Select Committee on European Scrutiny Thirty-Ninth Report

2   Defence and security procurement

(29267) 16488/07 + ADDs 1-2 COM(07) 766 Draft Directive on the coordination of procedures for the award of certain public works contracts, public supply contracts and public service contracts in the fields of defence and security

Legal baseArticles 47(2), 55 and 95 EC; co-decision; QMV
DepartmentMinistry of Defence
Basis of considerationMinister's letters of 21 and 30 October 2008
Previous Committee ReportHC 16-xi (2007-08), chapter 6 (6 February 2008),

HC 16-xiv (2007-08), chapter 4 (5 March 2008),

HC 16-xvii (2007-08), chapter 4 (26 March 2008),

HC 16-xxii (2007-08), chapter 6 (21 May 2008) and

HC 16- xxv (2007-08), chapter 6 (25 June 2008)

To be discussed in CouncilNo date set
Committee's assessmentLegally and politically important
Committee's decisionFor debate in European Standing Committee


2.1  We have considered this draft Directive on a number of occasions, most recently on 21 May and 25 June. We noted that, with a number of adaptations, it applied the procurement regime under Directive 2004/18/EC to the award of contracts in the fields of defence and security.

2.2  In our previous consideration of the proposal we noted that it attempted to set out a definition of "terrorism" and "criminal organisation" for the purposes of extending the scope of the procurement regime to contracts in the field of security, whereas we doubted that the adoption of definitions of crime was a matter falling within the scope of the EC Treaty. We also noted that if the Directive did not extend to security, the need for a definition of "terrorism" or "criminal organisation" would fall away.

2.3  The Slovenian Presidency issued a revised text in May and the Minister explained that the Government was broadly content with the progress made. The UK's proposals on Article 16 (extension to third countries of obligations relating to taxes, environmental protection and employment protection and working conditions) and Article 24 (shortening of timeframes where a Prior Information Notice (PIN) has already been issued) had been accepted in full and the recitals stress the fact that it is the responsibility of the Member States to determine what measures are necessary for the protection of national security, and to confirm that Article 296 EC[13] might still be relied on in relation to the security of information.

2.4  However, the Minister also explained that there had been some amendments about which the Government has concerns, notably the addition of a large amount of detail on the selection and management of sub-contractors, which it was doubtful would benefit small and medium enterprises whilst they would unnecessarily burden prime contractors, preventing them from managing their own supply chain effectively, and would allow the Commission to challenge subcontract awards.

2.5  The Minister also noted that the new text did not offer amendments to the key provisions of concern to the UK. These included Article 1 (scope), Article 2 (definitions), Article 9 (exemptions), Article 14 (security of information) and Article 15 (security of supply).

The revised version of the Directive

2.6  With her letter of 21 October the Minister for International Defence and Security at the Ministry of Defence (Baroness Ann Taylor) provided us with an analysis of the then latest text of the proposal. The Minister subsequently provided a copy of the text with her letter of 30 October.

2.7  As is evident in the latest text the original proposal has undergone substantial amendment. The main amendments may be summarised as follows.

2.8  The recitals have been completed by the addition of a first recital which emphasises that national security remains the sole responsibility of each Member State, both in terms of defence and security. A new recital (5a) has been added to make clear that military equipment is to be understood as the types of product included in the list of arms, munitions and war material adopted under the Council Decision of 15 April 1958 but that this is a generic list and is to be interpreted broadly in the light of the evolving character of technology, procurement practices and military requirements. Military equipment is also intended to cover products which were designed for civilian use but which are later adapted for military purposes to be used as arms, munitions or war material. New recitals (5b) and (c) refer to procurement in the field of "non-military security" and to research and development. Recital (7) emphasises that the Directive is not to prevent the imposition or application of measures considered necessary to safeguard interests recognised as legitimate by Articles 30, 45, 46, 55 and 296 EC and that this means in particular that the award of contracts which would fall within the scope of the Directive may nevertheless be exempted if this can be justified on grounds of public security or are necessary for the protection of the essential interests of a Member State. Recital (10) now refers to the possibility of relying on Article 296(1)(a)EC "where contracts are so sensitive that their very existence must be kept secret". A new recital (15a) records that some contracts are so sensitive that it would be inappropriate to apply the Directive. Examples given are procurements by intelligence services, or for intelligence activities as defined by the Member States, or for certain purchases intended for border protection, combating terrorism or organised crime, or related to encryption or other equally sensitive activities.

2.9  A new recital (19a) has been added in relation to sub-contracting. It is said that it seems appropriate to complement the tenderer's right to subcontract with the option of requiring that at least a certain share of the value of the public contract be awarded to third parties. A new recital (46b) provides that the procedures for reviewing the award procedures should be adapted so as to allow Member States to provide that an independent review body need not declare the contract ineffective (even if it has been awarded in breach of the procedures under the Directive) if there are defence or security interests or other overriding reasons for confirming the award of the contract.

2.10  In the main body of the Directive the definitions in Article 1 have been amended, notably by the omission of the definitions of "terrorism" and "criminal organisation" (previously in Article 2(1) and the legality of which we doubted). A new Article 5a allows contracting authorities to impose security requirements in respect of any classified information imparted during the tendering and negotiating process. A new exclusion is provided for in Article 9(a) so as to exclude contracts where the application of the rules under the Directive would oblige a Member State to supply information the disclosure of which it considers contrary to the essential interests of its security. A new Article 9a allows Member States to reserve contract awards to sheltered workshops.

2.11  A new Article 13 contains detailed rules on subcontracting, and includes for the first time a provision under which a contracting authority would be permitted to require a certain share of the value of the contract to be sub-contracted to third parties. This is combined with a new Article 38(a) to (d) setting out detailed rules on the appointment of sub-contractors.

2.12  Article 38(f) to (o) sets out a series of measures for the review and enforcement of the procurement rules established by the Directive. These are modelled on the rules for the review and application of Directive 2004/18/EC. Article 38(f)(6) requires Member States to provide that an application to a contracting authority for the review of a decision awarding a contract should have the effect of suspending that process at least for a period of 10 days from the time the contracting authority has replied to the request. The interim measures which a Member State must provide for under Article 38(g) must include a power to order a suspension of the award procedure, to set aside the award procedure and to award damages. Article 38(h) requires Member States to provide for a standstill period of at least 10 days from the date of notifying bidders of the decision to award a contract, during which period a contract may not be concluded. Article 38(k) requires provision to be made for annulling a contract, which may (but need not) have retrospective effect, if the award is made in breach of the rules under the Directive. However, Article 38(k)(3) enables Member States to provide for a contract to be affirmed if the "defence and/or security interests of the Member State or other overriding reasons relating to the general interest require that the effects of the contract should be maintained". In this event, Member States are to provide for alternative penalties "which shall be applied instead". The penalties are provided for by Article 38(l)(2) and are to consist of fines or a shortening of the duration of the contract. It is specifically provided that damages do not constitute an appropriate penalty for these purposes.

The Government's view

2.13  In her letter of 21 October 2008, the Minister for International Defence and Security at the Ministry of Defence (Baroness Ann Taylor) reports on the main issues arising in the negotiations and supplies an analysis of the then latest draft of the proposal. The Minister explains that discussions in the Council working group and in the European Parliament have proceeded at a fast pace and that the French Presidency has the goal of obtaining a first reading deal between the Council and the European Parliament by the end of the year. The Minister further explains that, whilst she expects the content of such a deal to be broadly consistent with the UK's negotiating position, some of the issues are very sensitive and some have been newly introduced. The Minister also informs us that, due to opposition from other Member States, the Government has not succeeded in its key aim of removing security from the scope of the Directive, but that it is hopeful of securing sufficient guarantees to minimise the negative impact on defence and security procurements.

2.14  The Minister adds that, whilst the current text could restrict the use of Treaty derogations, the Government has minimised any "practical negative impact" and believes that the text is acceptable in this light. The Minister also explains that the Government has further improved the UK position on some of the key Articles which were of concern. These included Article 1 (defence scope), Article 2 (some of the definitions), Article 9 (exemptions), Article 14 (security of information) and Article 15 (security of supply).

2.15  On the other hand, the Minister also explains that there are some amendments the Government remains concerned about. For example, the Government doubts whether the provisions on subcontracting (Articles 13 and 38) would benefit small and medium sized enterprises in the way suggested. The Minister notes that there is support for this from other Member States and from the Commission and that it may be "tactically necessary" to concede this point. The Government will nevertheless continue to oppose this measure "although if unsuccessful we would seek to limit its negative effects".

2.16  The Minister adds that several new issues have arisen since we last considered the matter in June. The Minister reports that in July the Presidency proposed raising the threshold contract value above which the Directive would apply from €250,000 to €1 million, in order to assist small and medium sized enterprises. The Minister explains that the Government does not believe there is any justification for this and that the Commission is strongly resisting it. The Minister also notes that the European Parliament is keen to introduce amendments to the proposal, in the form of a so-called 'Reciprocity'[14] clause which would negatively affect the UK's ability to trade with non-EU markets, notably the United States. The Minister comments that "if the perceived impact of this would negatively affect our support for open, global markets, then we will oppose or seek amendment".

2.17  The Minister further explains that several smaller Member States have proposed that the Directive be clarified to make clear that the practice of offsets (arrangements whereby a supplier is required to direct some benefit back to the purchaser as a condition of the sale) may continue. The Minister explains that the Government supports the view of the Presidency and of the Commission that the text should neither explicitly authorise nor prohibit offsets, because this is a complex issue which ought to be resolved gradually, including through ongoing work in the European Defence Agency.

2.18  The Minister adds this final comment:

"If following Council agreement on a text and negotiations with the European Parliament, we remain within the negotiating position discussed above and in the annex, I am confident that the Directive will have a positive impact in improving the competitiveness of European defence markets, and our ability to gain value for money. If we are not able to obtain satisfaction on the issues set out here, I will be consulting Cabinet colleagues again with a view as to whether on balance, the market-opening benefits of the Directive continued to outweigh the potential drawbacks."

2.19  In the more detailed analysis attached to her letter, the Minister describes the outcome of negotiations so far on the scope of the proposal (i.e. its application to procurement in the field of security), the secrecy and security exemption (Article 14), the impact of the Directive on a Member State's ability to rely on Article 296 EC, the issue of reciprocity or European preferences, offsets, sub-contracting and security of information and security of supply. In view of its comprehensive nature, the analysis is reproduced as an annex to this report.


2.20  It is apparent from the material supplied to us by the Minister that a number of improvements have been made to the proposal to meet the UK's concerns. This is notably the case in relation to ensuring that a Member State's ability to rely on the exemption under Article 296 EC is not radically curtailed. We also note that the legal difficulty we identified arising from the use of the EC Treaty to adopt definitions of terrorism and criminal organisation has now been resolved by the deletion of those provisions.

2.21  It is also clear from the Minister's account that a number of difficult issues remain, notably in relation to subcontracting and the question of the threshold for the application of the Directive. There is also the risk of amendments being made, such as provisions requiring reciprocity, which would affect the ability of UK industry to compete in world markets. Above all is the key question identified by the Minister of whether the market-opening advantages of the Directive continue to outweigh the potential drawbacks.

2.22  We consider that the consideration of the balance of advantage of this proposal would benefit from the matter being debated in European Standing Committee and we so recommend.


1. Security scope

UK remains one of the few MS specifically calling for the exclusion of Security from the scope of this Directive and (given also the lack of support for this in European Parliament) there is now little real prospect of achieving this key aim. However, both the Presidency and the European Commission are sensitive to UK concerns to minimise the impact on procurements by the defence and security service, and we expect to obtain the following guarantees:

It is the view of HMG that these guarantees would make the Directive acceptable.

2. Secrecy and Security Exemption

The Government's negotiating position has been to repeat the secrecy and security exemption (Article 14) from the general public procurement Directive (2004/18). Despite strong resistance from the Commission and European Parliament, they now agree that there will be circumstances where the new rules would prevent MS from sufficiently protecting sensitive information. As a consequence the Directive now includes an exemption for highly sensitive information and for intelligence activities, which, in the Government's view, provides sufficient protection. This is consistent with the UK negotiating position.

3. Defence Scope (Article 1)

Satisfactory progress has been made in Council to achieve the UK's aim of re-defining the Defence scope in Article 1. The scope is now based on a generic definition that ensures a wide application of the Directive to benefit the full range of Defence contracts. Although the related Recital includes a direct reference to the 1958 list of armaments and materiel (which was not our preference), it has been redrafted to leave no doubt about the flexibility with which the list should be interpreted. Overall this approach, assuming it is confirmed following negotiations with the Parliament, provides the required delineation with the existing Directive, and is consistent with the UK negotiating position.

4. Impacts on use of Treaty derogations including Article 296

The Directive usefully re-emphasises our ability to apply Treaty derogations - for example, to take measures to protect our essential security interests.

A legal concern has been raised, however, that the current draft could restrict the use of Treaty derogations. This is because, as mentioned above, the "secrecy and security" exemption has been narrowed and the Directive includes partial harmonising provisions, particularly on "security of supply" (Article 15), which may prevent the use of the derogations for those reasons. As a result, we are seeking language to clarify the continuing application of the derogations in such circumstances. We should continue to press for this, although as the Commission and other MS are resistant, we may not succeed. The policy view is that this is largely a theoretical risk, with little practical negative impact. As a result, the current draft is consistent with the Government's position which specified that the "directive should minimise where possible any practical negative impact" on the use of derogations, notably in relation to the Defence Industrial Strategy.

5. Reciprocity/European preference

MEPs are seeking an amendment that would restrict international trade in order to encourage European autonomy and operational sovereignty. The UK Government's position is that European autonomy in defence procurement is both unachievable and unrealistic. Furthermore, such ideals ignore the reality (and inevitability) of our need to exploit the world market. There is a broader and longer term need to encourage and maintain the Two Way Street with the US, not to impose road blocks. We need global access for defence products and services, not a protected and therefore shrinking European supplier base. This is also inconsistent with the wider Government position of support for global open markets.

6. Offsets

While there is a very wide range of views on offsets among MS, and some continue to insist that the Directive makes some provision for them, the Commission will likely oppose any such proposal. It is unlikely that any text on offsets will feature as the Commission will oppose, and only a unanimous vote by 27 Member States could overcome Commission opposition.

7. Sub-contracting

The Presidency has proposed new provisions by which contracting authorities would be able to require prime contractors to sub-contract up to 30% of the main contract. The UK continues to oppose these proposals as they would add unnecessary burdens on prime contractors and because of concerns that similar proposals could be inserted into the general procurement Directive (2004/18). We have proposed amendments limiting these provisions to specific circumstances where competition was lacking at the prime contract level.

8. Thresholds

A large number of MS support an increase in the contract value thresholds above which the Directive would apply (from around €250k to €1 m) on the basis that it will help SMEs and also better cater to the defence market where the average cost of contracts is higher. The UK view is that such an increase would be unhelpful to SMEs (as it would decrease openness and transparency in the European defence equipment market), that there is no defence rationale for doing so (in the UK we advertise at much lower values), and it would create an unhelpful precedent for other sectors, potentially opening the door to pressure to raise the thresholds in the general procurement directive (2004/18).

9. Security of information and Security of Supply (Articles 13, 14, 15)

The current provisions governing Security of Information are acceptable in principle, assuming they are confirmed following negotiation with the European Parliament.

Further essential changes are required to the Security of Supply provisions in Article 15 (regarding commitments that an MS may be asked to give in respect of granting an export licence and an ability to seek information regarding constraints on use or transfer). Our concerns have been discussed in Council working groups and have been well supported by both Commission and Parliament. We will need to ensure that the text does not negatively impact on UK export policy.

10. R&D

The latest Presidency draft has reinstated the R&D exemption that currently exists in the Classic Directive, with the new provisions in Article 20 being retained for those circumstances when the exemption is not applicable. This satisfies the relevant objectives in our position. We have had discussions with Industry recently to consider what further changes should be sought and have made proposals accordingly in respect of combining research and development production contracts.

11. Remedies

The Remedies provisions are based on the recently agreed Remedies Directive (2007/66), but with certain adaptations to make them appropriate to defence and security. This approach is acceptable although there remain a few concerns regarding the handling of secure information which we are addressing.

12. Confidentiality (Article 5)

The UK requires access to key Intellectual Property and not to be hindered by confidentiality constraints imposed by originating contractors. Text has been proposed to the Presidency to address this.

13. Contracts awarded pursuant to international rules (Article 8)

All of the UK's required changes (both in respect of revised wording and new provisions) have been incorporated in the latest Presidency draft. Overall these new provisions are considerably more useful than those n the existing Directive. Assuming negotiations with the Parliament confirm these points, they would be acceptable to us.

14. Local theatres of operation

The drafting in respect of contracts placed in a third country with local economic operators for civil purchases in support of deployed forces has been improved still further although some finer points of detail remain to be resolved (regarding legislative technicalities rather than points of principle).

In relation to information, Article 296 EC provides that "no Member State shall be obliged to provide information the disclosure of which it considers contrary to the essential interests of its security". Back

14   In other words a provision which would require some form of mutuality in the placing of other contracts as a consideration for the contract in question.  Back

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Prepared 24 November 2008