Documents considered by the Committee on 11 July 2018 Contents

14European Defence Industrial Development Programme

Committee’s assessment

Politically important

Committee’s decision

Cleared from scrutiny; Minister invited to give evidence; further information requested; drawn to the attention of the Defence Committee

Document details

Proposal for a Regulation establishing the European Defence Industrial Development Programme aiming at supporting the competitiveness and innovative capacity of the EU defence industry

Legal base

Article 173 TFEU; ordinary legislative procedure; QMV

Department

Ministry of Defence

Document Number

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

Summary and Committee’s conclusions

14.1In June 2018, we last considered the proposal for the 2019–2020 European Defence Industrial Development Programme (EDIDP). This is the precursor to a fully-fledged European Defence Fund, which is due to become operational in early 2021. The EDIDP, and subsequently the Fund, will co-finance the industrial development stages of new military technology, especially prototypes, from the EU budget. The European Parliament and the Member States reached agreement on the legal framework for the Programme in May 2018, and it only awaits formal adoption by the Council before it can become operational. Ministerial approval is due to be granted by the Council on 16 July 2018.89

14.2The UK is due to leave the EU in March 2019, before the Programme is fully up and running. However, under the terms of the draft Withdrawal Agreement (WA) the UK would have a transitional period until 31 December 2020, during which it would contribute financially to the EU budget (and therefore the EDIDP), and in return UK researchers and companies would, in principle, be eligible to bid for funding from the Programme. However, we also understand that there are concerns in the defence industry about the intellectual property restrictions that limit the transfer of the “results” of EDIDP-funded projects to outside the EU, meaning industry uptake of funding for projects with the highest potential-added value is not yet guaranteed.90

14.3While the Government has consistently supported the creation of the EDIDP in view of the perceived growth opportunities and economies of scale it offers for the UK’s defence industry,91 we were unwilling to clear the proposal from scrutiny in June. In particular, we were concerned about the potential impact of Article 122(7)(b) of the draft Withdrawal Agreement, under which the EU can unilaterally exclude UK entities from eligibility under EU funding programmes where they run beyond the end of the proposed transitional period and involve access to “sensitive security-related information”. The UK’s imminent change to a ‘third country’ vis-à-vis the EU has already led the Commission to exclude UK entities from bidding for the most sensitive contracts under the Galileo satellite navigation programme, and we felt we were not yet in a position to assess whether the same exclusion might be applied to the UK under the EDIDP. If it did, that would effectively mean the UK would be paying into the EDIDP while UK entities would be ex ante limited in their ability to secure direct funding from the Programme.92

14.4Following a specific request by the Committee for more information, by letter of 13 June 2018, the Minister for Defence Procurement (Guto Bebb) acknowledged that Article 122(7)(b) could be used to exclude the UK from specific projects funded by the EDIDP on a case-by-case basis, but adding that that the Government “has received no notification from the European Commission that it intends to apply the [article 122(7)] derogation to any EDIDP […] projects” during the transitional period.93 By that point, it was also clear that the EDIDP Regulation was due to be formally adopted by Ministers at the General Affairs Council on 16 July.

14.5As we did not feel the Minister’s letter offered adequate reassurance about the ability of UK industry to benefit from the Programme, we wrote back to the Minister on 27 June to clarify in particular:

14.6The Minister provided a further update ahead of the Council vote by letter dated 2 July 2018. He argues that the Committee’s concerns about potential exclusion of the UK are unfounded, and the Government is confident that the UK will be an involved participant in the EDIDP for a number of reasons:

14.7The Minister also referred to our question on EDIDP funding for specific projects related to the EU’s Permanent Structured Cooperation on defence (of which the UK is not a member).97 However, he is unable to clarify whether eligibility of UK industry to bid for EDIDP money related to a PESCO project would require the UK to be a formal participant in the relevant PESCO workstream. He notes that this will depend on “arrangements for third state participation in PESCO” (which the twenty-five participating Member States are due to adopt by means of a Council Decision before the end of 2018).98

14.8Overall, therefore, the Government takes the view that there are not any “significant potential implications” of Article 122(7)(b) of the Withdrawal Agreement (WA) for UK participation in EDIDP. This, in the Minister’s view, justifies his Department’s decision not to pro-actively inform Parliament of the potential interplay between the EDIDP and the draft Withdrawal Agreement (until explicitly requested to do so on 9 May by this Committee). It is noteworthy in this respect that we were told by Ministry of Defence officials on 5 June, nearly a month after that request, that questions about the Programme, Article 122(7)(b) and transition were “wider points about the EDIDP and where it sits within the overall system, some of which is yet to be fully determined particularly relating to the draft Withdrawal Agreement”. More recently, on 26 June, the Minister appeared before the Science & Technology Committee and was asked specifically about the potential exclusion of the UK from certain EDIDP projects. He responded that “nobody from the MOD or from the Government is claiming that this is easy, but these are things that we should resolve, and need to resolve. The good will that we are showing in relation to these defence projects [such as the EDIDP] shows that we want to be involved”.99

14.9In light of the additional information provided in his letter of 2 July, the Minister urges the Committee to release the file from scrutiny because he considers the risks to UK industry to be limited, while the potential gains of constructive UK engagement in the EDIDP—and by extension the full European Defence Fund from 2021—are larger:

“I urge you to consider that the best way for the UK to gain some benefit from this is with willing and enthusiastic engagement with the EDIDP. This will put us in a strong position to set the agenda for the capability development landscape in Europe and clearly demonstrate the innovation and strength of the UK defence industry. […] I fear that an abstention in that vote will send a message that the UK is not an enthusiastic participant, will undermine the interest already shown by other Member States in working with us in EDIDP and undermine our stated commitment to European security and defence.”

14.10The Minister then indicates that, should the Committee not release the file from scrutiny before the Council vote, the Government intends to override scrutiny to support its adoption for the above reasons.

14.11The Minister’s latest letter provides a number of detailed reasons to underpin the Government’s view that the possible risks of UK industry exclusion from the EDIDP during the transition are very limited. We agree, as we have done consistently, that the Government can reasonably support this Programme, in terms of its potential benefits for UK defence industry over the limited lifespan of the EDIDP during the post-Brexit transition (and potentially in the longer term, when the UK’s participation may be carried over into the full European Defence Fund).

14.12However, we find the way that parliamentary scrutiny has been handled by the Ministry of Defence on this file in recent months to be extremely regrettable. There is a disconnect between the information we received from the Ministry of Defence in early June, when we were told that the impact the Withdrawal Agreement could have on UK participation in the EDIDP was “yet to be fully determined”, and the Minister’s letter of 2 July, which implies that the concerns we have raised were already considered by the Department earlier this year and subsequently dismissed as unfounded for the reasons outlined in paragraph 14.6 above. However, we were clearly right to raise concerns: the Minister himself told the Science & Technology in late June 2018 that “nobody from the MOD or from the Government is claiming that this is easy, but these are things that we should resolve, and need to resolve”.

14.13We would note that our concern is not, and has never been, the fact that UK contributions to the EDIDP during the transition would also, to a greater or lesser extent, benefit the defence industries of other EU Member States. The very nature of the EU budget means that UK contributions, both before, during and after transition, will be pooled and the UK will not always be a net beneficiary of every EU programme in which it participates. This delivers economies of scale and cross-border collaboration which the UK (or other Member States) could not achieve by itself. As we have said, the Government is entitled to take the view that UK participation — especially where it lays the groundwork for involvement in the post-2020 European Defence Fund — is on the whole beneficial (although others may disagree).

14.14Rather, our concern was specifically that UK industry could be unilaterally excluded from meeting the eligibility criteria for EDIDP funding in an unknown proportion of calls for proposals, under Article 122(7)(b) of the draft Withdrawal Agreement. This possibility, which the Minister does not dispute (but argues will not arise in practice for political and legal reasons) was clearly a material factor that Parliament should consider when scrutinising the proposal and the Government’s negotiating position in Brussels.

14.15While the Government may have internally reached the conclusion that this risk of exclusion was too limited to seriously jeopardise full UK participation in the EDIDP during the transition, those issues should nevertheless have been proactively raised by the Department as part of the scrutiny process when the draft Withdrawal Agreement was published. In the Minister’s own words, there remains a “need to resolve” the question of UK participation once the Programme is actually operational. We remain of the view that, while the overall UK financial contribution to the EDIDP (an estimated £55 million towards grants in 2019 and 2020) may be relatively small, the purpose of that funding — and the very specific additional conditions that the WA allows the EU to attach to UK participation — clearly merited being brought to Parliament’s attention. It remains unclear to us why this was not done earlier.

14.16Without the context provided by the Minister’s latest letter—which it took considerable efforts to extract—we could only reasonably form the conclusion that UK industry faced the risk of being excluded from meeting the eligibility criteria for an unknown proportion of EDIDP projects in 2019 and 2020, while the Government would still make a full financial contribution. This would undeniably put British industry in a worse position than companies in any of the EU-27 countries also participating in the Programme.100

14.17However, the Minister’s letter of 2 July has at last provided the basis for the Government’s confidence about the negligible practical impact of article 122 WA on UK participation in the EDIDP. This argues the actual risk of exclusion is very low—but not eliminated—due to the limited lifespan and financial endowment of the EDIDP, coinciding fully with the proposed post-Brexit transition period; the likely value of the UK’s contribution to the Programme as a major military player and investor in defence technology; and the timing of the adoption of the EDIDP Work Programme, which allows for UK input.

14.18In light of these assurances, and our concerns about the Ministry of Defence’s approach to parliamentary scrutiny notwithstanding, we now clear the proposal from scrutiny to enable the Government to support its adoption at Council on 16 July.

14.19However, we ask the Minister to give oral evidence to our Committee as soon as practicable after the 2018 summer recess in light of:

14.20We also ask that the Minister to write to us before the summer recess in reply to the following questions:

14.21We draw these developments to the attention of the Defence Committee and other interested parties across the House.

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); Twelfth Report HC 301–xii (2017–19), chapter 10 (31 January 2018); Twenty-Seventh Report HC 301–xxvi (2017–19), chapter 7 (9 May 2018); and Thirty-Second Report HC 301–xxxi (2017–19), chapter 8 (20 June 2018).


89 The Regulation was endorsed by the European Parliament at its Plenary Session on 3 July 2018.

90 Articles 7 and 12 of the proposed EDIDP Regulation.

91 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.

92 Non-EU entities are excluded from receiving funding directly from the EDIDP, unless it is for an EU-based independent subsidiary. We set out the conditions for ‘third country’ participation in more detail in our previous Reports on the EDIDP.

93 The European Commission, however, has noted 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”.

94 The EU’s budgetary system of commitments and payments means that grant funding could be awarded in 2020 but not fully paid to recipients until 2021 or 2022.

95 The Minister’s letter notes that the Commission presentation “does not consider that EDIDP is a time and finance limited regulation”. However, the Commission — having proposed the EDIDP — would clearly be aware that the Programme and the transitional period are due to end on the same day. It nevertheless felt compelled to state explicitly that UK entities could be excluded from meeting the eligibility criteria for funding on an ad hoc basis, which presumably means it remains an option even if no formal notification to that effect has been made.

96 The Minister’s letter also says that “it is also not clear what power the Programme Committee will have beyond setting the [Work Programme] by December 2018”, although we understand the finalised legal text requires funding decisions to be awarded by the Commission by means of Implementing Acts. Those must be approved by a qualified majority of Member States on that Committee. The UK will lose its voting rights on that Committee on 29 March 2019, meaning its influence over the actual award decisions will be limited after that point will be limited. This is not, however, a consequence of a UK-specific exclusion under the draft Withdrawal Agreement, but rather the general position of any ‘third country’ which participate in EU programmes. For example, Switzerland and Norway act as observers on the Programming Committee for the civilian Framework Programme for Research, but have no voting rights over work programmes.

97 All Member States except Malta, Denmark and the UK are participants in PESCO. An initial list of 17 PESCO projects has been agreed, but it is not yet clear how the EDIDP will be used in practice to finance PESCO-related projects.

98 See for more information on PESCO our Report of 28 March 2018.

99 Oral evidence by Guto Bebb MP (26 June 2018), Q70.

100 We should also take into account that the UK, uniquely among contributing nations, will lose its vote on the EDIDP Programming Committee— and therefore over individual funding decisions — in March next year).




Published: 17 July 2018