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MEMO/07/547

Brussels, 5 December 2007

Commission proposes enhancing openness and transparency in EU defence markets

The European Commission wants to introduce specific rules for procurement in the defence sector. These rules will be better suited to the specificities of the defence sector and will facilitate cross-border procurement of Member States. Up until now, the vast majority of defence procurement contracts have been exempted from the rules of the Single Market on the basis of Article 296 of the Treaty. This practice stands in contrast to the case law of the Court of Justice and hampers the openness of defence markets between Member States. The same problem exists, albeit less prominently, for sensitive non-military security equipment. One of the reasons for this is that current EU procurement rules, which apply also to defence and security procurement, are ill-suited to most defence and security equipment. In order to improve this situation, the Commission is now proposing a new Directive, tailor-made for defence and security. Member States will then have at their disposal Community rules they can apply to complex and sensitive procurements without putting at risk legitimate security interests. This will make the regulatory framework for defence more efficient and improve the openness of defence and security markets between Member States.

Issue

Community procurement rules apply also in defence and security. However, Member States can exempt contracts in these fields if this is necessary for the protection of their essential security interests. The legal basis for this exemption is Article 296 of the Treaty (for defence) and Article 14 of the current procurement Directive (for security). According to the Court of justice, the use of these exemptions must be limited to exceptional cases. In practice, however, many Member States have used them extensively to exempt almost all defence and sensitive security procurement from Internal Market rules.

One of the reasons for this practice is the lack of Community rules suited to the specificities of defence and sensitive security contracts, namely complexity (which calls for flexibility) and special requirements for security of supply and security of information. Since the rules of the current Directive have been developed for non-military and non-sensitive procurement, they do not sufficiently take these features into account.

As a consequence, most defence and sensitive security equipment is procured on the basis of uncoordinated national rules, which differ greatly in terms of publication, tendering procedures, selection and award criteria, etc. This regulatory patchwork is a major obstacle on the way towards a common European defence equipment market and opens the door to non-compliance with the Treaty principles. Lack of transparency and discrimination of suppliers from other Member States leads to lack of openness of defence markets, with negative effects for all stakeholders.

Proposed measures

The new Directive will apply to the procurement of arms, munitions and war material, as well as related works and services. At the same time, Member States can also use it for certain particularly sensitive non-military procurements in areas such as protection against terrorism, where contracts often have similar features to defence contracts.

The new Directive will contain a number of innovations tailored to the specificities of such procurement cases. Awarding authorities may in particular use the negotiated procedure with prior publication as a standard procedure, which gives them flexibility to negotiate all details of the contract. They may also require from candidates specific clauses for security of information (in order to ensure the confidentiality of sensitive information) and for security of supply (in order to ensure on-time delivery).

Member States will still have the possibility to use Article 296 to exempt defence and security procurement contracts which are so sensitive that even the new rules do not satisfy their security needs. In most cases, however, Member States should be able to use the new Directive without any risk for their security. This has several advantages:

  • The use of Article 296 can be limited to truly exceptional cases, as stipulated by the Treaty and the Court. This will enhance legal certainty for awarding authorities;
  • National procurement rules will be coordinated, which streamlines the regulatory patchwork in these fields and reduces industries' administrative costs;
  • The principles of the Treaty, in particular transparency, non-discrimination and openness will be implemented in defence and security markets. This will improve the efficiency of defence spending and lead to better value for money.

Background

The defence procurement Directive is the logical follow-up to the Interpretative Communication on the application of Article 296 of the Treaty, which was adopted in December 2006 (IP/06/1703). This Communication clarifies the conditions for the use of Article 296 and gives guidance to awarding authorities for their assessment of whether defence contracts can be exempted from Community rules or not.

At the same time, the defence procurement Directive is complementary with the Code of Conduct administered by the European Defence Agency. The Code, which has been operational since 2005, aims at enhancing transparency for defence procurement contracts which are exempted from Community rules on the basis of Article 296.

The proposal for a defence procurement Directive has been developed in close consultation with all stakeholders. Since 2003, many meetings in different multilateral and bilateral formats have been held to involve defence industries and Member States in the process. A wide consultation was also launched in 2004 through a Green Paper, the findings of which were published in 2005. This enabled the Commission to understand the needs and the specificities of the market and to put forward a proposal which can count on the support of a broad majority of Member States and industries. The European Parliament is also supporting the initiative. (see the report adopted in 2005 by the Plenary on the basis of the "Wuermeling" report).

Defence procurement – Frequently Asked Questions

1) Why does the Commission deal with defence, which is an area of Member States' competence?

The Commission fully respects Member States' prerogatives in the field of defence. At the same time, however, the Commission has the duty to ensure compliance with the Treaty and the Court's case law, which have important implications for defence procurement. According to the Court, the use of Article 296 of the Treaty, which allows Member States under certain conditions to exempt defence contracts from Community rules, must be limited to exceptional cases. The new Directive will make it easier for Member States to comply with this. Since the new rules take into account the specificities of defence, national awarding authorities will be able to apply them to the majority of their defence procurement contracts. The use of Article 296 will still be possible, but less often necessary. This will enhance legal certainty for all stakeholders.

At the same time, the procurement Directive contributes to the progressive establishment of a European Defence Equipment Market (EDEM). Member States are clearly in lead in this endeavour, but the Commission can help them via Community instruments to make the regulatory framework for defence more efficient. The new Directive will do this in the area of procurement. Streamlining the current patchwork of national rules and regulations, it will enhance the transparency and openness of defence markets between Member States. Member States recognise the added value of the procurement initiative, and the Commission has prepared its proposal in close cooperation with them.

2) What are the main innovations of the new Directive?

The new Directive is tailor-made to the specificities of defence and security procurement contracts, namely complexity and sensitivity. To cope with these specificities, the new Directive offers in particular three new elements: 1) The negotiated procedure with publication can be used without restriction. This gives contracting authorities the flexibility to negotiate with suppliers in detail all features of complex procurement contracts. 2) Specific provisions on security of information are included, which ensure that sensitive information will remain protected against unauthorised access; 3) Special clauses on security of supply will make sure that armed forces will be delivered in time, in particular in times of crisis or armed conflict. On top of that come specific provisions for research and cooperative projects, which are particularly important in the defence sector. All this makes the new Directive a perfectly suited instrument for the procurement of defence and sensitive security equipment.

3) Will the new Directive cover all procurement contracts awarded in the field of security and defence?

The new Directive will cover only specific contracts in the fields of security and defence, to which the current public procurement Directive is ill-suited. These contracts concern namely the procurement of military equipment (i.e. arms, munitions and war material) and security equipment which is particularly sensitive and has similar features to defence equipment. Procurement of non-sensitive and non-military equipment remains covered by the current public procurement Directive (2004/18), even if it is procured by awarding authorities in the field of defence and security.

At the same time, the new Directive – like 2004/18 – will apply subject to Article 296, which means that Member States can still exempt defence and security contracts if this is necessary for the protection of their essential security interests.

4) Which contracts will come under the new Directive and which under Article 296?

The new Directive will apply to arms, munitions and war material, subject to Article 296. This means that, in principle, all military equipment which is on the list of 1958 comes under the new Directive. Only in cases where the rules of the new Directive are not sufficient to safeguard Member States essential security interests, Member States may use Article 296 to exempt the procurement of such equipment from the Directive. Whether this is the case or not must be assessed on a case-by-case basis. The criteria for this assessment have been explained in the Interpretative Communication of December 2006 and remain valid.

5) What impact will the Directive have on arms trade with third countries?

The new Directive will not change the situation for arms trade with third countries, which remain governed by WTO rules and in particular the Government Procurement Agreement (GPA). It remains Member States' decision to open or not to open competition to non-EU suppliers, in compliance with the GPA. Awarding authorities will still be free to invite EU companies exclusively, or to include non-EU companies.

6) Does the Directive lead to a "Buy European" policy?

The objective of the Commission's initiative is not to introduce a “Buy European” policy, but to foster transparency and openness of defence markets between Member States. Intra-European competition has indeed proven to be the best means to improve the competitiveness of Europe's defence industry. The Directive will set rules on how to procure defence equipment, but not determine which equipment should be procured. This is the decision of the customer, i.e. Member States. The proposal therefore does not contain a "Buy European" clause.

7) Why does the defence Directive apply also to security?

The emergence of transnational and asymmetric security threats has blurred the dividing line between external and internal, military and non-military security. Today, armed forces and (non-military) security forces often work closely together, for example to protect borders or during crisis management operations. Therefore they increasingly use equipment which must be interoperable and which is often based on the same technology. At the same time, the protection against threats such as terrorism or organised crime often necessitates the use of sensitive equipment and access to confidential information. For all these reasons, non-military procurement can be as sensitive as military procurement and require the same security safeguards during the award process. A majority of Member States therefore suggested making the new Directive also applicable to sensitive security procurement, if it has the same specificities as defence procurement. The Commission shares this analysis and therefore followed this recommendation. The focus of the initiative, however, remains on defence.

8) What is the relationship between the Directive and the Code of Conduct of the European Defence Agency?

The two instruments have the same objective, i.e. to enhance openness of defence markets between Member States, but they differ in scope and nature: The defence Directive is a 'first pillar' instrument, which sets legally binding EU (secondary) law and coordinates national procurement rules. It covers the procurement of arms munitions and war material, as well as sensitive non-military security procurements.

The Code of Conduct, by contrast, is non-binding political agreement which includes a set of general principles for defence (not security) procurement. Member States may apply these principles to the award of defence contracts which are exempted from Community rules on the basis of Article 296. The Code therefore comes into play only in cases where the Directive does not apply.

9) Does the Directive deal with offsets?

Offsets are a complex issue. They are politically controversial, economically questionable and legally problematic.

Offsets usually entail discrimination by their very nature and therefore stand in direct contrast to the Treaty. Consequently, the procurement Directive can neither allow nor regulate them. On the other hand, offset practices differ so much that any attempt to forbid them explicitly in the Directive would face serious definition problems. It is therefore preferable to leave it up to Member States to make sure that possible offset requirements stay in line with the rules of the Directive and the Treaty.

This is particularly important since offsets, in particular civil offsets, are legally problematic also when they are required for contracts which are exempted under Article 296. Offsets are thus an issue by itself which goes beyond the Directive and must be dealt with in a broader context.


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