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
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| Legal base | Articles 47(2), 55 and 95 EC; co-decision; QMV
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| Department | Ministry of Defence
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| Basis of consideration | Minister's letters of 21 and 30 October 2008
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| Previous Committee Report | HC 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)
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| To be discussed in Council | No date set
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| Committee's assessment | Legally and politically important
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| Committee's decision | For debate in European Standing Committee
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Background
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.
Conclusion
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.
ANNEX - ANALYSIS OF EUROPEAN COMMISSION
DRAFT DIRECTIVE ON DEFENCE AND SECURITY PROCUREMENT RULES
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:
- a new exemption for 'intelligence
activities'
- an exemption for contracts involving sensitive
information which, if revealed, would threaten essential security
interests
- a re-iteration that national security and its
definition are the sole competence of MS
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).
13 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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