Documents considered by the Committee on 31 January 2018 Contents

10European Defence Industrial Development Programme (EDIDP)

Committee’s assessment

Politically important

Committee’s decision

Not cleared from scrutiny; further information requested; drawn to the attention of the Defence Committee

Document details

Proposal for a Regulation establishing the European Defence Industrial Development.

Legal base

Article 173 TFEU; ordinary legislative procedure; QMV

Department

Ministry of Defence

Document Number

(38831), 10589/17 + ADD1, COM(17) 294

Summary and Committee’s conclusions

10.1In June 2017, the European Commission has proposed the creation of a European Defence Industrial Development Programme (EDIDP), which would co-fund from the EU budget the development of military technology. It will have a budget of €500 million (£439 million)192 in 2019–20, with the Programme’s future after that to be decided as part of the negotiations on the EU’s next long-term budget. The EDIDP, which is due to go live in January 2019, is part of the new European Defence Fund.193

10.2The EU Member States in the Council reached agreement on the legal text establishing the EDIDP in December 2017. Crucially, from the UK’s, perspective, the Council’s position on “eligible entities” for funding from the Programme would enable the UK defence industry to participate in EDIDP projects after Brexit, although it would be precluded from receiving funding directly except through subsidiaries established within the EU itself (see paragraphs 10.24 to 10.27 for more information). The European Parliament is expected to adopt its position on the proposal in February or March 2018, after trilogues will begin to agree the final legal text.

10.3The Government supported the Council’s general approach on 12 December 2017, overriding the scrutiny reserve which the Minister for Defence Procurement (Guto Bebb) confirmed by letter of 23 January 2018.194 He apologised for the override, arguing that it was “necessary due to the compressed timescales of the EDIDP negotiation”, and promised to keep the Committee informed about future development in the negotiations between the Council and the European Parliament.

10.4The Minister also replied to questions raised previously by the Committee about the UK’s involvement in the European Defence Fund more broadly after Brexit, noting that:

10.5We thank the Minister for his comprehensive reply to our questions on the European Defence Fund and its EDIDP component.

10.6The Government has repeatedly emphasised the importance of the Fund and the EDIDP for the UK defence industry. We are therefore not surprised that the Government supported the substance of the Council’s general approach, which would provide opportunities for UK participation in the Programme once it becomes a “third country” vis-à-vis the EU. We note that the original Commission proposal would have precluded such participation.

10.7However, we are not convinced that the Government’s scrutiny override in December 2017 was unavoidable. While we accept that the negotiations on the Regulation took place over a relatively short period of time, we remain of the view that the Minister could, and should, have informed the Committee in November 2017 about the direction of travel within the Council working party. A Presidency compromise had been circulated as far back as October, and Members of the European Parliament appear to have been aware of the Council’s position on the eligibility requirements for non-EU undertakings by late November.196

10.8We note furthermore that the terms used by the Council to frame participation in the EDIDP by undertakings controlled from, or based in, a non-EU country lack clear definitions. We would therefore like the Minister to clarify:

Brexit implications

10.9With respect to the implications for the Council’s proposed eligibility requirements for UK industry after Brexit, the Committee notes that there are two developments which could delay the imposition of the full third country restrictions on British companies within the EDIDP after the UK ceases to be a Member State.

10.10Firstly, under the terms of the financial settlement agreed between the Government and the EU on 8 December 2017, the UK will pay into the EU budget as if it were a Member State in 2019 and 2020. In return, UK participation in EU programmes—including the EDIDP—“will be unaffected by the UK’s withdrawal from the Union for the entire lifetime of such projects”.197 This is likely to be reinforced under the terms of any comprehensive post-Brexit transitional arrangement, which the Government is seeking to negotiate in the first quarter of 2018. The European Commission has suggested the transition should last until December 2020, to coincide with the end of the EU’s current budgetary cycle.

10.11As such, the conditions for “third country” participation within the Programme will not apply to the UK in 2019–20, unless a formal Withdrawal Agreement is never ratified198 (in which case the UK will become a “third country” on 29 March 2019). The eligibility requirements for the EDIDP after 2020 will need to be set down in a new Regulation. If we assume that they will be in substance the same as those agreed by the Council, they would apply to UK entities applying for EDIDP funding from 1 January 2021 onwards (unless the transition period is extended beyond December 2020).199

10.12Secondly, the Government is still considering the details of its preferred relationship with the EU on defence matters after the end of the transitional period. It may seek “special access” to the European Defence Fund, which would, presumably, negate the restrictions on third country participation in the EDIDP to some extent. The Government has not provided any concrete proposals to that effect however, and it is therefore unclear whether such a special arrangement would be acceptable to the EU-27.

10.13Given that the exact conditions for post-Brexit participation in the EDIDP by the UK defence industry remain uncertain, we retain the proposal under scrutiny. We also draw these developments to the attention of the Defence Committee.

Full details of the documents

Proposal for a Regulation establishing the European Defence Industrial Development Programme aiming at supporting the competitiveness and innovative capacity of the EU defence industry: (38831), 10589/17 + ADD1. COM(17) 294.

Background

10.14In June 2017, the Commission tabled a legislative proposal for a European Defence Industrial Development Programme or EDIDP, which will part-fund the “early stages of the development cycle” for new defence equipment, particularly early prototypes for military technology. The Programme is part of the new European Defence Fund.200

10.15The EDIDP is scheduled to become operational in early 2019, and has been earmarked for a provisional budget of €500 million (£438 million) in 2019–20. Co-financing from the EU budget for prototypes—the costliest development phase—will normally be capped at 20 per cent of the project cost, except for initiatives as part of the Permanent Structured Cooperation (PESCO) on defence, which was launched by twenty-five EU countries in December 2017.201

10.16The proposed Regulation to establish the Programme remains under consideration within the European Parliament and the Council, with the latter adopting its negotiating position in December 2017 (see paragraph 10.21 below). Under the terms of the proposal, the day-to-day management of the EDIDP and decisions to fund individual projects for the development of military technology will be in the hands of the European Commission. It will adopt a multi-annual work programme and make award decisions by means of implementing acts (which must be endorsed by a qualified majority of Member States to take effect).202 The Committee discussed the detail of the EDIDP proposal in more depth in its Report of 13 November 2017.203

10.17The Government has expressed its support for the establishment of the EDIDP on multiple occasions, with a key objective being to secure UK participation after Brexit (see below).204 The future of the EDIDP after 2020 will be discussed as part of the broader negotiations on the EU’s next Multiannual Financial Framework.

UK participation in the EDIDP after Brexit

10.18Under the terms of the original Commission proposal, funding from the EDIDP would only be available to EU-based organisations, which must also be owned and controlled by either EU governments or EU nationals. Moreover, the Commission proposed that all “infrastructure, facilities, assets and resources” used by the beneficiaries, including subcontractors and other third parties, must be located within the EU. This would clearly render participation by the UK defence industry in EDIDP projects after Brexit next to impossible.

10.19In her Explanatory Memorandum of 10 July 2017, the then-Minister for Defence Procurement (Harriett Baldwin) confirmed that the UK would in principle seek continued post-Brexit participation in the Programme, but that the specific conditions would be a “matter for our negotiations”. She argued that the proposed restrictions on non-EU countries’ participation in the EDIDP ran “counter to the need to attract new investment and ideas into defence”, and warned that, once the UK is outside the EU, this restrictive approach to participation could be “used in a way that disadvantages the UK and [its] defence industry”.

10.20At its meeting in November 2017, the Committee retained the EDIDP proposal under scrutiny given the uncertainties surrounding the UK’s post-Brexit access to the Programme.205 We asked the Minister to provide further information on the Council’s deliberations on the proposal, in particular with respect to third country participation; the ability of UK organisations to bid for EDIDP funding during any post-Brexit transitional period; and the Government’s proposals for long-term UK participation in the EDIDP after the end of that period.

The Council’s general approach

10.21The then Minister informed the Committee in December 2017 that the negotiations within the Council had led to an agreement on a general approach on the EDIDP. Furthermore, she explained that this draft position was due to be adopted by the Member States the next day, to serve as the basis for future trilogue negotiations with the European Parliament. The general approach was duly adopted at the General Affairs Council on 12 December, with DExEU Minister Lord Callanan—representing the UK Government—overriding scrutiny to vote in favour.

10.22The new Minister for Defence Procurement (Guto Bebb) confirmed the override by letter of 23 January 2018.206 He apologised that the scrutiny reserve resolution had not been observed, arguing that it was “necessary due to the compressed timescales of the EDIDP negotiation”, and promised to keep the Committee informed about future development in the negotiations between the Council and the European Parliament.

10.23We have set out the substance of the Council’s general approach below, with a particular focus on where it differs from the original European Commission proposal.

Third country participation in the EDIDP

10.24In the Council’s position, the Commission’s initial prohibition on third country participation in the EDIDP has been watered down. Although the Member States have retained the requirement that beneficiaries must be based in the EU, businesses within the UK defence industry would be able to participate in the EDIDP-funded programmes after Brexit in two circumstances:207

10.25The concepts used to frame these restrictions, including “sufficient assurances”, “national procedures”, “executive management structure” and “competitive substitutes”, are not precisely defined in the general approach, leaving them open to interpretation by each Member State. In particular, the Council has not specified who will judge whether assurances are sufficient, or whether competitive substitutes within the EU are indeed unavailable. It is also not clear whether these conditions would be sufficient to bar participation by undertakings controlled from or based in countries subject to EU foreign policy sanctions.

10.26Moreover, the European Parliament (which is co-legislator on this proposal) may take a more restrictive view on the eligibility of non-EU entities to contribute to EDIDP projects. The Parliament’s draft Report208 contains stricter provisions on assessing the extent to which EU-based undertakings applying for EDIDP funding are controlled by non-EU entities, although it has removed the requirement for beneficiaries to be majority-owned within the EU. However, the draft left the prohibition on third country participation as proposed by the Commission in place.

10.27The European Parliament’s Industry Committee is expected to formally adopt its negotiating position in February 2018. Any disagreements between the two institutions on the legal text would have to be resolved as part of the trilogue process before the EDIDP could become operational.

Other changes to the Commission proposal

10.28The Council has also included the European Defence Agency as a non-voting observer on the technical committee of Member States’ representatives, which will vote on the Commission’s EDIDP work programme and individual funding decisions. Moreover, at least 10 per cent of the Programme’s budget must benefit small- and medium-sized enterprises (compared the Commission’s more ambiguous target of “a credible proportion”).

10.29The Council has maintained the Commission’s proposal to provide projects for development of military technology under the umbrella of Permanent Structured Cooperation (PESCO) with a higher co-financing rate from the EDIDP than other projects. This is to incentivise joint development and acquisition of defensive equipment under PESCO, a voluntary agreement among 25 EU countries to work more closely together on improving their military capabilities.209

The financial toolbox for joint military acquisitions

10.30The Minister also informed us that there is still little detail on the Commission’s separate initiative to establish a Financial Toolbox for joint acquisitions of military technology by multiple EU countries, with the specific of this initiative to be worked out over the course of 2018. The purpose of the toolbox will be to facilitate the acquisition of technology developed as part of the EDIDP.

Our assessment

10.31As we noted in our Report of 13 November, the launch of the EDIDP marks a turning point for the use of the EU budget. For the first time, discussions are underway to allow for substantial amounts of EU funding for projects that are explicitly military, and not dual-use, in nature.

10.32With respect to the scrutiny override, we have taken note of the Minister’s apology for the scrutiny override to support the adoption of the Council’s general approach. While we accept that the override was acceptable in these circumstances, especially in view of the expedited nature of the negotiations and the importance of the changes made to the Programme’s eligibility requirements, it remains the Committee’s view that additional information on the direction of travel could have been brought to its attention sooner. We note in this respect that the Council’s EDIDP working party met at least eight times from July to November 2017 and that the Presidency circulated a first compromise text for the Regulation as far back as early October.

10.33It also appears that the substance of the Council’s position on eligibility requirements had already been established, in substance, in November. That month, four MEPs in the ECR group210 tabled an amendment to the European Parliament’s draft Report on the definition of “eligible entities” which is in substance mostly identical to the Council’s position and mirrors its terminology. It includes the requirement for beneficiaries to have an “executive management structure” within the EU; the need for sufficient assurances that awarding funding to a beneficiary controlled from a third country would not “contravene the security and defence interests” of the EU;211 and the pre-condition that use of assets or resources located outside of the EU for EDIDP projects could only take place “if there are no competitive substitutes readily available in the EU”.

10.34The timing of the amendment appears to indicate that some form of agreement on the wording of the Regulation was already sufficiently advanced by that point for it to be shared with Members of the European Parliament in a bid to align the text prior to formal trilogues. However, the proposed changes to the eligibility requirements as eventually endorsed by the Council were not brought to the Committee’s attention until the day before the Council meeting.

10.35We have written to the Ministry of Defence to underline the need to keep the Committee informed of progress in negotiations regularly, and not only when an agreement has already been reached for formal approval by the Council or COREPER. This amounts to presenting Parliament with a fait accompli, robbing the scrutiny process of its purpose.

10.36The European Parliament’s Industry Committee is expected to adopt its position on the EDIDP in February 2018, allowing for trilogues to begin in March. The aim is for the proposed Regulation to be approved by July 2018, in order that the EU funds are allocated in time for projects to commence on 1 January 2019.

10.37The Committee expects the Minister to keep us sufficiently informed of progress in the negotiations to avoid any possibility of an override on the final text of the EDIDP Regulation later this year. We would also like him to provide us with an assessment of the European Parliament’s mandate for negotiations as soon as is feasible after its adoption on 21 February.

Brexit implications

10.38As outlined above and in our previous Report, the EDIDP proposal’s primary significance for the UK lies in the conditions for post-Brexit participation in projects to be funded. As the Programme is not due to become operational until early 2019, there are no benefits to be reaped before the UK’s projected withdrawal on 29 March 2019. The Government has consistently sought to modify the elements of the Commission proposal that would preclude participation by the British defence industry after Brexit.

10.39The Council’s general approach represents a positive step in this regard. Under the definition of “eligible entities” proposed by the Council, after Brexit UK-based entities could apply for EDIDP funding provided they do so through a subsidiary based within the EU. Alternatively, UK firms could cooperate with EU-based companies on EDIDP-funded projects, although only under certain conditions and provided the assets or resources provided from the UK are not “readily available” in the EU. This is a substantial change from the original Commission proposal; although it will severely restrict the UK’s access to the Programme compared to Member States, it nonetheless leaves the door open for participation by this economically important sector.212

EDIDP during the transitional period

10.40The restrictions on non-EU participation are not expected to apply to UK firms for the duration of the current Multiannual Financial Framework. Under the terms of the provisional Brexit financial settlement, UK entities would remain eligible on par with EU companies during the post-Brexit transitional period:213

“Accordingly, the eligibility to apply to participate in Union programmes and Union funding for UK participants and projects will be unaffected by the UK’s withdrawal from the Union for the entire lifetime of such projects.”

10.41In his letter of 23 January, the Minister confirmed that Government has taken the view that UK undertakings should remain eligible for participation in the European Defence Fund for as long as the UK continue to contribute to the existing Multiannual Financial Framework (i.e. until the end of 2020). The Minister has also written to the UK’s Letter of Intent colleagues (France, Germany, Italy, Spain and Sweden) “encouraging them to consider UK and UK industry participation in cooperative programmes that might be submitted for EDIDP funding”.

10.42It is less clear how the UK Government would be able to influence the work programme of the EDIDP and individual funding decisions during the transitional period. While the UK may still be represented in the Committee of Member States when the draft work programme is put forward for adoption (if this occurs prior to March 2019), it will no longer have a vote on any implementing acts related to the EDIDP (such as individual funding decisions) after the end of the two-year Article 50 period on 29 March 2019.

10.43Under the European Commission’s negotiating directives214 on a transitional arrangement, which are to be agreed formally by the 27 other Member States on 29 January 2018, the UK would be precluded from attending meetings of the EU’s “institutions, (…) bodies, offices and agencies” during the transition. The Government could be “invited to attend, without voting rights” (our emphasis) meetings of committees such as the EDIDP Committee. However, the conditions for such “exceptional attendance” are to be specified in the Article 50 Withdrawal Agreement.215

10.44We have therefore asked the Minister to clarify as soon as possible what level of representation the Government will seek during the transitional period; this is clearly important as a horizontal matter, given that the EU is seeking for its entire acquis to apply during that time.

EDIDP after the transitional period

10.45The proposed EDIDP Regulation currently under discussion will expire on 31 December 2020, as it is part of the wider 2014–2020 Multiannual Financial Framework. If the Programme is to be continued after that, a new EDIDP Regulation will need to be proposed, negotiated and adopted in the coming years. Although we expect that any EDIDP Regulation for 2021 onwards would mirror most of the current terms for non-EU participation, this will also depend on the position of the European Parliament (which will have a different composition when the next Regulation is adopted, given the European elections in May 2019).

10.46The length of the UK’s post-Brexit transitional period is currently uncertain. On 20 December 2017, the European Commission proposed that it should end on 31 December 2020, to avoid it overlapping with the start of the EU’s new budgetary cycle. By contrast, the Prime Minister told the Liaison Committee on the same day that the transition may have to last longer in certain areas.216 If it extends past December 2020, the UK could, conceivably, still be a participant in the EDIDP as if it were a Member State under the new Programme in 2021. However, in the absence of any information by the Government on the scope and length of the transition, we presume that the UK will be a full participant in the EDIDP in 2019–20. Subsequently, by default, UK-based undertakings will be eligible for participation under the same conditions as those of any other third country.

10.47However, in his letter of 23 January, the Minister explains that the Government has not ruled out seeking a “special agreement which continues to provide the UK with special access to the European Defence Fund” (including the EDIDP) to come into effect at the end of the transitional period.217 In particular:

10.48As the Government has made no concrete proposals for the post-Brexit defence partnership with the EU, we cannot yet make an assessment of the likelihood that they would be acceptable to the EU-27. We will continue to follow the Article 50 negotiations closely, as well as future discussions on third country eligibility in the upcoming draft Regulation to continue the EDIDP after 2020 and under Permanent Structured Cooperation (PESCO).

Fall-back on WTO rules

10.49In its Report of 13 November, the Committee also asked if the Government had identified any benefits for the defence industry from the UK’s exit from the EU’s regulatory system; and what the implications would be for a “no deal” Brexit in which trade relations between the UK and the EU would be covered solely by WTO rules.

10.50The Minister has replied that it is difficult to assess the benefits of being out of the EU’s regulatory framework, as there is no clear picture of what possible reform would look like. He added that it would be “wrong to speculate about possible reforms at this stage”, but noted that most stakeholders in Government and industry who commented on this issue in the Five Year Statutory Review of the Defence and Security Public Contracts Regulations 2011 believed that the “defence procurement rules could be simplified to reduce the regulatory burden”.

10.51With respect to any fall-back on WTO rules, the Minister noted that WTO Agreement on Government Procurement (“GPA”) has a general exception for military equipment. As a result, EU Member States would retain the power to decide the level of market access they allow UK suppliers for goods and services covered by the EU Defence and Security Directive. However, government procurement of dual-use and civil goods and services for use by the defence sector under the EU Public Procurement Directive will be open to suppliers from GPA parties, including the UK post-Brexit.

Previous Committee Reports

First Report HC 301–i (2017–19), chapter 30 (13 November 2017).


192 €1 = £0.88723

193 See our Report of 13 November 2017 for more information on the European Defence Fund.

194 Letter from Guto Bebb to Sir William Cash (23 January 2018).

195 Under the provisional financial settlement as part of the UK’s withdrawal from the EU, the UK will pay into the EU budget as if it were a Member State in 2019 and 2020 (i.e. until the end of the 2014–2020 Multiannual Financial Framework). It will also take on liability for a share of any EU legally-binding expenditure commitments outstanding on 31 December 2020. See the Committee’s Report of 13 November 2017 on the financial settlement for more details.

196 See for more information the “Our assessment” section of this Report.

197 Joint Report from the negotiators of the European Union and the United Kingdom Government on progress during phase 1 of negotiations under Article 50 TEU on the United Kingdom’s orderly withdrawal from the European Union, paragraph 71.

198 In other words, concluded by the Council after obtaining the consent of the EP. Ratification by each of the 27 Member States is not required. It will need to be ratified by the UK, however.

199 In December 2017, the Prime Minister indicated the UK might press for a longer transition period (Oral evidence to the Liaison Committee, 20 December 2017): “[The European Commission] have set that end December 2020 date because that covers their current budget plan period, so that has a neatness for them—if I can put it like that—but we will obviously have to discuss it, because this is a practical issue about how long certain changes would need to take to be put in place”.

200 In addition to the EDIDP, the European Defence Fund will also consist of a European Research Development Fund (for which a formal proposal is expected in 2018) and a “financial toolbox” to assist EU countries in joint acquiring military equipment. The Committee set out the substance of all elements of this new Fund in more detail in its Report of 13 November 2017.

201 The UK, alongside Ireland and Malta, does not participate in PESCO (although the Government is seeking to secure access for UK industry to specific projects after Brexit). With respect to the EDIDP-PESCO link, the co-financing rate from the Programme for prototype development as part of a PESCO initiative would be 30 per cent (compared to 20 per cent for non-PESCO projects). For more information on PESCO, see our Report of 19 December 2017.

202 The Commission also foresees the creation of a Coordination Board for the European Defence Fund as a whole (i.e. the future European Research Development Fund, the EDIDP and the financial toolbox). This Board, which would coordinate initiatives undertaken as part of any of the three elements of the Fund, would consist of the Commission, the EU’s High Representative for Foreign Affairs, the Member States and the European Defence Agency. However, it is unclear what exact powers the Board would have.

203 Report of 13 November 2017.

204 See for example the Explanatory Memorandum of 10 July 2017 on the EDIDP; the Explanatory Memorandum on the 2018 budget for the European Defence Agency; and the Minister’s letter of 23 January 2018 informing the Committee of the Council’s general approach on the EDIDP.

205 Report of 13 November 2017.

206 Letter from Guto Bebb to Sir William Cash (23 January 2018).

207 These conditions will apply to third countries generally, not solely the UK.

209 The Committee considered the launch of PESCO in more detail in its Report of 19 December 2017, and recommended the initiative should be debated on the Floor of the House.

210 The ECR grouping in the Parliament is where MEPs representing the UK Conservative Party sit. The sponsoring MEPs were Zdzisław Krasnodębski, Edward Czesak (both from Poland), Evžen Tošenovský (the Czech Republic) and Hans-Olaf Henkel (Germany).

211 The European Parliament amendment additionally contains a stipulation that undertakings engaged in cooperation with countries subject to EU sanctions are by definition ineligible. This does not appear in the Council text.

212 According to the Government, the UK is the third largest defence exporter in the world with its market share estimated at £7.7 billion, representing 12.8% of the estimated market share of the top ten defence exporters). (House of Commons Library briefing paper CBP 7842, 21 December 2016).

214 European Commission, Annex to the Recommendation for a Council Decision on negotiations with the United Kingdom for an agreement setting out the arrangements for its withdrawal from the European Union (20 December 2017).

215 The European Commission’s draft negotiating directives mention only two instances where UK representation would be justified: where the Committee was considering individual decisions relating to the UK or UK natural or legal persons; or “where the presence of the UK is necessary from a Union perspective for the effective implementation of the acquis during the transition”.

216 In December 2017, the Prime Minister indicated the UK might press for a longer transition period (Oral evidence to the Liaison Committee, 20 December 2017): “[The European Commission] have set that end December 2020 date because that covers their current budget plan period, so that has a neatness for them—if I can put it like that—but we will obviously have to discuss it, because this is a practical issue about how long certain changes would need to take to be put in place”.

217 Letter from Guto Bebb to Sir William Cash (23 January 2018).

218 Administrative Agreement with the European Defence Agency are subject to the unanimous agreement of the remaining Member States. Such an arrangement with the EDA would enable the UK to participate in the Agency’s work, but it would not automatically entail involvement in other EU defence measures such as the European Defence Fund, PESCO, or individual CSDP operations.




2 February 2018