According to the Commission “The fragmentation of the European defence market and divergent national policies create red tape, hamper innovation and competitiveness and, ultimately, weaken the European Security and Defence Policy (ESDP)” therefore in December 2007 it has adopted a package aiming at opening up the European defence industry market. The so called “defence package” includes proposals for two directives on defence procurement and on intra-European Union transfers of defence products.
The Council, the European Parliament and the Commission negotiators have recently reached an agreement, behind closed doors, on the defence package. It should be recalled that the creation of a European defence equipment market was one of the priorities of France's presidency of the EU. The French Presidency was able to reach a fast track agreement in such a sensitive matter.
The package constitutes a new measure by the Commission to legislate in this area. The Commission as well as the European Court of Justice is provided with further legal instruments to intervene in this area and to further develop the market. Obviously, behind the aim of market opening it’s the aim of creating a genuine European defence industry market and strengthening of the European defence industrial and technological base (EDITB).
Presently, procurement regime for the award of public works contracts, public supply contracts and public service contracts is ruled by Directive 2004/18/EC. The scope of Directive 2004/18/EC covers public contracts awarded in the fields of defence and security however there are the exceptions of Articles 30, 45, 46, 55 (public security in respect of the free movement provisions of the EC Treaty) and 296 (the national security exemption) of the EC Treaty. Article 296 allows Member States under certain conditions to exempt defence contracts from Community rules if this is necessary for the protection of their security interests however, according to the ECJ, the use of this Article must be limited to exceptional cases. Obviously, Member States have been using those provisions to exempt defence and sensitive security procurement from Internal Market rules to protect their security interests.
The Commission has decided to put forward a Proposal for a Directive on the coordination of procedures for the award of certain public works contracts, public supply contracts and public service contracts in the fields of defence and security. The negotiations have proceeded at a fast pace. Several informal meetings between the Commission, the French Presidency and the European Parliament’s rapporteur have taken place in order to a first reading agreement to be reached.
On 14 January the European Parliament has approved at first reading the informal agreement which was also endorsed by Coreper under the French EU Presidency, on 23 December. The compromise deal will be soon adopted as an ‘A item’ (without debate) at an upcoming Council of Ministers. The Member States will then have two years to transpose it into their national laws.
The Draft Directive will apply to public contracts awarded in the fields of defence and security for the supply of military equipment, the supply of sensitive equipment, works and services for specifically military purposes, or sensitive works and sensitive services. In the area of non military security the directive will apply to all public contracts that have characteristics similar to defence contracts such as contracts related to the protection of borders, police activities and crisis management operations.
The draft Directive refers to list of arms, munitions and/or war material agreed by Member States in 1958 for the definition of the types of equipment concerned.
The directive covers defence as well as security public contracts. The insertion of security in the scope of the proposal has been a concern for the UK Government. According to the Government there are sensitive procurements which would not be suitably dealt by the draft proposal which may put at risk the security interests of Member States. However, the Government has not succeeded as security has not been removed from the scope of the Directive. But the directive will not apply to contracts governed by specific procedural rules pursuant to an international agreement or arrangement concluded between one or more Member States and one or more third countries. Neither will it apply to contracts involving sensitive information which, if revealed, would threaten essential security interests, nor to contracts for the purpose of intelligence activities.
The directive will cover all public contracts concluded between EU operators that have a value excluding tax of €412,000 for supply and service contracts and €5,150,000 for works contracts.
The new Draft Directive will also be subject to Article 296. Member States will be able to use Article 296 to exempt the procurement of such equipment from the Directive but only in cases where the rules of the new Directive are not sufficient to safeguard Member States essential security interests which will be assess on a case-by-case basis. Hence, it will be for the Commission and ultimately to the ECJ to decide what it is necessary for the Member States to safeguard their security interests.
Furthermore, the compromise deal has introduced some amendments about which the Government is concerned. The compromise deal has introduced several subcontracting rules. It is believed that the new rules will facilitate access to contracts for SMEs. Under the draft directive the tenderer may be required by the contracting authority to indicate in his tender any share of the contract he may intend to subcontract to third parties. The public authority may oblige or be made by the Member State to oblige the tenderer to apply to its subcontractors certain rules specified in the directive. The tenderer may be obliged by the contracting authority to subcontract up to 30% of the main contract. The UK Government has unsuccessfully opposed to these provisions. It has doubts that such provisions will benefit small and medium enterprises however according to the Government they “(…) would unnecessarily burden prime contractors, preventing them from managing their own supply chain effectively, and would allow the Commission to challenge subcontract awards.”
The European Parliament was able to introduce a review procedure which is a reiteration of principles that already exist for civil contracts. Hence, Member States will have to take measures in order to ensure that decisions taken by the contracting authorities/entities may be reviewed effectively. The draft directive provides that “Member States shall ensure that there is no discrimination between undertakings claiming harm in the context of a procedure for the award of a contract as a result of the distinction made by this Directive between national rules implementing Community law and other national rules.”
It should be mentioned that the European Parliament has tried to introduce the so-called “reciprocity clause” which would require the Member States, when selecting candidates, to take into account “the requirement of autonomy and operational sovereignty […] and the necessity of reciprocal access with regard to third state." Fortunately, the Council has not accepted such amendment. Such clause would have negatively affected the UK’s ability to trade with non-EU markets, particularly the United States.
According to Geoffrey Van Orden "Today's Directive has less to do with free trade than the promotion of an EU defence policy.” Moreover, he said “(…) An inward looking European approach will also be detrimental to Britain's very necessary and fruitful defence equipment relationships with other countries – particularly the US.”
The Aerospace and Defence Industries Association of Europe (ASD) considers that the Directive "could be damaging to R&D investment and hence to the defence and technology base in Europe." According to ASD Secretary General François Gayet "to apply the logic of EU internal market rules which rigidly divide R&D and production phases is to reduce the incentives for defence capability investment by both the public and private sectors." He believes that Governments will invest less in R&D if the resultant production for their armed forces may be conducted elsewhere as well as companies will no longer invest in R&D if there are no guarantees of winning the resultant production.
Presently, the export of defence related products is subject to national licensing schemes in all Member States. The European Commission has pointed out that this constitutes “a major impediment to industrial competitiveness, and a considerable obstacle to the emergence of a European Defence Equipment Market (EDEM) as well as the functioning of the Internal Market.” The Commission has put forward a proposal for a Directive on simplifying terms and conditions of transfers of defence-related products within the Community, aiming at strengthening the European defence industry competitiveness as well as at improving security of supply of European defence products for Member States by facilitating transfers of defence related products and licensing procedures in the European Union. The main aim is to create a uniform European licensing system applicable throughout the EU. A company will obtain a general export licence through an authorisation issued by a single member state.
The French Presidency has conducted intensive negotiations. A first reading agreement reached at an informal tripartite dialogue has been endorsed by Coreper and the European Parliament, on 16 December, voted to approve such agreement. The original text has been amended by the compromise between the Council and the European Parliament. The directive will be then formally adopted at the Council without debate.
The draft Directive provides for general and global licences for the transfer of defence-related products within the EU and minimises the use of individual licences. Member States will be required to establish systems of general licences for transfers of defence equipment and supplies to the governments of any Member States or to other recipients in other Member States who are certified taking into account the Directive common criteria.
Presently the UK may argue that restrictive licence conditions on exports of military equipment to Member States would be justified under Articles 30 or 296 EC. The draft Directive will restrict the scope for determining national policy on licence conditions. The text was amended in order to stipulate that the directive shall apply without prejudice to Treaty articles 296 and 30. Member States would still be able to rely on Article 296 EC however under the draft proposal the Commission would be able to challenge more often the use of this exception by Member States.
Member States would be required to grant general and global licences for intra-EU transfers and individual licensing should be reserved for exceptional circumstances. Under the draft proposal any transfer of defence related products in the European Community will be subject to prior authorisation through general, global or individual transfer licences granted or published by the Member State where the supplier is established. Such authorisation should be valid all over the Community and no further authorisations for the passage through Member States or for the entrance on the territory of the Member State where the recipient is located of defence-related products.
Under the draft directive Member States will be allowed to grant individual transfer licences solely where a request for a licence is limited to one transfer, where it is necessary for the protection of its essential security interests, or public policy; where it is necessary for compliance with international obligations and commitments of Member States; or where a Member State has serious reasons to believe that the supplier will not be able to comply with all the terms and conditions necessary to grant it a global licence.
The compromise deal has added a new provision requiring Member States to set out rules on penalties applicable to infringements of the provisions adopted in implementation of the Directive.
The draft directive would apply to transfers of defence-related products corresponding to those listed in the Common Military List of the European Union including sub-systems, components, spare parts, technology transfer, maintenance and repair. The ESC has drew attention to the fact that the Common Military List of the European Union was adopted intergovernmentally under the EU Treaty which is now reproduced as an Annex to a measure adopted under the EC Treaty. However such concern was not shared among the other EU Member States.
It should be mentioned that under the draft directive the Commission is provided with the power to amend the list of defence related products in the Annex as well as "non-essential elements" of the Directive. However, there is not a definition of “non-essential" elements. Therefore the Commission is provided with extensive delegated powers. Such provision was amended and now imposes an obligation on the Commission to update the abovementioned list “(…) so that it strictly corresponds to the Common Military List of the European Union.” The UK Government is satisfied with such amendment. However, the Commission will have the power “to amend non-essential elements of this Directive” therefore it still has a broader power.
