Not cleared from scrutiny; Minister invited to give evidence; drawn to the attention of the Business, Energy and Industrial Strategy, Defence and Exiting the EU Committees
Proposal for a Regulation establishing the European Defence Industrial Development
Article 173 TFEU; ordinary legislative procedure; QMV
Ministry of Defence
(38831), 10589/17 + ADD 1, COM(17) 294
8.1As part of wider efforts towards a ‘European Defence Union’, the EU’s Member States and the European Parliament have been engaged in discussions about the establishment of a , which will for the first time fund research & development of new military technology from the EU budget to underpin the Union’s collective defensive capabilities.
8.2The proposed Fund will consist of a European Defence Research Programme (the ‘research window’, funding the early stages of the research cycle) and a European Defence Industrial Development Programme or EDIDP (the ‘capability window’, which will provide finance for the development of prototypes and other stages of development of new technology). In anticipation of the establishment of the full fund under the next long-term EU budget (2021–2027), the Commission laid the groundwork for preparatory versions of both the research and development ‘windows’. A small-scale €90 million Preparatory Action on Defence Research (PADR) was launched in 2017, and that same year the Commission published the for the much larger defence industrial programme for 2018–2020 (with a budget of €500 million or £438 million).
8.3The Government has the creation of the European Defence Fund in view of the perceived growth opportunities and economies of scale it offers for the UK’s defence industry. In the context of Brexit, it has focused efforts in the negotiations on the industrial component of the Fund on the eligibility criteria for “third country” companies, to provide a mechanism for participation by the UK defence industry in projects funded by the Programme after Brexit (and when the UK would no longer be a contributor to the EU budget).
8.4When we last considered the proposal (), we retained it under scrutiny because the precise legal restrictions on the involvement of the UK’s industry in EDIDP-funded projects had not yet been agreed. Given the Government’s insistence that the UK should have a role to play in the European Defence Fund from its launch onwards, we specifically queried the UK’s position under the EDIDP and the Preparatory Action on Defence Research during the proposed post-Brexit transitional period from March 2019 onwards.
8.5Under the terms of the the UK would remain a contributor to the EU budget and eligible for EU funding as if it were a Member State from March 2019 until December 2020. However, article 122(7) of the Agreement allows the EU to exclude the UK from EU programmes involving “security related sensitive information” even during the transition (which has been at the root of the Government’s very public about the effective exclusion of UK firms from the next round of tenders under the EU’s Galileo satellite programme). We therefore asked the Minister to confirm whether the EU had indicated whether it would invoke the same provision to effectively prevent UK entities from meeting the eligibility criteria for the EDIDP and PADR during the transition, given that defence-related projects might by definition be considered to involve “sensitive” information. If so, that would effectively mean the UK would be paying into the EDIDP without any ability for UK entities to secure direct funding from the Programme.
8.6We have also expressed concerns about the Government’s vision for UK participation in the European Defence Fund beyond the transitional period, if it had no influence over the way in which the Fund would be used, or how the technology developed under its aegis could be deployed as part of the Common Security & Defence Policy. We therefore asked the Minister whether he would seek a formal agreement with the EU to give the UK ‘associate’ status within the . Such status, which already exists for the EU’s civilian research programme, allows third countries to make an annual financial contribution to make their researchers eligible for funding as if they were based in the EU (and gives its Government non-voting observer status on the relevant EU programming committees). The Government subsequently that it wanted to discuss with the EU precisely such a “model for participation” after Brexit (the implications of which we discuss further in paragraphs 8.4 to 8.17 below).
8.8However, the Minister (Guto Bebb) that some further technical changes had been made, which required further contacts with Member States and the Parliament to ensure the legal text was acceptable to both co-legislators. One of these related to the source of funding from the EDIDP within the EU budget (i.e. from which existing funding programmes money would be diverted). The two institutions eventually agreed that the €500 million funding for the Programme in 2018–2020 would be diverted by reducing funding for the Connecting Europe Facility for transport, energy and digital infrastructure; the EU’s space programmes; and the ITER nuclear fusion project, as well as by using the unallocated margin within the EU budget.
8.9Moreover, there was a last-minute addition to the legal text requiring the European Commission to be notified of “any transfer of ownership of, or granting of a licence in respect of, any of the results generated by the Programme” to an entity in a non-EU country. In particular, if such a transfer or licence was deemed to contravene the objectives of the EDIDP Regulation, then all funding from the EU budget would have to reimbursed. Following an intervention by France and the UK, the application of this notification requirement to granting of licences for the use of technology developed using EDIDP funding was removed.
8.10We have now considered the finalised legal text for the 2018–2020 EDIDP in the context of the UK’s withdrawal. This makes clear that, in cases where the UK were to be excluded from specific EDIDP-funded projects during the transitional period after Brexit (see above), the opportunities for involvement by UK entities would be severely restricted (as we described ). The Programme’s framework establishes limitations on ‘third country’ involvement that create a clear difference between funding eligibility for EU-based entities and for those based outside the EU, including for sub-contractors. As a result, the UK defence industry (for projects where it was considered a ‘third country’ during the transition) would only be able to participate in the EDIDP-funded programmes in one of two ways:
8.11As noted, the same restrictions apply to sub-contractors engaged by recipients of funding from the EDIDP (i.e. they would also have to meet the EU residence criteria to be allocated any of the EU funding by their contractor), including those who have access to ‘classified information’ to carry out their contractual obligations. All decisions to award funding from the 2018–2020 EDIDP will be made by the European Commission, subject to the approval of a qualified majority of Member States on a ‘programming committee’. Given its exit from the EU’s institutions, the UK will not have a vote on that Committee after 29 March 2019.
8.12The Minister’s also acknowledged the questions put to him in our (including with respect to the eligibility of UK firms to receive funding from the EDIDP during the transitional period, or whether they would be classified as ‘third country’ entities), which he said he “intend[ed] to address in his next correspondence”. The Minister’s subsequent gave further information about the eligibility of UK entities to receive funding from the EDIDP, noting in particular that the Government “has received no notification from the European Commission that it intends to apply the [article 122(7)] derogation to any EDIDP and PADR [i.e. European Defence Fund] projects” during the transitional period.
8.13As the UK will therefore—in principle—remain eligible for EDIDP funding during the transition as if it were a Member State, the ‘third country’ restrictions in the Regulation would not apply to UK entities (except for projects where the exclusion in the Withdrawal Agreement was specifically invoked). It is unclear how often this may occur in practice, or how it may affect overall levels of UK participation in the EDIDP. Similarly, although the Ministry of Defence told us in April that it would “be making the case for UK participation in the programme committees” during transition, the Regulation makes no provision for this and the draft Withdrawal Agreement makes any such attendance dependent on a case-by-case invitation from the EU. In any event, the Government will have no vote over decisions to award funding from the Programme during the transitional period.
8.14With respect to the UK’s long-term participation in the European Defence Fund from January 2021 onwards, there are further political hurdles to the level of participation sought by the Government.
8.15On 13 June 2018, the European Commission published its for the full European Defence Fund for the 2021–2027 period. This largely replicates the structure and eligibility restrictions agreed for the 2018–2020 EDIDP, but does create a mechanism for ‘association’ with the Fund for non-EU countries. Such status would essentially allow entities in a third country to be considered EU-based entities for the purposes of determining eligibility in return for an annual financial contribution. However, the Commission has proposed to restrict this option solely to the non-EU members of the European Economic Area (Norway, Iceland and Liechtenstein). To create an opportunity for UK ‘associate’ status, a broadening of the eligibility criteria would have to be agreed by the European Parliament and the Member States as part of the legislative process.
8.16Any estimate of the size of a UK financial contribution to the European Defence Fund after 2020 in return for ‘association’ is necessarily speculative, given that the proposal as tabled by the Commission makes no provision for UK participation in this way. However, participation by EEA countries would an annual contribution calculated by multiplying the EU’s own annual budget for the Fund (as decided by the European Parliament and the Member States) with a ‘proportionality factor’: the size of the third country’s economy compared to that of the EU plus that country combined (which, in the UK’s case, would be 16 per cent). As the European Defence Fund has a provisional budget of €13 billion for 2021–2027, that would equate to a hypothetical gross Norwegian contribution of €300 million; the UK, which its larger economy, would have to make pay €2.1 billion (£1.84 billion) over the same period, all other things being equal.
8.17For third countries participating in EU programmes, there is no equivalent to the UK rebate, or any direct link between the size of the contribution and the funding received. A similar approach in this instance would preclude any guarantee to prevent the UK from becoming a net contributor to the European Defence Fund (especially as individual funding decisions are made by the Commission and the Member States, with no voting rights for ‘associate’ countries). We note in this respect that Norway to the Preparatory Action for Defence Research (the existing precursor to the research component of the post-2020 European Defence Fund), but has not received any funding from it. Even if the eligibility criteria for ‘association’ to the Fund were widened to include the UK, the Commission has also been pushing for an “automatic correction” to any UK financial contributions so that it cannot be a major net beneficiary of an EU programme when it is no longer a Member State.
8.18We thank the Minister for the latest information on developments in the establishment of the 2018–2020 European Defence Industrial Development Programme. Its legal framework is now set to be adopted by the Member States in the Council and the European Parliament in the coming weeks. After repeated requests, the Government has now provided an assurance that the European Commission has not indicated that the EU intend to exclude the UK from full eligibility in the Programme during the transitional period. As such, UK entities are expected to be eligible for funding from the EDIDP during the post-Brexit transitional period, although such exclusion could still take place on a case-by-case basis “for security related reasons”. That is clearly a setback from the UK’s perspective. However, the practical implications of the possibility that the UK may be excluded from EDIDP-funded projects on an ad hoc on its overall levels of participation is not clear.
8.19Similarly, the Government has not been successful in securing political representation within the governance structures of the Programme during the transition. Consequently, the Government will have no direct influence over the decisions to award funding and therefore no direct way of ensuring the UK receives a fair share of the Programme’s expenditure commensurate with its contribution. This is not a problem that is unique to the EDIDP, as a similar lack of representation will occur for many other EU funding programmes to which the UK will remain a contributor after it ceases to be a Member State.
8.20Significant outstanding questions also remain with respect to the UK’s engagement with the European Defence Fund when it becomes fully operational in early 2021. As part of the Government’s negotiations for the future security partnership with the EU, the Ministry of Defence has confirmed it wants to discuss a form of ‘associate’ status with the Fund. This, if it builds on the existing precedent for EEA countries in the Commission’s proposal, would give the Government limited (non-voting) representation within its governance structures and formalise the eligibility of UK entities to secure funding from the EDF. In return, the UK would have to make a gross contribution that could run into hundreds of millions of pounds per year.
8.21However, as noted, the proposed European Defence Fund Regulation for 2021–2027 makes no provision for such status for the UK, as it reserves ‘associate’ status for EFTA-EEA countries (although a broadening of the scope could be introduced by the European Parliament and the Council during the legislative process). We will return to this matter in more detail when we receive an Explanatory Memorandum from the Ministry of Defence on the European Defence Fund proposals in the coming weeks.
8.22At present, there are therefore still significant political and legal unknowns about the precise parameters of UK involvement in the European Defence Fund from ‘exit day’ on 29 March 2019 onwards. Parliament may also want to consider how UK participation in the Fund could impact on the future direction of the Government’s security policies, given that the technology the Fund will support is meant to contribute to military capabilities to underpin the EU’s ““ (over which the UK will necessarily have very little influence once outside the Union’s foreign policy bodies). The Defence Committee may wish to consider the implications of these developments in more detail.
8.23With respect to the upcoming vote by Member States to formally establish the EDIDP for the 2018–2020 period in July, the Minister has requested we clear the proposal from scrutiny to enable the Government to vote in favour of the Programme. Although we take note of the Minister’s assurance that the Government “has received no notification from the European Commission that it intends to apply a derogation to any EDIDP or PADR projects”, the use of that derogation remains a possibility, and the UK would have very limited options to effectively challenge it if it was invoked.
8.24We do not believe it is acceptable that the UK should be contributing financially to a programme that funds the development of defensive technology by other countries, when UK entities may be unfairly, and unilaterally, excluded from even bidding for funding. While no EU country is guaranteed a fair return on its contribution to the Programme, their researchers will by default be eligible to bid for funding. Because the UK would always face the possibility of upfront exclusion, our industry would be uniquely disadvantaged. Therefore, we are not content to grant scrutiny clearance at this stage. However, we are asking the Minister to give evidence to us in person about the possibility of UK exclusion from the EDIDP during transition before the final vote on the Programme in the Council. We will reconsider our conclusions with respect to scrutiny clearance based on that evidence in the coming weeks.
8.25We draw these developments, including our initial observations on the UK’s status under the 2021–2027 European Defence Fund, to the attention of the Business, Energy & Industrial Strategy, Defence and Exiting the EU Committees. We will consider these matters again when we have heard from the Minister for Defence Procurement.
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), + ADD 1, COM(17) 294.
First Report HC 301–i (2017–19),(13 November 2017); Twelfth Report HC 301–xii (2017–19), (31 January 2018); and [add].
70 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.
71 See document C(2017)2262: .
72 €1 = £0.87680 Or £1 = €1.14051 as at 31 May 2018.
73 See for more information the Ministry of Defence’s Explanatory Memorandum on the proposal, and also our previous Reports on the EDF and the EDIDP.
74 Article 122(7)(b) of the draft Withdrawal Agreement. A published by the Government In May 2018 sought “explicit assurance that Article 122.7b in the draft Withdrawal Agreement relating to ‘security-related sensitive information’ shall not be applicable to the exclusion of the UK in relation to Galileo and EGNOS in the implementation period”. It is unclear at this stage whether the European Commission granted this assurance (although an absence of confirmation of this suggests it was not). The Government has not commented publicly on the possibility that Article 122(7)(b) could see the UK excluded from participation in the EDIDP as well.
75 We also noted that formal participation alone is no guarantee of a fair return in terms of investment. 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.
76 Letter from Guto Bebb to Sir William Cash (4 June 2018).
77 The specific diversions of funding agreed are as follows: €116.1 million (£101.7 million) from the Connecting Europe Facility; €108 million (£94.7 million) from the Galileo and EGNOS satellite navigation projects; €63.9 million (£56 million) from the ITER nuclear fusion project; €12 million (£10.5 million) from the Copernic earth observation project; and €200 million (£175.3 million) from the unallocated margin.
78 The ‘unallocated margin’ is the difference between an expenditure limit in broad headings of the EU’s long-term budget (the Multiannual Financial Framework) and expenditure actually committed from that heading.
79 The Government (unsuccessfully) requested that the text should be amended so that only subcontractors having access to “highly classified” (rather than simply “classified”) information would have to pass the funding eligibility tests.
80 The European Commission, however, has that “UK undertakings can be eligible [during the transition] unless, for security-related reasons, there would be a need to exclude UK undertakings on an ad hoc basis”.
81 from Guto Bebb to Sir William Cash (17 April 2018).
82 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.
83 In practice, given the lack of defence forces in Iceland and Liechtenstein, only Norway is likely to seek participation in the European Defence Fund.
84 The European Commission proposal for the next Framework Programme for Research introduces a new methodology for the calculation of the UK’s contribution specifically, increasing it beyond what it would pay under the ‘proportionality’ approach and instead linking the payments to the funding the UK received from the current Framework Programme while it was a Member State.
85 Norway’s contribution in 2017 was €585,000 (£512,000), derived from its proportionality factor of accounting for 2.31 per cent of the GDP of the EU and Norway combined against the EU’s budget for the PRAD for that year of €25 million (£22 million).
Published: 26 June 2018