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Defence procurement: new ways ahead?

01 January 2005

Important developments are on the way in Europe’s armaments sector. Following the official establishment of the European Defence Agency (EDA), the focus has currently shifted to the Commission’s Green Paper on defence procurement.
Published in September, the Green Paper has opened a four-month consultation phase for stakeholders to comment on the Commission’s ideas for a more coherent regulatory framework in this area.
At the core of the debate is Article 296 TEC, which allows member states to derogate from the rules of the common market if their ‘essential security interests’ are concerned. Such exemptions are subject to certain conditions defined by the Treaty and the case law of the European Court of Justice (ECJ). In practice, however, most governments have regarded the possibility to derogate as an automatism, passing almost all defence contracts on the basis of national procurement laws.
The latter are not only complex, they also differ greatly from country to country. On top of that come a variety of specific procurement rules for cooperative projects. The result of all this is a highly complex regulatory framework which lacks transparency, is highly inefficient and hinders fair intra-European competition, in particular for small and medium-sized enterprises. Cooperative projects do not really help either, since they are still organised on the basis of juste retour and cover only parts of the market (mainly those which are the most competitive anyway).
In its Green Paper, the Commission puts forward two options to improve this situation:
— An interpretative Communication, which would not change the existing legal framework, but clarify it. The Commission would further explain the principles defined by the ECJ for the interpretation of Article 296 and establish criteria enabling member states to determine, for each individual contract, whether it falls within the scope of 296 or not.
In this case, normal public procurement Directives would still apply to all contracts not covered by Article 296. Member states would thus continue to face a dilemma: either they use existing Community Directives, which are in general ill-suited to the specificities of defence, or they invoke Article 296 and use national rules, even if they want intra-European competition. Under these conditions, it is difficult to see how transparency or competition could be improved. The clarification of ECJ judgements may ‘oblige’ member states to use civil Directives for certain defence contracts, whereas the bulk of the latter would remain under national law.
— A new Directive especially adapted to the defence market. Member states would then still have the possibility to invoke Article 296, but could also use the new Directive for the procurement of military equipment, in particular if the latter did not concern their ‘essential’ security interests.
The usefulness of such a Directive would depend on the way its form and content were designed. Most importantly, it would have to allow for flexible procedures and include specific selection criteria, in particular security of supply and confidentiality. Moreover, it would need to be accompanied by measures in other related fields, in particular transfers and transits. Certain tricky issues like offsets would have to be resolved as well. All these are enormous political challenges.
However, handled in a sensible way, a Directive could be an appropriate tool to escape the current dilemma of whether to apply either civil Directives or Article 296. Coordinating national regulations, it could rationalise Europe’s fragmented regulatory framework and make the system more transparent.
However, scepticism is widespread among both governments and industries. Many fear the Commission’s lack of experience in defence, and see a Directive in particular as an attempt naïvely to enforce radical market liberalisation. On closer inspection, these concerns do not seem justified:<br />· Even if the Commission wanted, it could not enforce anything. According to co-decision mechanisms, the Commission may determine the form of a Directive, but member states would decide on its content and scope (who has to apply it to which items).<br />· A Directive is an instrument which offers a considerable degree of flexibility. If all parties involved played a constructive role, there would be enough room to adapt it to the specificities of defence.<br />· A Directive would certainly not open the door to blind market liberalism. First, it would not concern WTO rules and therefore only apply to intra-European competition. Second, specific selection criteria and procedures can be powerful tools to ensure that Europe’s defence industrial base does not fall victim to uncontrollable market forces.
As with all reforms, the risk is that everyone agrees in principle on the necessity to do ‘something’, but shies away when things become serious, threatening vested interests and old habits. However, given the poor record of intergovernmental arrangements, it is difficult to see how the regulatory framework can be rationalised without Community tools. Member states and industry should thus take the Green Paper as an opportunity to establish a serious dialogue with the Commission that continues beyond the current consultation phase.