Documents considered by the Committee on 9 May 2018 Contents

7European 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 Business, Energy and Industrial Strategy and Defence Committees

Document details

Proposal for a Regulation establishing the European Defence Industrial Development

Legal base

Article 173 TFEU; ordinary legislative procedure; QMV


Ministry of Defence

Document Number

(38831), 10589/17 + ADD 1, COM(17) 294

Summary and Committee’s conclusions

7.1In June 2017 the European Commission proposed the creation of a European Defence Industrial Development Programme (EDIDP) as part of the new European Defence Fund.53 The EDIDP would allow the EU budget to co-fund the final stages of the development of military technology (in particular the manufacture of prototypes), with a coordination role for the European Defence Agency in deciding on specific projects to be funded.54 While the Programme does not create new EU military structures, it is part of wider efforts to create a European ‘Defence Union’ in which the armed forces and military capabilities of the EU’s Member States are increasingly integrated.55

7.2If the Member States and the European Parliament agree on the Programme’s legal foundations as planned by summer 2018, it will initially run for a period of two years to align with the EU’s current long-term budgetary cycle (which ends in December 2020), although it is expected to be extended for at least a further seven years from 2021 onwards. The EDIDP is due become operational in early 2019 with a budget of €500 million (£439 million)56 in 2019–20. The Committee set out the details of the EDIDP proposal at some length in its previous Reports on this subject.57

7.3The Government has consistently supported the creation of the EDIDP in view of the perceived opportunities and economies of scale it offers for the UK’s defence industry. Given the UK’s exit from the EU, its efforts have therefore focussed on ensuring that “third country” companies would be able to participate in some way in projects funded by the Programme. In December 2017, the Member States—the UK included—put forward a number of amendments to the legal text underpinning the EDIDP. Notably, in a partial victory for the Government, they watered down the initial prohibition on any third country participation in the EDIDP. Although the Member States retained the requirement that direct beneficiaries of the Programme must be based in the EU, businesses within the UK defence industry would be able to participate in the EDIDP-funded programmes either:

7.4The Member States did not include any provision for participation by a third country’s Government to be represented in the governance structures of the European Defence Fund. They also did not substantively define the concepts used to frame the ‘third country’ restrictions—including “sufficient assurances”, “national procedures”, “executive management structure” and “competitive substitutes”. Moreover, when the Committee last considered the EDIDP in January 2018, the European Parliament had yet to establish its position on the proposal before entering into negotiations with the Member States on the final legal text to establish the Programme. The Committee therefore retained the proposal under scrutiny and asked the Minister to provide further information on the negotiations as they progressed.

7.5The Minister for Defence Procurement (Guto Bebb) wrote to the Committee in April 2018.58 His letter notes that the European Parliament’s Industry, Research & Energy (ITRE) Committee adopted its position on the EDIDP proposal on 28 February and received endorsement from the Plenary on 13 March.59 The Minister notes that MEPs maintained a ban on non-EU firms receiving funding from the EDIDP, as well restricting parent company outside the EU from being involved in any decisions made by their EU-based subsidiaries related to EDIDP-funded activity. However, like the Member States, the Parliament supported allowing “third country” defence industry companies to cooperate as third parties in EDIDP-funded projects on an ad hoc “pay for play” basis, i.e. without an arrangement that allows a non-EU country to be treated as if it were a Member State for the purposes of the Programme in return for an annual financial contribution.

7.6The Minister’s letter also clarified a number of technical points about how the proposed restrictions on third country participation in EDIDP-funded projects would work:

7.7Trilogue negotiations on the EDIDP Regulation between the European Parliament and the Member States began on 15 March 2018, and we understand they are likely to be completed by the end of May. This would allow for the first funding to be awarded from the EDIDP in January 2019. The future of the Programme after the end of the current EU budgetary cycle in December 2020 is to be decided as part of the negotiations on the EU’s next long-term budget, which began in earnest in May 2018.60 The Government is of the view that the European Commission, when proposing the post-2020 successor to the current two-year EDIDP framework, is “likely to be guided” by the substance of the EDIDP Regulation currently being finalised.61

7.8We are grateful to the Minister for his latest update on the state of play in the negotiations on the European Defence Industrial Development Programme, and look forward to receiving further information from him shortly about the outcome of the trilogue process with the European Parliament.

7.9The Government has consistently supported a legal framework that allows UK firms to seek involvement in EDIDP-funded projects after Brexit, which both the Parliament and the Council are minded to allow via a subsidiary in the EU or indirectly on a “pay for play” basis. This is far more limited than the involvement available to entities based in and controlled from the EU, and as such there is still significant uncertainty about the extent to which the UK defence industry will be able to make use of any opportunities afforded by the Programme—both during and after the post-Brexit transition.

7.10We note in this respect that Norway—which participates in the EU’s Preparatory Action for Defence Research, the EDIDP’s counterpart vehicle to fund early-stage defence R&D—was not awarded any funding from that programme despite being in the Single Market, applying the EU’s Defence Procurement Directives and having ‘associate’ status within the EU’s civilian research programme.62 It is therefore not a given that UK industry, even if theoretically able to participate in the European Defence Fund during the transition or afterwards, would substantially benefit in practice. We also note that the defence industry with pan-EU supply chains that include the UK will be impacted by the new trade barriers likely to arise when it leaves the Customs Union and Single Market, which may diminish the attractiveness of UK companies as partners in the eyes of EU industrial consortia in EU-funded research and development projects.

7.11In January 2018 the Minister told us that it was the Government’s position that UK undertakings should remain fully eligible for funding from the EDIDP during the transitional period (due to last until the end of 2020), in view of the fact that the UK will contribute to the EU budget in 2019 and 2020 as if it were still a Member State. However, article 122(7)(b) of the draft Withdrawal Agreement, published in March 2018, allows the EU to exclude the UK from specific programmes during transition in certain cases, namely where Union legislation restricts access to “security related sensitive information” only to EU-based natural or legal persons. This provision is shaded in green in the published text, indicating “the text is agreed at negotiators’ level”. In other words, the Government has agreed to it in substance subject only to minor technical modifications. We have previously concluded that this provision would allow the EU to exclude the UK from the military applications of the EU’s Galileo satellite navigation system during the transition.63

7.12Moreover, as we noted in our previous Report on the EDIDP, the practical level of cooperation by UK industry in EU-funded projects under the Programme after the transitional period also remains highly uncertain. While the eligibility requirements for the EDIDP after 2020 will need to be set down in a new Regulation before the end of 2020, it is likely that they will in substance be the same as those to be agreed by the Parliament and Council in the coming months. As such, we note that the EDIDP Regulation is unlikely to contain a formal mechanism for a non-EU country to seek full ‘membership’ of the Programme.64 While the EU’s civilian research programme, Horizon 2020, allows ‘association’ of a third country (which means that, in return for a financial contribution by its taxpayers, entities from that country can participate in EU-funded projects as if they were based in a Member State), the EDIDP Regulation contains no such mechanism.

7.13By default therefore, the involvement of UK companies in any EDIDP-funded projects—whether directly or through an EU-based subsidiary—will be assessed by the EU on a case-by-case basis (including during the transitional period, if the UK is to be considered a ‘third country’ for the purposes of the EDIDP). Each funding decision where the project involves a British company would have to meet the additional requirements that apply when a ‘third country’ is involved, and be approved by a qualified majority of Member States. Similarly, unless the Government can secure a different arrangement, there will be no participation of the Ministry of Defence in the governance structures of the European Defence Fund either during or after the post-Brexit transition. Any involvement by UK companies in the EDIDP after Brexit would be ad hoc and based on mutual agreement between the EU and the UK.

7.14However, as has been suggested by the Centre for European Reform,65 the UK could seek to secure a higher level of access to the European Defence Fund (including both the research and capability components) via an international agreement (treaty) between the UK and the EU. This would likely require an annual contribution to the European Defence Fund, with the manner of its calculation a matter for negotiation. Any formalised agreement on European Defence Fund participation, however, would have potential consequences for the continued integration of the UK’s defence capabilities with those of the EU-27, even though the Government would have very limited influence over the direction of the Common Security & Defence Policy or even the way in which EDF funding was spent.66 It is therefore imperative the Ministry of Defence set out its detailed proposals for what it has called the possible “models for participation” for the UK’s continued involvement in the EDIDP, especially—as we have noted—the Programme’s legal framework does not contain a model ‘third country’ mechanism the UK can seek to use.67

7.15In view of the timetable for formal adoption of the EDIDP Regulation—expected to take place in summer 2018 after informal agreement between the co-legislators in May or June—we expect to receive a further update from the Minister before too long. In addition to the Government’s assessment of the outcome of the trilogue process, we ask that the Minister’s next update to Parliament on the EDIDP negotiations also clarifies:

7.16In the meantime, we retain the proposal under scrutiny and also draw these developments to the attention of the Defence Committee and the Business, Energy and Industrial Strategy 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 + ADD 1, COM(17) 294.

Previous Committee Reports

First Report HC 301–i (2017–19), chapter 30 (13 November 2017) and Twelfth Report HC 301–xii (2017–19), chapter 10 (31 January 2018).

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

54 The EDIDP is one half of the European Defence Fund. The other half, the European Defence Research Programme (EDRP), will finance the earlier R&D stages of new defensive technology.

55 These wider efforts include for example Permanent Structured Cooperation on defence between 25 EU countries, the establishment of a Military Planning & Conduct Capability Unit for advisory EU military missions, and the launch of the ‘research’ window of the European Defence Fund.

561 = £0.88415 or £1 = €1.13103 as at 28 February.

57 See in particular our Reports of 13 November 2017 and 31 January 2018.

58 Letter from Guto Bebb to Sir William Cash (17 April 2018).

59 See European Parliament document A8/2018/37.

60 The European Commission tabled a proposal for the EU’s overall long-term budget for the 2021–2027 period, known as the Multiannual Financial Framework, on 2 May 2018. A specific proposal relating to the long-term future of the EDIDP is expected on 12 June.

61 The formal European Commission proposal for the European Defence Fund—which will succeed both the existing Preparatory Action on Defence Research and the 2019–2020 EDIDP—is due in late June 2018.

63 See our Report of [date] on Galileo and the post-Brexit transitional period.

64 See our Report of 2 May 2018 for more information on the UK’s options for participation in the EU’s civilian Framework Programme for Research after Brexit.

65 Centre for European Reform, “Plugging in the British: EU defence policy“ (April 2018).

66 The Government has previously told us in January 2018: “From the Government’s perspective, we recognise that one option could be a financial contribution in return for some kind of special status in the European Defence Fund, however, this has yet to be explored in any detail with the European Commission and the remaining Member States. Subject to the outcome of these discussions we will make an assessment of the available options, taking into our account our political, capability and industrial interests.”

67 See the Government’s policy paper, “Framework for the UK-EU Security Partnership“ (9 May 2018), p. 37.

Published: 15 May 2018