Documents considered by the Committee on 12 September 2018 Contents

26European Defence Fund 2021–27

Committee’s assessment

Politically important

Committee’s decision

Not cleared from scrutiny; further information requested; drawn to the attention of the Business, Energy & Industrial Strategy and Defence Committees

Document details

Proposal for a Regulation establishing the European Defence Fund 2021–27

Legal base

Articles 173(3), 182(4), 183 and 188 TFEU; ordinary legislative procedure; QMV

Department

Ministry of Defence

Document Number

(39894), 10084/18 + ADDs 1–2, COM(18) 476

Summary and Committee’s conclusions

26.1Since 2017, the EU has been setting aside part of its budget for investment in research & development of military technology, such as encrypted software and drone technology, as part of a wider effort to make the Union a more cohesive actor in military affairs.286 This innovation is currently in its early stages: a small-scale defence research programme287 was launched in 2017, and a two-year industrial development fund for the defence industry— the EDIDP—is due to become operational in early 2019. Both strands are linked to the EU’s current budgetary cycle,288 and will therefore end in December 2020.

26.2A fully-fledged European Defence Fund is due to be launched in January 2021, as part of the EU’s next Multiannual Financial Framework (MFF). The European Commission presented a formal Regulation to that effect on 13 June 2018. The Fund has a provisional budget of €13 billion (£11.6 billion) for the period from 2021 until 2027; its general objective is to “foster the competitiveness, efficiency and innovation capacity of the European defence industry” and in doing so contribute to EU’s “strategic autonomy” in military matters. Financial assistance would normally take the form of grants, although it could also take the form of a public procurement exercise (after which the resulting results would be owned by the European Union).

26.3Despite the UK’s exit from the EU, the Government has supported the establishment of the Defence Fund, citing the benefits to Europe’s defensive capabilities, as well as the opportunities and economies of scale it could afford to the UK defence industry.289 It has also insisted that it should be complementary to other European defence initiatives, and in particular NATO. A May 2018 policy paper confirmed that the Government wanted to discuss “models for participation of the UK, and UK entities” in the European Defence Fund after Brexit. In his June 2018 Explanatory Memorandum on the formal proposal to establish the Fund, the then-Minister for Defence Procurement (Guto Bebb)290 reiterated that it “should be open to third parties” but stopped short of committing the UK to seeking formal participation in the EDF.291

26.4However, UK participation in the Fund—if the Government ultimately decides it would offer value for money and would benefit the UK’s defence policy—is complicated by its decision to leave the European Union. During the proposed post-Brexit transitional period, due to last from 29 March 2019 until 31 December 2020, the UK would remain a contributor to the EU budget and consequently a participant in all EU funding programmes (including, in principle, the current small-scale precursor programmes to the Defence Fund referred to above).292 If it leaves the Union without a Withdrawal Agreement and transitional period, UK participation in all EU programmes would cease abruptly on 29 March next year.

26.5Irrespective of the outcome of the withdrawal process, any UK participation in the full European Defence Fund from 2021 onwards would need to be negotiated afresh as part of the discussions on its future economic and security partnership with the EU.293 The Withdrawal Agreement offers no guarantee of UK involvement in any EU programmes after the end of the transitional period in December 2020. Such participation, including in the Defence Fund, will be highly dependent on the overall political context. If the UK had left the EU without a formal Withdrawal Agreement, the remaining Member States can be expected to require resolution of the outstanding issues related to Brexit, not least the financial obligations vis-à-vis the EU budget (which the Government has accepted exist), before they would allow the UK as a ‘third country’ to formally participate in any EU-funded initiatives.

26.6If the Government had decided to seek participation in the Defence Fund, and the overall political relationship with the EU was conducive to this objective, there are further hurdles. The Commission proposal for the EDF reserves the ability for non-EU countries to be ‘associated’ with the Fund to the non-EU Member States of the European Economic Area only. As a result, UK entities could only participate in projects financed by the EDF under a very limited set of circumstances, primarily via EU-based subsidiaries and subject to numerous constraints (see “Background” below). Although the Minister’s Explanatory Memorandum completely ignores this provision, his successor (Andrew Stuart) subsequently clarified that the Government is working to persuade the European Parliament and the Council to make it easier for ‘third countries’ to be involved in EDF-funded projects (whether through the formal ‘association’ process or otherwise). If not, the Minister warns that the Fund “could be implemented in a way which is very inward-looking and protectionist” and ultimately jeopardise its ability to “deliver the best capabilities at the best value for money for ourselves and our European partners”.294

26.7If the UK were to be able to obtain ‘association’ with the European Defence Fund as a ‘third country’ under the final legal framework, it would be required to make a financial contribution. Under the model that applies to the European Economic Area countries when they participate in EU programmes, the UK’s putative gross contribution—taking the proposed budget of €13 billion over from 2021 to 2027—could amount to €2.1 billion (£1.9 billion) over that period. It is unclear how the UK could secure a fair return for UK organisations seeking funding from the Fund to match its contribution, as the remaining Member States would take grant decisions without any direct involvement by the UK Government.

26.8The Government has strongly hinted that it wants to maximise opportunities for UK involvement in the new European Defence Fund after Brexit as a ‘third country’. While the current legal text makes such participation very difficult, that may change as the European Parliament and the remaining Member States amend the legal framework for the Fund ahead of its scheduled launch in early 2021. In particular, should formal UK ‘association’ with the EDF become both legally possible and a Government objective, we would need robust reassurances about the UK’s likely lack of influence over the way the Defence Fund was managed.

26.9In particular, as a non-Member State there would be no formal voting rights for the UK on the Committee where the Fund’s work programmes and individual grant decisions must be approved by the remaining Member States. As such, it is not clear how the Government—if it had successfully sought ‘associate’ status—could ensure that the Fund’s general direction chimes with UK priorities, or even that it would not end up being a net contributor to the Fund (and therefore effectively end up subsidising the defence industries of other countries). Similarly, given the Fund’s objective of enhancing the EU’s ‘strategic autonomy’, it would be necessary to ensure that any technology developed under the auspices of the EDF could be used by the UK autonomously and separately from the other Member States (whether within the context of the Common Foreign & Security Policy or not).

26.10The Commission has also proposed to revive a restriction, mooted but ultimately not included in the EDIDP precursor programme,295 that even the granting of a licence to a ‘third country’ to use defensive technology developed with EU funding could be subject to “all funding….. be[ing] reimbursed” if the licence contravene[s] the defence and security interests of the Union and its Member States. This could limit the extent to which technology developed with support from the EDF could be licensed to the UK defence industry, even if British companies had been involved in the original project via an EU-based subsidiary. Should the UK obtain ‘association’ status, transfers and licensing would be unrestricted (but is unclear what the situation would be if it withdrew from the Programme at a later stage in relation to EDF projects begun while the UK was still a participant).

26.11Given the Government’s desire to secure participation in the European Defence Fund after Brexit, and the consequent uncertainty about the legal and financial conditions for such involvement, we retain the proposal under scrutiny.

26.12We ask the Minister to keep us informed about developments in the legislative process, with a particular focus on the conditions for, and limitations on, ‘third country’ participation in the Fund. In addition, we request that his next update to us clarify in which circumstances the Fund would be used for a public procurement exercise of both research and development actions, and consequently what type of military technology developed with EDF funding could end up being owned by the European Union itself.

26.13We also draw the document to the attention of the Defence and Business, Energy & Industrial Strategy Committees.

Full details of the documents

Proposal for a Regulation establishing the European Defence Fund: (39894), 10084/18 + ADDs 1–2, COM(18) 476.

Background

26.14In the last few years, the EU and its Member States have committed to closer cooperation in military matters as part of a ‘European Defence Union’.296 Examples of such collaboration include:

26.15To improve the industrial base that underpins the EU’s collective military capabilities, the Member States and the European Parliament have agreed to the establishment of a European Defence Fund. This investment programme for the defence industry would operate under the EU’s next Multiannual Financial Framework, which takes effect in January 2021 and runs until the end of 2027. The Fund would be the EU’s first comprehensive financial instrument to increase its Member States’ defence capabilities, “ranging from the research phase to the acquisition phase of military equipment and technologies”.298

26.16In anticipation of the establishment of the full fund from 2021 onwards, the Commission and Member States have already carried out extensive preparatory work and pilot projects. A small-scale €90 million Preparatory Action on Defence Research (PADR) was launched in 2017, which will fund the early stages of research into new defence technology. That same year, the Commission published the draft legal framework for the much larger European Defence Industrial Development Programme (EDIDP) to invest in the later stages of the development cycle, with a budget of €500 million (£438 million) between now and end 2020. The Committee cleared the latter proposal from scrutiny at its meeting on 11 July 2018, and a detailed work programme is due to be approved by Member States by the end of this year.

26.17The UK Government has consistently supported the creation of the European Defence Fund, including the preparatory works, because of the perceived growth opportunities and economies of scale it offers for the UK’s defence industry. In the context of Brexit, the Ministry of Defence has focused its efforts in the negotiations on the EDIDP —as the precursor and template for the full Fund from 2021 onwards—on the eligibility criteria for “third country” companies, to provide a mechanism for participation by the UK defence industry in projects funded by the European Defence Fund after Brexit (and when the UK would no longer be a contributor to the EU budget and have no default right to participate in the Fund).

The Commission proposal for the European Defence Fund 2021–27

26.18The European Parliament and the Member States concluded their negotiations on the short-term European Defence Industrial Development Programme in June 2018, and the first funding will likely be awarded in early 2019.Building on the outcome of the EDIDP negotiations, the European Commission tabled a formal proposal to establish a fully-fledged European Defence Fund for 2021–27 on 13 June 2018. This would amalgamate both the EDIDP and the Preparatory Action on Defence Research (PADR) into a joint legal framework, thereby providing a single funding instrument for both research and development of defence technology.

26.19The Commission’s legislative proposal is closely modelled on the legal framework for the 2019–20 EDIDP, as recently adopted. The general objective of the Fund would be to “foster the competitiveness, efficiency and innovation capacity of the [European] defence industry”, by supporting cross-border research projects aimed at “introducing new defence products and technologies” and “development projects of defence products and technologies” that would contribute to the EU’s defence capability priorities as agreed by the Member States. Ultimately, the European Commission says, this should “lead to greater interoperability between Member States’ capabilities” and contribute to the EU’s “strategic autonomy” in military matters.

26.20Funding from the EDF would therefore be invested only in the research & development phases of the defence industry: the Fund would not co-finance the actual acquisition of military technology by Member States, or make granting of funding conditional on a commitment to joint procurement of the resulting technology by groups of EU countries.299 However, the Commission is in the process of establishing a voluntary “Financial Toolbox” that aims to support EU countries when investing in their defensive capabilities, effectively a set of standardised financial tools to facilitate joint procurement exercises for defence equipment by clusters of Member States.

26.21The European Defence Fund has a provisional allocation of €13 billion (£11.6 billion) from the EU budget for its first seven years, which the Commission proposes be split between research—€4.1 billion—and industrial development—€8.9 billion. The final financial allocation of the Fund, and its split between the research and development strands, will be decided by the Member States and the European Parliament as part of the wider negotiations on the EU’s expenditure limits and spending priorities under the EU’s 2021–27 Multiannual Financial Framework. If the Commission’s proposed budget is accepted, “the Fund’s contribution will account for approximately 28% of the total defence R&D effort in the EU” (minus the UK as departing Member State).300 Out of all proposed EU expenditure over the next MFF period, the Defence Fund would account for 1.5 per cent.

Practical implementation of the European Defence Fund

26.22The European Defence Fund could finance the majority—ranging from 80 to 100 per cent—of the costs of eligible projects. The major exception to this generous co-financing rate would be projects relating to the development of system prototypes, where the rate would normally be a maximum of 20 per cent. However, for developments projects that are part of ‘Permanent Structured Cooperation—the new political framework within which twenty-five EU Member States set themselves joint targets for increasing their defensive capabilities—the co-financing rate could be increased by 10 percentage points. EU funding could also be increased if a project is supported by a significant number of small- and medium-sized enterprises.

26.23Funding decisions would be made by the European Commission, but subject to the support of a qualified majority of Member States for each individual grant.301 Beneficiaries would have to work together in a consortium to secure funding, consisting of at least three separate organisations based in three different Member States. The EU’s national governments would also have to sign off on an annual work programme for the Fund each year. Funding would normally take the form of grants, but could also be awarded as part of a public procurement exercise (in which case results would be owned by the EU, while Member States would have access or licensing rights to the results free of charge.

Eligibility to receive funding from the Defence Fund

26.24Given the obvious sensitivities around defence capabilities, only organisations based in EU Member States or an ‘associated country’ (see below) would be eligible to apply for funding under both the ‘research’ and ‘development’ strands of the Fund. The same would apply to any sub-contractors302 involved in an EDF-funded project successful applicants want to involve.

26.25To ensure that funding is not channelled into non-EU entities—which could give foreign powers access to sensitive research and development projects—applicants and their sub-contractors would need to have “executive management structures”, and be ultimately controlled from an EU Member State or an ‘associated’ country. Similarly, all infrastructure, facilities, assets and resources ………. used in actions supported by the Fund” have to be located within an EU or associated country, and beneficiaries (and their subcontractors) should in principle cooperate “only with legal entities established in the Union or associated countries” and not controlled by non-associated third countries or non-associated third country entities.303

26.26As can be seen, full involvement (‘association’) with the Defence Fund is possible for non-EU countries, provided they have a legal agreement with the EU to cement this status. However, under article 5 of the Commission proposal, ‘association’ is open only to non-EU members of the European Economic Area (Norway, Iceland and Liechtenstein), “in accordance with the conditions laid down in the EEA agreement”. In practical terms, that means these countries could inform the EU they wanted to be a participant in the Fund, requiring them to make a proportional financial contribution. Unlike the Commission’s proposals for other EU funding instruments under the 2021–27 MFF, such as the Framework Programme for Research, the EDF contains no mechanism for association by other ‘third countries’ (such as the UK). If an EEA country successfully obtained ‘association’, its Government would be represented on the Committee that scrutinises the Fund’s Work Programme and individual grant decisions but without voting rights.

Possibilities for UK participation in the European Defence Fund

26.27For ‘third countries’ that cannot seek association under the Commission proposal, eligibility for EDF funding would be limited to any EU-based subsidiaries of parent undertakings controlled from that third country. Furthermore, these subsidiaries would only be eligible for funding “if this is necessary for achieving the objectives of the [project] and provided that […] participation will not put at risk the security interests of the Union and its Member States”. They would also need to guarantee that any classified information that forms part of the EDF project is not shared with any entity outside the EU or an ‘associated country’.

26.28This partial derogation to the eligibility criteria—based in the EU, but controlled from elsewhere—is not available to subcontractors: to be eligible for funding, they must be based in, and controlled from, the EU or an associated country. There appears to be some very limited leeway for UK-based or controlled companies to act as sub-contractors vis-à-vis a beneficiary from the European Defence Fund, provided the costs of their contribution are not paid for by the Fund and they do not have access to classified information related to the project.

26.29While the proposed Regulation would allow the use of “infrastructure, facilities assets, and resources” located outside of the EU or an associated country (e.g. in the UK) for use in an EDF-funded project, this would be discouraged in practice because:

26.30Moreover, the Commission has proposed that the ex-post use of technology developed with EDF funding could be restricted. Under article 25 of the draft Regulation, the Commission has to be notified of “any transfer of ownership or grant of a licence to non-associated third countries”. If the transfer or licence contravened the “defence and security interests of the Union and its Member States”, this would “necessitate reimbursement of the funding provided under the Fund”.305

26.31The different eligibility criteria for different categories of organisations are set out schematically in the table below. ‘Entity’ refers here to both direct beneficiaries of the Defence Fund, as well as their sub-contractors.306

Eligible to a beneficiary of EDF funding

Necessity test306 to receive funding

Can act as sub-contractor to a beneficiary

Use of facilities and assets outside of the EU or an ‘associated country’

Entity based in, and controlled from, the EU or an ‘associated country’

Yes

No

Yes

Yes, if owned by the beneficiary or sub-contractor

Entity based in the EU or an ‘associated country’ but controlled from elsewhere (e.g. the UK)

Yes

Yes

Yes

Yes, if owned by the beneficiary or sub-contractor

Entity based outside the EU or an ‘associated country’ (e.g. the UK)

No

Not applicable

No

Not applicable

The Government’s position on the Commission proposal

26.32The then-Minister for Defence Procurement (Guto Bebb) submitted an Explanatory Memorandum on the EDF proposal in June 2018. It reiterates the Government’s view that EU action in support of national defence capabilities are “appropriate” because “the resources involved […] are regularly too high for countries to pursue individually”. He also noted, however, that article 346 of the Treaty on the Functioning of the EU (TFEU) allows Member States to “take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material”. The European Defence Fund could not interfere with that national autonomy.

26.33The Government has made plain on several occasions that it believes continued UK participation in the European Defence Fund could be beneficial to both sides. In September 2017, the UK Government said it “could […] consider options and models for participation in the […] European Defence Fund” as part of the new ‘deep and special partnership’.307 A subsequent policy paper on the “UK-EU security partnership” confirmed that the UK wanted to discuss “models for participation of the UK, and UK entities” in the European Defence Fund. In his June 2018 Explanatory Memorandum on the proposal, the then-Minister for Defence Procurement (Guto Bebb)308 reiterated that the Fund “should ……. be open to third parties”. He stopped short of committing the UK to seeking formal participation in the EDF, saying “the exact terms” (including a financial contribution) would be “subject to negotiation”, “where it would be in the mutual interest of the UK and the EU for the UK to participate”.

26.34Although the Minister’s Explanatory Memorandum completely ignored the provisions on ‘association’ by third countries, his successor (Andrew Stuart) subsequently clarified that the Government is working to persuade the European Parliament and the Council to widen the eligibility criteria for ‘third countries’ to participate in projects funded by the EDF, whether through the formal ‘association’ process or otherwise. The Regulation as drafted, he said, could see the Fund “implemented in a way which is very inward-looking and protectionist” and make it “unattractive for third parties to participate”. Ultimately, this could “damage the ability for the programme to deliver the best capabilities at the best value for money for ourselves and our European partners”.309

The implications of Brexit for UK participation in the European Defence Fund

26.35The Committee has only recently cleared from scrutiny the immediate precursor to the 2021–2027 European Defence Fund, the 2019–2020 European Defence Industrial Development Programme (EDIDP). In the course of our scrutiny work on that proposal, we encountered significant difficulties in extracting information from the Ministry of Defence about the implications of, and limitations on, UK participation in the Programme. In particular, we expressed concern that under the terms of the draft Withdrawal Agreement, the UK would be required to pay into the EU budget—and therefore the EDIDP—but could be excluded from participation in specific projects if they were scheduled to last beyond the end of the post-Brexit transitional period.

26.36In relation to the post-2020 European Defence Fund, those concerns do not apply (provided the post-Brexit transitional period ends no later than 31 December 2020 as currently envisaged). The European Defence Fund will become operational in January 2021, when as things stand the UK will no longer be a de jure participant in all EU-funded programmes. Once the UK is a fully a ‘third country’ when the transitional arrangement ends, the Government will need to proactively seek participation in EU programmes on a case-by-case basis. However, whether such involvement is legally possible from the EU’s perspective will depend on the terms of the Regulation establishing that specific programme.

26.37In that context, it is important to note that the Commission proposal for the European Defence Fund limits ‘third country’ participation to the non-EU members of the European Economic Area only. In practice, Norway would be the only non-EU country likely to seek participation.310 It will be a test of the Government’s influence in Brussels whether it can persuade both the remaining Member States and the European Parliament to widen the scope of third country participation over the course of the legislative process.

26.38If ‘association’ remains limited to EFTA-EEA countries, options for participation by UK industry in projects to be funded by the EDF will be very limited. It would have to occur either via an EU-based subsidiary (with additional conditionality in place if that entity is still effectively controlled from the UK), or as a sub-contractor without funding from the EU budget. That will reduce the attractiveness of working with UK companies as part of an EDF project in the eyes of researchers in the EU-27, as they would have to comply with additional requirements to stay within the rules of the Defence Fund. For purely UK-based entities without EU subsidiaries, such as small businesses, participation could effectively be all but impossible. Conversely of course, in the absence of UK ‘association’, the Fund will not benefit from a financial contribution by the Treasury or the full participation of the British defence industry.

26.39The Minister’s Explanatory Memorandum on the 2021–27 European Defence Fund proposal reiterates the view that the Fund “should be open to third parties” (and by implication the UK), but does not refer directly to the limitations of articles 5 and 10 of the proposed Regulation, which restrict full non-EU participation to the EFTA-EEA countries only. The Commission’s decision to omit the possibility of association to the EDF by non-EEA countries is, necessarily, deliberate. It is unclear at this stage whether the European Parliament and the remaining Member States, which must jointly decide on the legal framework for the European Defence Fund, would support a more flexible ‘association’ mechanism that would be open to non-EEA countries.

26.40[The feasibility of UK participation in the European Defence Fund could also be complicated by the UK’s scheduled exit from the Single Market by the end of the post-Brexit transitional period: goods and services required to underpin collaborate cross-border efforts would not move between the UK and the EU as easily as they do at present, for example due to the re-introduction of customs and regulatory controls on UK-EU trade in goods.]

26.41However, if UK association to the European Defence Fund were to be possible, this would raise a new set of questions for the Government.

26.42We will continue to keep these issues under review as we assess changes to the legal text underpinning the European Defence Fund. In anticipation of further information from the Ministry of Defence on developments in the legislative process in the Council and the European Parliament, we have kept the proposal under scrutiny.

Previous Committee Reports

None, this is a new proposal for legislation. However, the Committee considered the predecessor, the European Defence Industrial Development Programme, on five occasions. See: (38831), 10589/17: 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); Thirty-Second Report HC 301–xxxi (2017–19), chapter 8 (20 June 2018); and Thirty-Fifth Report HC 301–xxxiv (2017–19), chapter 14 (11 July 2018).


286 For example, as part of the ‘European Defence Union’, Member States have launched Permanent Structured Cooperation on defence and established a centralised Military Planning & Conduct Capability unit for the EU’s advisory military missions. The European Commission is also proposing to use the EU’s post-2020 Connecting Europe Facility to invest in dual-use infrastructure that can be used by armed forces to move troops and equipment around Europe more efficiently, and has proposed the establishment of a ‘European Peace Facility’ (considered in a separate Chapter of this Report).

287 The research programme is the Preparatory Action on Defence Research. Preparatory Actions are a type of pilot project funded by the EU budget without a specific legal base (as long as they fall within the EU’s competence).

288 The 2014–2020 Multiannual Financial Framework (MFF).

289 See for example the Ministry of Defence’s first Explanatory Memorandum on the European Defence Fund (July 2017).

290 Guto Bebb was replaced by Stuart Andrew MP as Defence Procurement Minister on 19 July 2018.

291 The Explanatory Memorandum says “the exact terms” of any UK participation (including a financial contribution) would be “subject to negotiation”, “where it would be in the mutual interest of the UK and the EU for the UK to participate”.

292 UK participation during the transitional period can be restricted unilaterally by the EU if a project funded under the EDIDP or the defence research programme lasted beyond the end of the transitional period. We have expressed concern about this aspect of the Withdrawal Agreement in more detail in our recent Reports on the European Defence Industrial Development Programme, most recently on 11 July 2018.

293 If the Withdrawal Agreement is ratified and the transitional period takes effect, the consequences of any extension to the transition in terms of UK participation in EU programmes (and the concomitant financial contribution) are unclear.

294 The Ministry of Defence acknowledged the limitations of the ‘association’ mechanism in a letter to the House of Lords dated 1 August 2018. The proposal to establish the European Defence Fund is subject to the ordinary legislative procedure, and as such the European Parliament and the Member States in the Council must jointly agree on its legal text.

295 See for more information the letters from Guto Bebb to Sir William Cash dated 4 June and 13 June 2018.

296 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 proposal for a new European Peace Facility.

297 We have considered the proposal for a European Peace Facility in a separate chapter of this Report.

298 European Parliament briefing, “European Defence Industrial Development Programme“ (29 June 2018).

299 The European Commission’s original proposal for the 2019–2020 EDIDP included a requirement that “Member States have committed to jointly produce and procure the final product or technology in a coordinated way, including joint procurement where applicable”.

300 Commission Impact Assessment SWD(2018) 345, p. 25.

301 Funding decisions would be made by means of Implementing Acts.

302 A ‘subcontractor’ is defined in the proposal as entities “with a direct contractual relationship to a beneficiary, other subcontractors to which at least 10% of the total eligible costs of the action is allocated, and subcontractors which may require access to classified information […] in order to carry out the action”.

303 The Regulation’s provisions on eligibility for funding restrict access to EU funding for defence research compared to the current PADR, because multinational research centres like NATO’s Centre for Maritime Research would no longer be eligible.

304 Article 5(4) of the proposed EDF Regulation states that “beneficiaries and subcontractors involved in the action may use their assets, infrastructure, facilities and resources” located outside the EU (emphasis added).

305 For the transfer or licensing of results related to an EDF-funded research project to a third country, the Commission could ‘object’ but not initiate a claw-back procedure.

306 Article 10 of the proposed EDF Regulation stipulates: “An applicant established in the Union or in an associated country and controlled by a non-associated third country or a non-associated third country entity may be eligible for funding if this is necessary for achieving the objectives of the action and provided that its participation will not put at risk the security interests of the Union and its Member States”.

308 Guto Bebb was replaced by Stuart Andrew MP as Defence Procurement Minister on 19 July 2018.

309 Letter from Andrew Stuart to Lord Boswell (1 August 2018).

310 The other non-EU EEA countries, Iceland and Liechtenstein, have no defence industry or standing army.

311 Under the EEA Agreement, the contribution by an EEA country to participate in an EU programme is calculated annually. The calculation is based on the EU’s own budget for the programme in question for that year, combined with the EEA country’s proportion of the GDP of that country plus the EU as a whole. As the UK accounts for 16 per cent of the GDP of the EU-28, its putative contribution to the €13 billion European Defence Fund would be approximately €2.1 billion over the 2021–2027 period.




Published: 18 September 2018