply chains, with a prime benefit for large industrial groups with subsidiaries in several member states. It will make a crucial contribution to a more competitive European industrial and technological defence industrial base.

Proposed measure
Concretely, the EU framework will induce member states to replace, as far as possible, their existing individual licences by general licences for those intra-community transfers where the risks of undesired re-exportation to third countries is under control, namely:

• Purchases by armed forces of others EU member states.
• Transfers to certified companies of components in the context of industrial cooperation.
• Transfers of products necessary for cooperative programmes between participating member states.

Global licences - regrouping several transfers to several recipients by one supplier - should, in principle, cover most of the remaining intra-community transfers, individual licensing thus becoming the exception. Member states will remain free to determine the products eligible for the different types of licences, to set terms and conditions of such licences and to continue their cooperation in intergovernmental bodies such as the LoI.

The shift from less ex-ante to more ex-post control will require additional guarantees designed to increase confidence between member states in their mutual ability to deal with export to third countries following the initial intra-community transfer. Member states will have to establish procedures on the basis of common criteria to certify recipient companies' capacities to properly handle the risks associated with the commerce in defence-related products. Hence, any SME, wherever located in Europe, will be able to benefit from the simplified framework when transferring under a general licence its products to a certified system integrator located in another member state.

In addition, there will be a "safeguard clause" whereby, in exceptional circumstances concerning risks to national security, member states can suspend or revoke general licences to certified companies.

The proposed directive takes full account of member states' need to protect their essential security interests as well as to respect their commitments under international armaments control regimes. Indeed, companies will be responsible for managing export limitations attached to transfer licences for defence-related products sourced from another member state and will be prohibited from requesting export authorisations that infringe such restrictions.

By reinforcing controls at the common external frontiers of the European Community, the proposed directive will also contribute to strengthening the fight against illicit trafficking of defence-related products.

Background
An extensive consultation process has paved the way for this initiative. Besides an on-line consultation and the commissioning of two preparatory studies^[2] involving a series of interviews with relevant stakeholders, several workshops with industry stakeholders and member states representatives have been organised since July 2005.

Questions and Answers

Why has the EC taken an initiative in the European Community framework?
Constant case law by the European Court of Justice (ECJ) has made clear that EU treaty (internal market/first pillar) rules apply to defence-related products.

Though Article 296 of the treaty allows member states to take restrictive measures pertaining to defence-related products to protect their "essential security interests," the ECJ has constantly stated that no general reserve existed under Article 296. Recourse to Article 296 has to be demonstrated on a case-by-case basis, and it is up to the member states to provide evidence that such recourse is necessary to protect their essential security interests.

Thus, Article 296 has no effect on the European Community's legislative power to lay down measures concerning the approximation of the national provisions that have as their object the establishment and functioning of the internal market (Article 95(1)). Of course, Article 296 remains unaffected and the adoption of internal measures does not deprive member states from the possibility to invoke Article 296 on a case-by-case basis.

Member states, indeed, currently implement export controls in a very heterogeneous and disproportionate way, which is detrimental to the internal market of defence-related products. The EC, therefore, proposes a minimum harmonisation of such export controls schemes as far as intra-EU transfers are concerned.

What is the articulation with the work in the context of the common foreign and security policy (CFSP)?
The European Council adopted in 1998 an EU Code of Conduct on arms exports to strengthen cooperation between member states and promote convergence with regard to exports of conventional weapons. The proposal is complementary to this code: it embeds the Common Military List annexed to the code as its scope in order not to duplicate ammunition lists of reference, but refrains from the harmonisation of export policies, which clearly remains within the remits of the Code of Conduct.

What is the link with current ongoing EDA and intergovernmental endeavours?
In 2004, the European Council created the European Defence Agency (EDA). Although deprived of any mandate for simplifying transfers between member states, the EDA has since constantly voiced the need to streamline current transfer procedures in order to ease industrial cooperation and to foster security of supply for governments procuring cross-border.

The proposal also fully integrates the international cooperation of member states in the area of export control. It leaves a large margin of manoeuvre to member states for deeper cooperation - for instance, as regards the choice of products for the different types of licences and the terms and conditions of such licences.

How precisely does the proposal simplify existing licensing systems?
A major contribution to simplification is the introduction in all member states, where they do not exist, of general and global licences. The general licence will allow all domestic companies that comply with the conditions to transfer the covered defence-related products without individual prior authorisation. Global licences will allow companies and administrations to cover a large number of a company's products to a large number of recipients in one single administrative act.

How does the proposal take into account the need to protect national security interests against the risks associated with the transfer of defence-related products?
The consultation process has revealed that the risks are generally not created by the transfer as such, but by the subsequent exportation to third countries. The proposal, therefore, requires additional guarantees designed to increase confidence between member states in their mutual ability to properly deal with export to third countries following the initial intra-community transfer:

• According to common criteria, member states will have to certify the capacities of recipient companies to properly handle the risks associated with the commerce in defence-related products. In problematic cases, a member state may use a safeguard clause to exclude certain companies from receiving defence-related products under its general licence.
• In addition, companies will have to report on the use of the licences, which enables regular public reporting and ex-post control.
• The proposal has a clear "internal market" basis and does not affect member states' export policies. The decision to authorise or deny an export remains at the discretion of each member state.

^[1] Costs linked to the avoidance of transfer authorisations: inefficiencies of supply chains, unexploited economies of scale, etc.

^[2] See the EU web site on the Intra-Community Transfer of Defence Products.

^[3] See, notably, the calls for simpler transfers in the three main EDA achievements: the Code of Conduct on defence procurement (since July 2006), the Framework Arrangement for Security of Supply in Circumstance of Operational Urgency (September 2006) and the Strategy for the European Defence and Technological Base (May 2007).

Source: European Commission.