10 European Defence Procurement
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COM(05) 626
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| Commission Communication: Results of the consultation launched by the Green Paper on Defence Procurement and on the future Commission initiatives and Annex
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| Legal base | — |
| Document originated | 6 December 2005
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| Deposited in Parliament | 18 January 2006
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| Department | Defence |
| Basis of consideration | EM of 28 February 2006
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| Previous Committee Report | None; but see HC 42-xxxvii (2003-04), para 3 (17 November 2004)
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| To be discussed in Council | To be determined
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| Committee's assessment | Politically important
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| Committee's decision | Not cleared; further information awaited
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Background
10.1 The Commission's September 2004 Green Paper is one of the
outcomes of its May 2003 Communication, "European Defence
— Industrial and market issues — towards an EU defence
policy", which aimed to improve the EU regulatory framework
so as to promote a robust, internationally competitive Defence
and Technological Industrial Base. The previous Committee cleared
that Communication in June 2003,[32]
noting the Government's commitment to promoting a non-interventionist
model and to overcoming the obstacles to effective market access
overseas.
10.2 That Communication also foreshadowed the establishment
of the European Defence Agency (EDA), which the previous Committee
considered on several occasions and which was ultimately debated
in European Standing Committee B in 2004.[33]
10.3 The Commission described its Green Paper as
its contribution 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". It described
moving towards a truly European market as "crucial towards
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". Having examined how the nature of the
EDEM and various earlier attempts at introducing greater openness
and competition,[34]
the Commission floated two proposals:
- 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 EC (which allows Member States not to apply EC procurement
rules under specified national security conditions); and
- 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 and bringing forward a new Directive to
co-ordinate defence procurement procedures in cases where Article
296 EC is not applicable, with new, flexible (but not otherwise
defined) EU-wide rules that would take into account the specific
nature of the defence sector.
10.4 In a letter and Explanatory Memorandum of 27
October 2004, the Government said that it had put forward a "Non-Paper"
in which it had outlined a third, and its preferred, approach,
which it had worked up in close consultation with the National
Defence Industry Council — a voluntary Code of Conduct,
supervised by the EDA and relying on peer pressure against Code-breakers.
10.5 Our predecessors noted that 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 had only a more limited
advisory role — was consistent with the Government's overall
approach, would be quicker to agree and implement and be less
of an imposition on industry. They commented that, though lacking
legislative teeth, the Code approach would arguably have a better
chance of succeeding in practice than would a law-based regime
— an 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
being 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. But they nonetheless recognised in the questions posed
by the Commission, as well as from the Government's thinking,
that there were neither quick nor easy answers to reconciling
enhanced transparency and greater open competition with the inevitable
constraints resulting from fundamental considerations of national
security, and accordingly recommended the Green Paper for debate
in European Standing Committee B, before the Government concluded
its detailed response to the Green Paper. The purpose of so recommending
was to enable the House to follow up evidence already given by
the Minister to the House of Lords European Union Committee and
explore the Government's detailed thinking on the practicalities
prior to the end of the consultation period set by the Commission.
That debate took take place on 8 February 2005.[35]
The Commission Communication
10.6 This latest Communication is the Commission's
report on that consultation and presents the actions it now intends
to take. It outlines the context thus:
"According to existing EU law, defence contracts
fall under internal market rules. Thus, Directive 2004/18/EC for
public procurement of goods, works and services ("the PP
Directive") applies to public contracts awarded by contracting
authorities in the field of defence, subject to Art. 296 of the
Treaty ('Article 296'). The latter allows Member States to derogate
from Community rules for the procurement of arms, munitions and
war material if Member States' essential security interests are
concerned. By contrast, the contracts for the procurement of items
other than arms, munitions and war material, as well as for arms,
munitions and war material not concerning essential security interests,
are covered by Community rules.
"However, since the concept of essential security
interests is rather vague, implementation of Article 296 has been
always very difficult. Under paragraph 2 of that article, a list
of arms, munitions and war material covered in principle by the
derogation was adopted by the Council in 1958. However, this list
is rather generic, and it is therefore not always clear which
rules should apply to which defence contracts.
"At one end of the spectrum, non-war material
is not included in the list based on Article 296 and (normally)
does not concern essential security interests; as a result, the
PP Directive applies. At the other end, highly sensitive defence
equipment is included in the list of 1958 and clearly concerns
essential security interests; in these cases, the use of Article
296 is legitimate. However, Member States also procure equipment
which has the specific features of defence material but which
is not (necessarily) essential for their security interests. This
category forms a major "grey area" where the use of
Article 296 is less clear. In practice, most Member States make
almost automatic use of the possibility of exempting nearly all
defence procurement contracts from Community rules, often without
taking into account the conditions defined by the Treaty and the
Court for the use of Article 296…. As a consequence, most
defence contracts are awarded on the basis of national procurement
rules, which have widely differing selection criteria, advertising
procedures, etc. Member States do this partly because they consider
the PP Directive not always suited to the procurement of defence
material.
"It is generally acknowledged that the fragmentation
of national procurement rules and their practical application
have the effect of limiting transparency and competition on defence
markets. This, in turn, has brought negative consequences for
the efficiency of public spending, for Member States' military
capabilities and, finally, for the competitiveness of Europe's
Defence Industrial and Technological Base (EDITB). The Green Paper
sought to identify options for action at the Community level in
order to improve this situation."
10.7 The Commission then reiterates its two alternative
approaches, saying that they are presented as not being mutually
exclusive and that "the Commission has made it clear that,
in every possible scenario, Member States would always have the
right to invoke Article 296, provided that the conditions established
in the Treaty (and confirmed by the case law of the ECJ) are strictly
met". It also says that the two options would only concern
defence procurement by national Authorities inside the European
internal market, with arms trade with third countries continuing
to be governed by WTO rules, and in particular by Article XXIII
of the Government Procurement Agreement (GPA), which allows Members
to derogate from the Agreement itself, when essential security
interests are at stake.
10.8 The Commission says that during a six-month
consultation period it used a series of meetings to explain its
initiative and gain a clearer idea of stakeholders' interests
and concerns; it also received 40 contributions from 16 Member
States, Institutions and industry, which "given the sensitivity
of the issue and the relatively small number of actors involved"
it considers to be a good level of participation. The Commission
says:
- all welcomed the Green Paper
and supported the objective;
- "the vast majority" acknowledged the
widespread misinterpretation of Art 296 and considering the existing
PP directive as being often ill-suited for defence procurement;
and
- almost all supported a Community initiative and
ruled out the "no action" option;
and sums up thus: "even if it is very difficult
to draw a general conclusion or a single general trend, it does
appear that a majority of stakeholders are in favour of an interpretative
communication, and not against a directive. There is some disagreement
about the timing of the latter".
10.9 It also says that, during the consultation period,
several stakeholders put forward other options. Some saw a need
for greater transparency and competition, including in the area
covered by Article 296, which the Commission says underlies the
EDA's work on an intergovernmental Code of Conduct to foster intra-European
competition in this area of the market too: "Such a Code
would be a political but not a legally binding instrument, which
would complement Community instruments and pursue the same objective
in a different segment of the defence market". Others are
said to consider an intergovernmental instrument to be an interim
solution or intermediate step on the way to a Community directive.
Some others, however, are said to believe that a directive would
only be acceptable if the Code proved ineffective.
10.10 In addition, almost all stakeholders are said
to have highlighted the necessity for any Community initiatives
in the field of procurement law to be accompanied by actions in
other areas; this was seen as a necessary precondition for an
efficient internal defence market and for the creation of a level
playing field for industry. In this context, stakeholders mentioned
arrangements for security of supply, transfers and transits, harmonisation
of export policies, state aid, offset practice and the full privatisation
of all European defence firms. Stakeholders are also said to have
expressed concerns about the conditions of access to the EU market,
"particularly in view of the unbalanced situation with certain
third countries. They expected all measures taken at EU level
to favour reciprocal access, in particular with the US, and stressed
the need to strengthen the competitiveness of EU industries on
world markets".
10.11 Overall, the Commission says that the consultation
confirms a situation in which the current legislative framework
on defence procurement is almost unanimously regarded as unsatisfactory,
with the dividing line between defence acquisitions concerning
essential security interests according to Article 296 and defence
acquisitions which do not concern essential security interests
being unclear or not perceived in the same way by all Member States,
meaning that "the application of the derogation remains problematic".
It will therefore adopt in 2006 an "Interpretative Communication
on the application of Article 296 of the Treaty in the field of
defence procurement", which will "recall the principles
governing the use of the derogation, in the light of the case
law of the Court of Justice, and will clarify the criteria on
the basis of which Member States have to decide when the conditions
for the application of the derogation are met and when they are
not. While providing additional legal certainty and guidance for
Member States, an Interpretative Communication will not alter
the current legal framework. It will simply clarify the existing
one, with the objective of making its implementation more uniform".
10.12 On the other hand, the Commission says, "a
simple clarification may be insufficient", stating that the
consultation "also confirmed that the current PP Directive,
even in its revised version, may be ill-suited to many defence
contracts, since it does not take into account some special features
of those contracts. The Commission therefore considers that a
directive coordinating national procedures for the procurement
of defence goods (arms, munitions and war material) and services,
would be the appropriate instrument to improve the situation described.
This directive could take into account all the specific needs
of defence procurement, and offer new, more flexible rules for
defence procurement, to be followed in cases where the derogation
in Article 296 does not apply".
10.13 Finally, the Commission says that "in
line with the principle of better regulation", both the Interpretative
Communication and the Directive will be accompanied by "a
proportionate impact assessment", aimed at verifying whether
they are is actually likely to bring benefits, which will be completed
in 2006, prior to the presentation of a possible proposal. The
approach to the impact assessments, the potential impacts to be
measured and "other contributing factors", including
the proposed Code of Conduct and the Global Market, are described
in detail in the Commission Staff Working Document annexed to
the Communication.
The Government's view
10.14 In a sketchy Explanatory Memorandum of 28 February,
which does little to analyse or assess the content of the Communication,
the Minister for Defence Procurement (Lord Drayson) says that,
while the document in itself does not pose any policy implications,
the initiatives that the Commission intends to launch could impact
upon existing UK policy for defence procurement, though the extent
cannot be determined until the Commission has made a specific
proposal. He also says that the Government has "cautiously
welcomed" an Interpretative Communication (IC) on the understanding
that Member States are consulted on the text. Conversely, he says
that in its response to the Green Paper (which he says was deposited
in Parliament on 10 February 2005), the Government did not support
the creation of a Directive: "On balance, it was thought
preferable to see what impact other measures (such as the IC and
the EDA's Code of Conduct on Defence Procurement) had on the effectiveness
of the market before taking this additional step. However, if
the Commission did decide to proceed with a Directive then the
Government would aim to participate actively in the preparatory
work to ensure that the regulation is as helpful as possible".
That response, he says, has been discussed with industry as well
as international stakeholders, including the European Defence
Agency, with the Defence Industries Council having advised the
Government that "they broadly welcome the EC's work to open
up this market". Finally, he says that the EU Presidency
has no plans for the Communication to be considered by the Council
of Ministers.
Conclusion
10.15 This might suggest that we should now clear
the Communication, since the next step will be Commission proposals.
But, as we note, the Commission itself finds it very hard to sum
up their findings. There is clearly no widespread support for
a new Directive. Still the Commission proposes to press ahead,
even though it is no more able than it was 18 months ago to describe
it other than in generalities, and notwithstanding the arguments
against it put forward by some of those consulted, whom it does
not identify, and which it oddly refers to, as if this somehow
devalued them, as being "widely differing", viz:
"As a legislative measure, it is unlikely
to be achieved quickly;
"The existing Directive is sufficiently flexible
and there is therefore no necessity for a new legislative instrument
that would add extra regulation;
"It would have only a limited impact, either
because it would take too long to be developed and implemented,
or because it would not apply to high-value contracts (which usually
concern essential security interests and would therefore remain
covered by the Article 296 derogation);
"It would create three separate procurement
processes with new boundaries between the various market segments.
This could involve a limitation of the right to use Article 296
and make it difficult to demarcate the respective scope of the
civil and the defence Directives".
10.16 The Minister's somewhat half-hearted response
is thus surprising. It contrasts strongly with the position taken
by the Minister for the Armed Forces during the debate on the
EDEM:
"we do not believe that the benefits that
might result from introducing a specific defence procurement directive
are sufficient to offset the drawbacks. In particular, an additional
regulatory burden on top of those already in place is unlikely
to support our aim of making defence markets more effective and
efficient. We do not, therefore, support the development of a
new directive at this time".[36]
10.17 We therefore ask the Minister — since
it does not emerge from either the document or the EM —
why the Government apparently finds the case for a Directive more
compelling than it did last February, and why it does not instead
insist — all the more so now that the EDA Code of Conduct
has been agreed — that the Commission concentrates in the
first instance on an Interpretive Communication, instead of tying
up its own and Member State resources for what are likely to be
several years on a proposal that it cannot properly justify at
this stage, and for which there is no Member State or industry
demand.
10.18 In the meantime, we shall keep the document
under scrutiny.
32 (24451) 8484/03; see HC 63-xxiii (2002-03), para
22 (4 June 2003). Back
33
Stg Co Deb, European Standing Committee B, 4 June 2004,
cols. 3-24. Back
34
Which is set out in detail in our consideration of the Green Paper:
see headnote. Back
35
Stg Co Deb, European Standing Committee B, 8 February 2005,
cols. 3-26. Back
36
Stg Co Deb, European Standing Committee B, 8 February 2005,
col 5. Back
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