3 European defence equipment market
| (26019)
13177/04
COM(04) 608
| European Commission Green Paper on Defence Procurement
|
| Legal base | — |
| Document originated | 23 September 2004
|
| Deposited in Parliament | 15 October 2004
|
| Department | Defence |
| Basis of consideration | Minister's letter and EM of 27 October 2004
|
| Previous Committee Report | None; but see (24451) 8484/03: HC 63-xxiii (2002-03), para 22 (4 June 2003)
|
| To be discussed in Council | Yet to be decided
|
| Committee's assessment | Politically important
|
| Committee's decision | For debate in European Standing Committee B
|
The Commission Green Paper
3.1 The Commission explains the Green Paper's origin, purpose
and approach as follows:
"This Green Paper is one of the measures announced by the
European Commission in its Communication 'Towards a European Union
defence equipment policy', adopted on 11 March 2003. Through these
measures, the Commission intends to contribute to the gradual
creation of a European defence equipment market (EDEM) which is
more transparent and open between Member States and which, whilst
respecting the sector's specific nature, would increase economic
efficiency.
"Moving towards a truly European market is crucial
for strengthening the competitiveness of European industry, improving
the allocation of defence resources and supporting the development
of the Union's military capabilities under the European Security
and Defence Policy (ESDP).
"The establishment of the European Defence Agency
with its responsibilities in the field of defence capabilities,
research, acquisition and armaments, makes the development of
such a market even more important.
"Creating an EDEM would require a set of complementary
initiatives, including the establishment of an appropriate regulatory
framework for the procurement of defence equipment. The opening
up of defence markets, which are currently fragmented along national
lines, would increase the commercial opportunities for European
companies in the sector, including SMEs, and contribute to their
growth and increase their competitiveness.
"The purpose of this Green Paper is to develop
the debate on these issues, bearing in mind the principle of subsidiarity.
For this purpose the Commission set up two working parties consisting
of representatives of the Member States and European industry
to contribute to the preparatory stages of the Green Paper.
"In the first part, the Green Paper identifies
the reasons for specific action by giving a summary of the current
state of defence procurement markets, their numerous special characteristics
and the existing regulatory framework. In the second part, on
the basis of this analysis, it considers possible lines of action."
3.2 The Commission looks first at what it describes
as "reasons for action in the field of defence procurement":
"Defence expenditure constitutes a large part
of Member States' public spending, to the order of €160 billion
for the 25 Member States, one fifth of which is used for the procurement
of military equipment (acquisition plus research and development).
Defence procurement is currently characterised by the fragmentation
of markets along purely national lines (point 1), by the specific
features which distinguish it from other types of public procurement
(point 2) and by a complex legal framework (point 3)."
3.3 On the fragmentation of markets, the Green Paper
says:
"Although Member States' combined military expenditure
is considerable, it remains split into national markets. This
fragmentation poses a major problem for all Member States with
defence industries. Following budgetary reductions and the restructuring
of the armed forces, the size of national markets — including
those of the large states — is no longer sufficient to allow
for production volumes that can offset the high R&D costs
of arms systems. This situation, along with the fragmentation
of R&D spending in Europe, increases the cost to the taxpayer
and damages both the competitiveness of the European defence industry
and its ability to meet the requirements of the ESDP. Given the
growing dual use potential of technologies (military and civilian),
the global competitiveness of European industry is also affected.
"Some progress has been made in the last ten
years, particularly as a result of the increase in European armaments
cooperation and an initial opening-up of national markets to European
competition. These initiatives have had modest success, but have
not resulted in the creation of a European defence market. As
regards cooperative programmes, the still frequent use of the
principle of fair return on investment ('juste retour') generally
limits any opening-up to the participating countries and implies
a distribution of work based on purely national industrial policy
criteria. As for national procurement, the share of contracts
awarded by competitive procedure is still low. Irrespective of
the procedures used, national suppliers are still generally awarded
most of the contracts."
3.4 On the specific features of defence markets,
the Green Paper says:
"Defence markets have particular characteristics
because of the very nature of military products and related services.
These characteristics are not only economic and technological;
they are also related to the security and defence policies of
each Member State. Defence industries are therefore of a strategic
nature and have special relations with the state.
Dominant role of the state
"Following privatisations and efforts to optimise
procurement policies in recent years, the role of the state has
been reduced, but it still remains dominant. As sole clients,
states determine demand for products on the basis of military
needs linked to their strategic objectives and thus define the
size of the market. They participate, to varying degrees depending
on the country, in the financing of R&D, thus influencing
the technological know-how and long-term competitiveness of industry.
As regulators, they control the arms trade by means of the licences
which exporters must have, including for the delivery of equipment
within the European Union, and the granting of authorisations
to tender for contracts. State control also extends to industrial
restructuring, although to a more limited degree, and even to
the level of shareholding.
Security of supply and confidentiality requirements
"The nature of defence requires sources of supply
to be guaranteed for the entire duration of an arms programme
from the time the equipment is designed until it is withdrawn
from service, at times of peace and at times of war. States may,
therefore, see fit to set up special supply guarantees. The maintenance
of a purely national industrial capacity for defence may seem
a reliable way of being able to respond to strategic interests
and emergency situations (military operations).
"The nature of defence may also require states
to have equipment that guarantees the technological superiority
of their military forces. This superiority depends, in particular,
on the confidentiality of programmes and their technical specifications.
The obligation to protect this confidential information means
companies must have special national security clearances.
Complexity of arms acquisition programmes
"Arms development programmes are complex. Since
production volumes are limited and the risk of commercial failure
high, state support is required. Equipment often consists of new
systems which incorporate both military and civilian technologies.
It has also a long life cycle: the time between the expression
of an operational need and the end of a system's life may be as
long as 50 years. The quality/price ratio and risk management
must be guaranteed throughout this period. States must, therefore,
have access to adequate industrial and technological capacity
throughout the life cycle of a system and maintain lasting, reliable
relations with suppliers.
"In addition to this, 'off-the-shelf' arms purchases
are often subject to offset arrangements. This allows the purchasing
country to require a return on investment that may exceed 100%
of the value of the contract. Such offsets may be direct, in the
form of orders for local companies or transfers of know-how and
technology related to the original contract. Offsets may also
be indirect and concern industrial sectors other than the one
covered by the contract in question, even non-military ones."
3.5 The Green Paper then looks at the current legal
framework:
Community exemption system
"The special nature of the defence sector has
been recognised ever since the establishment of the Community
through an exemption system laid down in Article 296 EC of the
Treaty. According to paragraph 1 of that Article:
(a) no Member State shall be obliged to supply
information the disclosure of which it considers contrary to the
essential interests of its security; and
(b) any Member State may take such measures as
it considers necessary for the protection of the essential interests
of its security which are connected with the production of or
trade in arms, munitions and war material; such measures shall
not adversely affect the conditions of competition in the common
market regarding products which are not intended for specifically
military purposes.[13]
"Given its wide scope, this article may also
apply to public procurement. As recently clarified in Article
10 of Directive 2004/18/EC, Community rules on public procurement
apply to contracts awarded by the awarding authority in the field
of defence, subject to Article 296 EC of the Treaty. Consequently,
Community rules also apply in principle to the defence sector,
but Member States may derogate from them in the circumstances
and subject to the conditions set out in the Treaty. In any event,
the possibility of a derogation provided for under Article 296
EC cannot apply either to civilian goods or to those not intended
for specific military purposes, even if they are purchased by
national defence ministries.
"The Case Law of the Court has interpreted the
conditions of use of this derogation restrictively, stating that
— its use does not constitute a general,
automatic exemption, but should be justified case by case. States
thus have the possibility of secrecy regarding information which
would undermine their security and the option of invoking an exemption
to internal market rules for the arms trade. They are also obliged
to assess whether or not each individual contract is covered by
the derogation;
— use by states of national derogation
measures is justified only if it is necessary for achieving the
objective of safeguarding the essential security interests invoked;
— burden of proof lies with a Member State
that intends to make use of the derogation; and
— such proof is to be supplied, if necessary,
to the national courts or, where appropriate, the Court of Justice,
to which the Commission may refer the matter in the performance
of its duties as guardian of the Treaty.
"As a general rule, Member States may, therefore,
derogate from the rules of the Treaty and Community directives,
but only in well defined circumstances."
3.6 Nevertheless, the Commission says "several
difficulties of implementation arise":
- in the absence of a precise
interpretation of these provisions, "there is quasi systematic
use of the derogation in the area of public procurement",
with outcomes that "imply that some Member States believe
they can apply the derogation automatically";
- with no definition in either Community law or
ECJ case law of essential interests of security, "in practice
states allow themselves wide discretion in determining which contracts
could damage them"; and
- the list drawn up in 1958 "is not an appropriate
reference for defining the scope of Article 296 EC", since
it has never been officially published or revised.
3.7 The Green Paper concludes in this section that
"defence procurement is still, therefore, to a large extent
covered by purely national legislation". Most of such national
legislation "provides for exemptions to the application of
public procurement rules, with differing degrees of transparency.
This constitutes a potential difficulty for non-national suppliers".
3.8 The Green Paper then briefly analyses attempts
hitherto at greater transparency and more open competition in
defence supplies:
"Some Member States have undertaken, under an
inter-governmental political agreement of the Western European
Armaments Group (WEAG),[14]
to harmonise the content and publication of their national gazettes
and to follow more open tendering rules. Although based on relevant
principles, this system has produced limited results regarding
both transparency and competition, because it is not legally binding."
3.9 There have also been other "special procedures
for cooperation programmes":
"Alongside national systems, ad hoc rules laid
down in intergovernmental agreements are used for purchases related
to joint arms programmes. Generally speaking, because of the heavy
investment agreed by the countries participating in these programmes,
it is the principle of fair industrial return ('juste retour')
that determines who is awarded the contract.
"To offset the high costs resulting from this
practice, the transnational agency OCCAR[15]
was set up in 1996 and given legal personality in 2000. Its contractual
rules are more competition-based and provide for replacing the
system of a 'juste retour' per programme by an 'overall juste
retour' covering several years and several programmes."
However, as the Green Paper notes, "the success
of this system will depend on the number of new programmes managed
by OCCAR".
3.10 So the Commission concludes:
"since these efforts have failed to achieve
satisfactory results, the Member States recently created a European
Defence Agency under the authority of the Council within the single
institutional framework of the European Union, which will have
the remit, among other things, to contribute, in consultation
with the Commission, to the setting up of a competitive European
defence market."[16]
3.11 In his helpful Explanatory Memorandum and letter,
the Minister for Defence Procurement (Lord Bach) outlines both
the Green Paper's proposed alternatives to the status quo and,
in a UK "Non-Paper" annexed to his Explanatory Memorandum,
an alternative approach based on a voluntary Code of Conduct:
"Taking the view that there are significant
deficiencies with current defence acquisition practice, the Commission
introduces a number of proposals with the aim of stimulating debate
on possible avenues of improvement. In particular, the Commission
suggests two routes for further discussion:
a. Clarifying, by way of an Interpretative Communication,
the existing legal framework, including the identification of
the types of contract that fall within the scope of Article 296
TEC. This Article allows Member States to deviate from the EU
procurement rules under specified national security conditions.
The Commission indicates that there is evidence to suggest that
the application of Article 296 TEC by individual Member States
is interpreted differently.
b. Examining the desirability of adapting the
EU's acquisition rules to take into account the specific characteristics
that differentiate defence equipment acquisition from other forms
of public procurement. As part of this, the Commission considers
the possibility of creating a new Directive to co-ordinate defence
procurement procedures in cases where Article 296 TEC is not applicable.
The Commission envisages that such a proposal, if implemented,
would be linked with new, flexible EU-wide rules, which would
take into account the specific nature of the defence sector. The
Green Paper notes that any such instruments would not prejudice
any complementary measures taken by the Member States."
3.12 For the immediate future, the Minister says:
"The Commission seeks responses to its ideas;
both in general terms, and to the eleven specific questions set
out in the document, by 23 January 2005. After that date, the
Commission will issue a conclusive summary, which could lead to
the publication of a proposal."
3.13 Those questions are as follows:
"1. Clarification of the EU's existing legal
framework
Questions
1. Do you think it would be useful/necessary/sufficient
to explain the existing legal framework in the way presented?
2. Are there other aspects of the Community system
in question that should be clarified?
"2. Supplementing the EU's legal framework
with a special instrument
Questions
3. Do you consider the rules of existing directives
suited/unsuited to the specific characteristics of defence contracts?
Please give your reasons.
4. Would a specific directive be a useful/necessary
instrument for creating a European defence equipment market and
strengthening the industrial and technological base of European
defence?
5. What is your opinion regarding the use of
a possible directive for purchases by other bodies, such as the
European Defence Agency?
6. Procedures: do you believe the negotiated
procedure with prior publication to be suitable for the specific
needs of defence procurement? In what situations should use of
the negotiated procedure without publication be allowed?
7. Scope: what would be the most appropriate
way of defining the field of application? A general definition?
If so, what? A new list? If so, what? A combination of a definition
and a list?
8. Exemptions: do you think it would be useful/necessary
to define a category of products that would be excluded categorically
from the directive?
9. Publication: do you think a centralised publication
system would be appropriate, and, if so, how should it function?
10. Selection criteria: what criteria do you
think should be taken into account in addition to those already
laid down in existing directives to take account of the specific
features of the defence sector? Confidentiality, security of supply,
etc.? And how should they be defined?
11. How do you think offset practices should
be handled?"
The Government's view
3.14 The Minister comments as follows:
"As a consultation document, the Green Paper
does not pose any direct policy and financial implications at
this stage although, if taken forward, any Commission proposals
to regulate the defence equipment market could impact upon existing
UK policy relating to defence procurement. The Green Paper relates
to procurement within Europe. It does not, therefore, hinder the
UK's ability to look to both sides of the Atlantic for equipment
to meet our defence capability requirements. The Government will
be fully involved in discussions with the Commission linked to
any developments to this work in the future.
"The UK supports increasing the openness and
transparency of the European defence equipment market and the
global competitiveness of European defence industry. The UK also
recognises that the Commission's initiative has the potential
to deliver improvements in co-operative practices, reduce market
distortions, and improve access to European defence markets, all
of which are aims of the UK's Defence Industrial Policy.
"The Commission's paper does not appear to cover
sensitive areas of defence equipment, covered by Article 296 TEC,
but seems intended to open up other areas of the defence equipment
market not covered by the Article (or meant to be covered by the
Article). As such, the paper does not fundamentally impact upon
our ability to procure items directly related to UK national security,
or the Department's policy of normally only allowing UK organisations
to bid for MoD research competition contracts. In addition, and
as indicated to the Commission during the preparatory phase, the
UK already has in place a procurement policy for less sensitive
items based on the use of open competition.
"The Government is in the process of examining
the Commission's proposals in detail, but has already indicated
to the Commission that it does not favour the automatic use of
regulation. In this regard, the Government has been assessing,
in tandem with industry, alternative approaches to create a more
open and transparent European defence equipment market. Included
within this is the idea to introduce a voluntary Code of Conduct
that would set out the conditions which could improve the ability
of a much wider range of companies to compete for European defence
business. Through the issue of a non-paper, the Government is
currently seeking views on such a concept with European colleagues.
These include the European Defence Agency, which we see as having
a key role in developing this initiative further with the Commission
once the Agency becomes operational at around the turn of the
year."
3.15 He concludes by saying that the Government will
be consulting interested parties, including industry, prior to
the provision of a response to the Commission and will be replying
to the Commission's call for comments by the deadline of 23 January
2005.
Conclusion
3.16 In clearing the precursor Communication,
"Towards a European Union defence equipment policy",
on 4 June 2003, we noted that the Government remained committed
to promoting a non-interventionist model and to overcoming the
obstacles to effective market access overseas.[17]
Clearly, the idea of the UK "Non-Paper" — broadening
the discussion to include "self regulation", monitored
by the European Defence Agency (EDA) in which the Commission has
only a more limited advisory role — is consistent with the
Government's overall approach, and would be quicker to agree and
implement, be less of an imposition on industry and leave the
Commission with no greater involvement than hitherto. Either
of the alternatives would give the Commission greater involvement.
Though lacking legislative teeth, the Code approach would arguably
have a better chance of succeeding in practice than would a law-based
regime. The EDA, with a Board of 25 EU defence members and tasked
to strengthen the European defence industrial and technological
base and create a competitive European defence equipment market,
would be likely to be more effective in clarifying the existing
legal framework and identifying the types of contract that fall
within the scope of Article 296 EC than would the Commission.
And if it were not, then a different approach could again be
examined. So we are content with what can be deduced from the
Government's approach.
3.17 But it is plain from the questions posed
by the Commission, as well as from the Government's thinking,
that there are neither quick nor easy answers to reconciling enhanced
transparency and greater open competition with the constraints
that are bound to result from fundamental considerations of national
security. We accordingly recommend the Green Paper for debate
in European Standing Committee B. We ask for the debate to take
place before the Government concludes its detailed response to
the Green Paper.
13 In accordance with paragraph 2 of this Article,
a list of products to which the provisions of paragraph 1 apply
was adopted by the Council in 1958. Back
14
In 1976, the Defence Ministers of the European NATO nations (except
Iceland) established a forum for armaments cooperation, the Independent
European Programme Group (IEPG). In 1992, the Defence Ministers
of the 13 IEPG countries transferred its functions to the Western
European Union - hence WEAG (Western European Union Armaments
Group), managed by the National Armaments Directors of all the
13 nations, and accountable to those Defence Ministers. Back
15
The four-member OCCAR (Organization for Joint Cooperation in Armaments,
known by its French acronym OCCAR; Organisation conjointe de Coopération
en matière d'Armément) was established in1996 by
the Defence Ministers of Germany, Italy, France and the UK.OCCAR
encourages States to conduct collaborative programmes, improve
efficiency and develop and purchase common equipment as cost-effectively
as possible, with the aim of improving the competitiveness of
the European defence technological and industrial base. Back
16
Joint action to set up a European Defence Agency (EDA), adopted
by the Council on 12 July 2004. Back
17
(24451) 8484/03; see HC 63-xxiii (2002-03), para 22 (4 June 2003). Back
| 
