The Chairman: Does a member of the European Scrutiny Committee wish to make a brief explanatory statement on the decision to refer the relevant documents to the Committee?

Keith Hill (Streatham) (Lab): Such is my desire, Mrs. Dean. May I say how delighted I am to serve for the first time under your benign, but I am certain authoritative, auspices?

It might be helpful for the Committee if I take a few minutes to explain the background to the document and the reasons why the European Scrutiny Committee recommended it for debate in the European Committee. The document proposes a free-standing procurement regime for the defence and security sectors, based on the existing procurement regime for the generality of public contracts—namely, directive 2004/18/EC. The original proposal, Document No. 16488/07, has been modified by the presidency several times, but a copy of the most recent presidency version has been included in the debate pack better to inform the debate.

Public procurement in the fields of defence and security is not, as such, exempted from the scope of the EC treaty. However, article 296 EC provides several exemptions that have been litigated before the European Court of Justice, with member states arguing for a broad interpretation of the exception, while the Commission seeks to narrow it. The directive seeks to adopt rules in that area and so reduce the need to rely on article 296 EC.

The European Scrutiny Committee considered the proposal on several occasions. We shared the Government’s concern that the adoption of the directive might erode a member state’s ability to rely on the exemptions under article 296 EC. The Committee noted that there was little support for excluding security from the scope of the directive, but recognised the Government’s view that sufficient guarantees had been given on the disclosure and handling of sensitive information, and that confirmation had been secured so that national security and its definition were within the sole competence of the member states.

The Committee also noted that the Government were considering whether the advantages of the directive, in the sense of opening markets for UK suppliers, outweighed its potential drawbacks, which include concerns over eroding the various treaty exemptions, the treatment of subcontracting and offsets, and a raising of the threshold. We therefore considered that that balance of advantage ought to be debated before the Government reached any firm conclusion.

The Parliamentary Under-Secretary of State for Defence (Mr. Quentin Davies): It is pleasure for me, too, to serve for the first time under your chairmanship, Mrs. Dean. As the hon. Member for Streatham made clear—

Mr. Simon Burns (West Chelmsford) (Con): Right hon. Friend.

Mr. Davies: As my right hon. Friend the Member for Streatham made clear, there is a balance to be struck here. In the course of a few brief remarks, I shall deal with how that balance is to be struck and try to explain the genesis and purpose of the directive, setting out the Government’s views on it.

Since the origin of the Common Market, which subsequently led to a full single market, as foreseen in its preamble, there has been a provision, on the one hand, for increasing the reduction of barriers to trade within the Common Market, but, on the other, there has always been provision for a special regime for defence and security. That was enshrined in what is now article 296 of the treaty—it used to be article 228—and it might help the Committee if I refer to the most relevant section of article 296. It states that

Members will see that that balance is already included in the treaty and has been from the beginning.

The problem has been that, over a number of years, there have been several abuses of article 296. A number of member states appear to have decided to use article 296 just to adopt protectionist purchasing policies supporting their domestic industries, in which the ultimate customer may have been a military one—the relevant Ministry of Defence or equivalent. Nevertheless, the items could hardly have been considered essential for the security of that nation. Among the more egregious and famous cases of such abuse are a Mediterranean country that decided that firemen’s headgear should be protected and the contracts given exclusively to suppliers in that member state’s territory, and a Nordic country that decided the same thing about buying T-shirts for its armed forces.

The Commission, as the guardian of the treaties and the single market, was rightly concerned about the abuses and came up with two initiatives in 2006. One was a communication that set out what the Commission understood to be the rules and established the prosecuting guidelines that it would adopt in cases of particularly strong abuse. We welcomed that communication. The Commission foresaw the new draft directive in that communication, and duly produced it in 2007. The draft directive is now going through the co-decision procedure, and the French EU presidency intends that an agreement be reached by the end of the year. I cannot predict whether it will succeed in that.

Precisely to achieve the balance set out by my right hon. Friend the Member for Streatham, the draft directive is designed on the one hand to ensure greater liberalisation wherever possible, ensuring that the single market prevails when the essential security interests of a member state are not impacted, and on the other to ensure that the essential protections that some member states—the UK very much included—set a lot of store by are explicitly reserved. Our belief, so far, is that the Commission in its consultations and the discussion in the Council of Ministers have proceeded in a favourable and positive direction and that there is a good chance of reconciling satisfactorily those two important objectives.

The trade liberalising aspects of the new directive, which make it clearer that all firms will have a fair chance in the single market when there are no essential security interests to be protected, reinforce and confirm the regime on such matters as the need to advertise contracts under the public procurement directive—the same applies in defence as elsewhere in public procurement in so far as strengthening the appeals procedure is concerned—and insisting on statistical reporting by member states to the Commission, so that the Commission can keep under review what is going on. We welcome those measures.

The other side of the balance is protecting the security interests of member states. In our case, we have, for example, an interest in the ability to procure particularly sensitive equipment solely from our own suppliers, with which we have a long-term relationship. In that way we can be certain of security of supply and of the confidentiality of information, and we can develop the kind of long-term partnerships that are foreseen in the defence industrial strategy.

We have some particular concerns here, and we have been able to secure our objectives in some areas, as a result of our initiative in negotiations in the Council of Ministers and at official level. We have succeeded in achieving agreement on the exclusion of intelligence agencies from the public procurement directive, so that they can procure where they need to when the essential security interest of the nation is concerned. That explicit recognition is extremely welcome.

In article 9(a) there is protection for secure information—a point that I have just made. That means that member states can specify companies that meet their criteria, irrespective of whether they are in their national area. Security of supply and national capability security—the issue of a defence industrial strategy for us—have been secured by recital 7, and articles 14 and 15.

There are provisions on research and development, which we greatly welcome, and article 5 is on confidentiality, which is important in many defence contracts. Something close to our heart and our needs is the fact that we have protected, in article 8, the possibility for member states to conclude joint ventures with third countries. Article 9, which is a UK initiative, protects the possibility of local contracting where our forces are deployed abroad, which is important to us given that we are engaged in two important operations. We have also secured protection for reserved contracts, such as for Remploy in this country, which employs disabled people. We are allowed to discriminate in its favour. Finally, we have also secured useful provisions on electronic contracts.

On that basis, I am happy to recommend the draft directive to the Committee.

The Chairman: We now have until half-past 5 for questions to the Minister, which should be brief. It is open to Members, subject to my discretion, to ask a series of related question.

Dr. Andrew Murrison (Westbury) (Con): It is a pleasure to serve under your chairmanship once again, Mrs. Dean.

I am concerned that the latest text of the proposed directive on defence and security procurement, mentioned in the 30 October letter from the Under-Secretary of State for Defence, Baroness Taylor, was not included in the material that we were given to study over the weekend, which means that Opposition Members, at least, will have to struggle and second-guess what the noble Lady was saying. Nevertheless, we will endeavour to do our best.

In a letter of 21 October, Baroness Taylor says

although she also wrote that she would seek to secure

of that failure.

We support the Government’s aspiration to remove security from the directive, but will the Minister tell us what success has been achieved since Baroness Taylor wrote her letter and clarify what is the negative impact to which she referred?

Mr. Davies: At a quarter to 3 this afternoon, I discovered that the latest version of the directive had not been passed to the Committee and expressed my surprise. I have launched an inquiry to discover why this has happened. It might be relevant to my answer, however, because under articles 9(a) 14 and 15, as well as recital 7, of the new version of the directive, which followed the latest round of consultations and discussions, changes have been introduced on the security of information and supply, a couple of which I referred to in my introductory remarks.

Mr. Greg Hands (Hammersmith and Fulham) (Con): It is a pleasure to serve under your chairmanship, Mrs. Dean.

I fail to see why anybody would think that raising the threshold in the directive from €250,000 to €1 million could assist small and medium-sized enterprises. Why did the presidency take that view?

Mr. Davies: The Government share the hon. Gentleman’s reaction. As he knows, that view was taken by France, acting as the presidency, so he should really ask the presidency that question. By raising from €250,000 to €1 million the minimum threshold for contracts that have to be advertised, we might exclude many contracts of great interest to SMEs, so we hope to persuade our partners and allies to retain the €250,000 threshold.

Mr. Hands: How did the French make their argument? Presumably, during the Minister’s discussions with his French opposite number, they put their proposal. What arguments did they put behind it?

Mr. Davies: I have not been involved in any discussions with the French Government on that matter, but I repeat that the French have argued that this would be a positive change. That might well be for reasons of administrative efficiency or convenience on the part of their defence procurers. That might be the real agenda, but I cannot speak for the French Government nor explain their reasoning.

Mr. Burns: To pick up on the question asked by my hon. Friend the Member for Westbury, which member states are opposing the issue of security? Also, the Minister in another place says that the Government

What are those guarantees that the Government hope to secure?