ec defence procurement

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EC Defence Procurement

Standard Note: SN/IA/4640

Last updated: 17 November 2008

Author: Claire Taylor

Section International Affairs and Defence Section

In December 2005 the European Commission published a number of recommendations for

improving efficiency and competition in the EU defence market. The primary intention was to

establish guidance on how EC Treaty exceptions and requirements under Article 296 TEC

should be interpreted with respect to defence procurement contracts. Specifically the

Commission set out its intention to publish an Interpretative Communication on the

application of Article 296, to be followed by a proposal for a legally-binding EU Directive on

the procurement of defence related contracts. As part of these measures to open up the

European defence market, the European Commission also published proposals in April 2006

on regulating the intra-Community transfer of defence products.

The Interpretative Communication was published in December 2006 while the draft

Directives on defence procurement and intra-community transfers were published as part of

a wider package of European defence equipment market measures in December 2007.

This note examines the background to these measures, the specific proposals which the

European Commission has put forward, and the current legislative situation.

The European Defence Agencys code of conduct on the application of Article 296 TEC isexamined in Library Research Paper RP06/32, European Security and Defence Policy:

Developments since 2003.

This information is provided to Members of Parliament in support of their parliamentary duties

and is not intended to address the specific circumstances of any particular individual. It

should not be relied upon as being up to date; the law or policies may have changed since it

was last updated; and it should not be relied upon as legal or professional advice or as a

substitute for it. A suitably qualified professional should be consulted if specific advice or

information is required.

This information is provided subject to our general terms and conditions which are available

online or may be provided on request in hard copy. Authors are available to discuss the

content of this briefing with Members and their staff, but not with the general public.


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Contents

1 Background 21.1 Article 296 EC Treaty 21.2 European Commission Green Paper September 2004 31.3 European Commission Recommendations 51.4 Proposal on Intra-Community Arms exports 5

2 EC Interpretative Communication 73 EU Package of Defence Measures December 2007 10

3.1 Policies to Support the Competitiveness of the Defence Sector 113.2 EU Draft Directives 13

Proposal for a Directive on Defence and Sensitive Security Procurement 13Proposal for a Directive on Intra-Community Defence Transfers 19

1 Background

Most defence and security related products are purchased by EU Member States on the

basis of uncoordinated national contract award procedures and rules. These provisions can

differ significantly in terms of publication, tendering procedures, selection and award criteria.

The European Commission considers that this lack of legal uniformity constitutes a major

obstacle to the establishment of a European defence equipment market and opens the door

to non-compliance of Treaty principles by Member States, in particular the principles of

transparency, non-discrimination and equal treatment.

The establishment of an effective European Defence Equipment Market (EDEM) is also

regarded as a key factor in the development of ESDP.

1.1 Article 296 EC Treaty

Public procurement contracts currently fall under the scope of Directive 2004/18/EC.

However, under Article 296 of the EC Treaty the procurement of equipment, supplies, works

and services intended for military purposes and crucial to national security can be exemptedfrom EU public procurement rules, therefore enabling Member States not to competitively

tender contracts in this area. Article 296 states:

1. The provisions of this Treaty shall not preclude the application of the following rules:

(a) no Member State shall be obliged to supply information the disclosure of which it

considers contrary to the essential interests of its security;

(b) any Member State may 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; such measures shall not

adversely affect the conditions of competition in the common market regarding

products which are not intended for specifically military purposes.

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2. The Council may, acting unanimously on a proposal from the Commission, make

changes to the list, which it drew up on 15 April 1958, of the products to which the

provisions of paragraph 1(b) apply.1

Under the provisions set down in clause 1 (b), civilian goods or those not intended for military

purposes, even if purchased by the defence ministry of a Member State, are not covered by

the exemption that this Article provides. The products to which clause 1 (b) could apply (the

list does not provide automatic exemption) were set down in April 1958 as Council Decision

255/58.2 However, this list has not been revised since it was first established.

European Court of Justice (ECJ) case law supports this view and states that Article 296 does

not permit automatic exemption for all defence procurement.3 As the Commission has

pointed out:

Using Article 296 TEC for defence procurement results in the non-application of

Directive 2004/18/EC, which is the legal instrument intended to secure respect for the

basic provisions of the treaty relating to the free movement of goods and services as

well as freedom of establishment in the area of public procurement (Articles 28, 43, 49TEC). The rules of this Directive are the expression of the fundamental principles and

objectives of the Internal Market. Thus, any derogation under Article 296 TEC touches

the core of the European Community and is, by its very nature, a legally and politically

serious matter.4

However Member States have, to date, largely adopted a broad interpretation of the

provisions of Article 296 and applied the exemption to the majority of procurement contracts

issued by their respective defence ministries, regardless of their nature. As such, defence

procurement is largely conducted according to national regulations and guidelines on

tendering and the award of contracts, all of which differ extensively. Factors such as offset

obligations,5 security of supply and workshare have thus influenced the defence procurement

process within each Member State to a varying degree. Some EU Member States are

inherently protectionist in their approach to defence procurement; while others such as the

UK have pursued an open market approach and competitiveness as a means to securing

best value for money.6

Under the Lisbon Treaty, Article 296 will become Article 346.7

1.2 European Commission Green Paper September 2004

EU Member States have the prerogative in defence matters. However, the European

Commission has a duty to ensure compliance with the principles of the Treaties and the case

law of the European Court of Justice.

1Treaty on European Union, Article 296 (2002/C 325/01)

2A copy of that list is available at:

http://aof.mod.uk/aofcontent/tactical/toolkit/content/topics/ecannex/ann_c1.htm3

European Court of Justice, Case C-222/84, Johnston, 15 May 1986; and subsequently Case C-414/97,Commission v Spain, 16 September 1999.

4 Interpretative Communication on the application of Article 296 of the Treaty in the field of defence

procurement(COM (2006) 779)5

Offset is also referred to as Industrial Participation.6

These issues are examined in greater detail in Library Research Paper RP03/78 UK Defence ProcurementPolicy, 20 October 2003. An examination of the French and US defence markets is also provided in Library

Standard Note SN/IA/3759, The Defence Industrial Strategy, 23 September 20057

Foreign and Commonwealth Office, Consolidated Texts of the EU Treaties as Amended by the Treaty ofLisbon, Cm 7310, Session 2007-08

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Therefore, in September 2004 the European Commission Internal Market Commissioner

published a consultative Green Paper onDefence Procurement.8 The aim of the paper was

to improve efficiency and competition in the EU defence market by establishing guidance on

how EC Treaty exceptions and requirements under Article 296 should be interpreted. The

initiative was intended to complement harmonisation measures being pursued through the

newly established European Defence Agency (EDA), including the Defence ProcurementCode of Conduct.9

The paper identified two possible options for action by the European Commission:

introducing a non-legislative instrument clarifying the existing legal framework; or introducing

a new legal instrument aimed at establishing specific rules in defence procurement to

supplement the current regulatory framework.

However, support for these stand-alone legislative options was minimal. The introduction of

an interpretative communication was regarded by many as potentially useful, although

insufficient in the longer term as it would be a non-legislative measure and would do nothing

to promote either transparency or competition in the defence market. A new Directive, on theother hand, was viewed by many as a viable option but its impact was considered to be

limited, as Member States would have to unanimously decide on when article 296 applied;

while issues such as security of supply would remain subjective and the prerogative of

Member States.

As the European Union Institute for Security Studies pointed out, the notion of essential

security interests remains vague, and it would still be difficult to draw the borderline between

contracts covered by Article 296 and those which are not. A defence directive would not do

away with this problem of definitions.10

Therefore, the consultation paper put forward a third possible option. Under this proposal an

interpretative communication, prepared in conjunction with Member States, would be set

down to clarify the existing legal framework; while in tandem a voluntary European Defence

Agency code of conduct would set down guidelines and broad categories for the

procurement of goods under Article 296.

Appearing before European Standing Committee B on 8 February 2005, the then Minister for

the Armed Forces, Adam Ingram, set out the Governments view on the green paper

proposals. He stated:

We see it as an important lever in opening up thinking and discussions on how we

might improve defence equipment procurement in the European Union, and increase

the global competitiveness of the European defence industry. We believe that there isa significant need to improve the defence capability of EU member states so that they

meet the headline goals of European security and defence policy. We believe that an

important step towards that goal is improving the transparency and openness of

defence procurement across Europe, potentially providing UK industry with improved

access to EU defence markets and providing better value for UK and EU taxpayer []

We agree that such an open market is needed if Europe is to have the opportunity to

meet cost-effectively the capability requirements of the ESDP []

8A copy of this consultation document is available online at:

http://ec.europa.eu/internal_market/publicprocurement/dpp_en.htm9

Further information on the EDA code of conduct is available in Library Research Paper RP06/32, European

Security and Defence Policy: Developments since 2003, June 200610

Submission from the EU Institute for Security Studies to the European Commission Green Paper on DefenceProcurement, 15 February 2005

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The Government believe that an interpretive communication might have some benefit,

in that it could clarify the existing framework and particularly the use of article 296.

However, we do not believe that the benefits that might result from introducing a

specific defence procurement directive are sufficient to offset the drawbacks. In

particular, an additional regulatory burden on top of those already in place is unlikely to

support our aim of making defence markets more effective and efficient. We do not,

therefore, support the development of a new directive at this time. 11

1.3 European Commission Recommendations

In December 2005 the European Commission published its recommendations in response to

the results of the consultation. In a Communication to the Council and the European

Parliament the Commission highlighted its intention to introduce the following:12

1. An Interpretative Communication on the application of Article 296 of the Treaty in the

field of defence procurement. This Communication would recall the principles

governing the use of the exemption in line with European Court of Justice (ECJ) case

law, and would clarify the criteria on which Member States would have to decide

when the conditions for applying the article 296 exemption apply and when they do

not.

The Commission Communication stated:

While providing additional legal certainty and guidance for member States, an

Interpretative Communications will not alter the current legal framework. It will

simply clarify the existing one, with the objective of making its implementation more

uniform.13

2. In addition to the Interpretative Communication, the European Commission also

considered that a Directive coordinating national procedures for the procurement of

defence goods and services, where Article 296 does not apply, would be appropriate.

Therefore, impact assessments would be undertaken throughout 2006 with a view to

the presentation of a possible proposal for legislation.

Both Commission proposals would be complementary to the EDA Code of Conduct on Article

296 procurement contracts.

1.4 Proposal on Intra-Community Arms exports

As part of European Commission initiatives to open up the European defence market to

greater competition, the Directorate General for Enterprise and Industry also published a

consultation at the beginning of April 2006 on Intra-Community Transfer of DefenceProducts. The aim of the consultation was to facilitate the movement of defence products

and services within the EC by laying the groundwork for a future initiative that would

overcome the varying national administrative procedures for arms export licensing and

establish simplified export procedures based on common criteria for products and services

exported between EU Member States. In support of the development of such a framework,

the European Commission has pointed out that licence applications for intra-Community

11European Standing Committee B, 8 February 2005, c3-5, Session 2004-05

12

The full text of this Communication is available online at:http://europa.eu.int/comm/internal_market/publicprocurement/docs/defence/com05-626_en.pdf

13 http://ec.europa.eu/internal_market/publicprocurement/docs/defence/com05-626_en.pdf

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transfers are hardly ever rejected. Approximately 11,500 such licences are issued annually

and no request has been formally denied since 2003. 14

As this proposal focused solely upon intra-Community transfers of defence products, and

was not intended to replace national export licensing policies to non-EU countries, it falls

within the competence of the European Commission. In its consultation paper theCommission sets out the following legal framework as justification for its proposals:

According to the case-law of the Court of Justice of the European Communities,

Community law applies to defence-related products, as it does to all other products. In

particular, the principle of free movement of goods and services and commercial policy

(Articles 28, 49 133 TEC) are applicable. By their very nature, export authorisations are

one of the measures which create quantitative restrictions or measures having

equivalent effect [] which Community law aims to eliminate with regard to intra-

Community trade.

Nonetheless, Articles 30 or 296 allow Member States to justify restrictive measures by

demonstrating on a case-by-case basis that they are needed and proportional to

protect national security. However, it is not possible to infer from these articles that

there is inherent in the Treaty a general proviso covering all measures taken by

Member States for reasons of national security. Thus articles 30 or 296 have no effect

on the Communitys legislative power to lay down measures concerning the

approximation of the provisions laid down by law, regulation or administrative action in

Member States which have as their object the establishment and functioning of the

internal market (Article 95 (1)).15

With a view to the aims of the consultation, the paper set out three options for improving

arms export licensing procedures:

Continued intergovernmental co-operation The Six Nation FrameworkAgreement signed in July 1998 and the Farnborough Framework Agreement of

July 2000, for example, included undertakings to apply simplified export

procedures to transfers carried out as part of multinational procurement

programmes. Intergovernmental co-operation could continue on this basis.

However the paper acknowledged that the Framework would have to be extended

and the 19 other Member States would be required to participate if the benefits of

the system were to be extended to the EU as a whole. One of the main

advantages of this approach would be the utilisation of an instrument that already

exists.

Reinforcing ESDP this could be achieved by a Common Position of the Councilof Ministers. Agreed on the basis of unanimity the Common Position could set out

simplified procedures for export licensing for those products being transferred

within the EU, while at the same time setting out where exceptions could apply.

However, the consultation paper highlighted the inability of the Council to approve

similar proposals in the past and suggested that support for this initiative had not

increased.

Establishing a Community Instrument for defence markets the Instrument would

replace the authorisation of each intra-Community transfer with a procedure

14

European Commission, MEMO/07/54615

European Commission, Consultation Paper on the Intra-Community Circulation of Products for the defence ofMember States, 21 March 2006, para. 1.2

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based on common EU criteria. The paper acknowledged that such an instrument

would also be required to lay down measures which were sufficient for ensuring

the national security of Member States, including the possibility of Member States

exempting themselves from the principles of this Instrument in certain

circumstances. The products covered by this Instrument could be included on a

list drawn up on the basis of existing lists, such as the Common list of militarygoods covered by the EU Code of Conduct.

The consultation paper also acknowledged that any Community-level system would be

required to provide guarantees that defence products exported to another EU Member State

under this system would not then be re-exported to a country outside the Community. The

paper suggested that establishing a list of third countries to which exports could be

authorised on the basis of the EU Code of Conduct could be one option for addressing this

concern.

In its July 2007 report on the Strategic Export Controls: 2007 Review, the Quadripartite

Committee examined the proposals on intra-community transfers of defence products. Itconcluded:

If the EU were to acquire a competence in defence manufacturing and to remove the

barriers to the free movement of military goods and technology that currently exist

within the EU, it would have a profound effect on the UKs system of strategic export

controls, potentially such a development could be cause for serious concern, given that

EU Member States export control policies and practice vary. In our view the

Government needs to formulate a policy to respond to any proposals emerging

from the European Commission to remove the barriers to the free movement of

military goods and technology that currently exist within the EU. The

Governments policy needs to address the effect that any changes would have

on export controls and to ensure that UK and EU export controls are notweakened. We recommend that the Government set out its policy in responding

to our Report.16

In its response to the report the Government noted:

In essence, the Commission is seeking ways to make intra-Community transfers less

cumbersome and to remove unnecessary barriers, rather than removing all control

over such transfers. For our part we are seeking to ensure that any proposals would

not impact on our ability to use OGELs, nor result in any weakening of the control

regime; and the recommendations would offer some tangible benefits for British

industry with minimal changes to existing regimes. Commission officials have held a

number of discussions with Member States and with representatives from industry onvarious ideas and continue to refine their thinking. The Government will develop its

policy when the extent of the formal proposals is known.17

2 EC Interpretative Communication

In December 2006 the European Commission presented its Interpretative Communication on

the application of Article 296.18 The intention of the Communication is to give contract

awarding authorities some guidance for their assessment whether the use of the [article 296]

16Quadripartite Select Committee, Strategic Export Controls: 2007 Review, HC 117, Session 2006-07, p.128-9

17Quadripartite Select Committee, Response of the Secretaries of State for Defence, Foreign and

Commonwealth Affairs, International Development and Business, Enterprise and Regulatory Reform, Cm7260, Session 2006-07, p.30

18COM (2006) 779

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exemption is justified. It does not attempt to either provide an interpretation of Member

States essential security interests,19 or determine which procurement contracts the Article

296 exemption should apply to. The communication also only concerns defence procurement

by national authorities inside the European internal market and does not apply to defence

contracts with third countries. As outlined above, the communication does not alter the

existing EC legal framework but merely clarifies existing provisions. As such, it is regarded asvery much the first step toward an open and fairer European defence equipment market

(EDEM).

The Interpretative Communication makes the following observations:

The nature of the products on the 1958 list20 and the explicit reference in Article 296

TEC to specifically military purposes confirms that only the procurement of

equipment which is designed, developed, and produced specifically for military

purposes can be exempted from Community rules.

The interpretation of Article 296 (1) (b) TEC and the definition of its field of

applications must take into account the evolving character of technology and

procurement policies. With regard to technology, the 1958 list seems sufficiently

generic to cover recent and future developments.21 Similarly, Article 296 (1) (b) TEC

can also cover the procurement of services and works directly related to the goods

included in that list, as well as modern, capability-focused acquisition methods,

provided always that the other conditions for the applicability of Article 296 TEC are

met.

Security is becoming increasingly complex and that new threats blur the traditional

dividing line between military and non-military, external and internal security

dimensions. However, since the roles of military and non-military security forces stilldiffer, it is normally possible to distinguish between military and non-military

procurement. With regard to procurement for non-military security purposes, security

interests may justify exemption from Community rules on the basis of Article 14 of the

Public Procurement Directive.

Article 296 (1) (a) TEC can also cover the procurement of dual-use equipment for

both military and non-military security purposes, if the application of Community rules

would oblige a Member State to disclose information prejudicial to the essential

interests of its security.

Member States have the prerogative to define their own essential security interests

and their duty to protect them. However, that discretion is not without limits. The

objective justifying the exemption is only the protection of a Member States essential

security interests. Other interests, in particular industrial and economic interests such

as indirect non-military offsets, although connected with the production of and trade in

arms, munitions and war material, cannot justify by themselves an exemption on the

19Defence policy, and therefore a definition of what constitutes essential security interests, is not within theCommissions competence.

20A copy of that list is available at:

http://aof.mod.uk/aofcontent/tactical/toolkit/content/topics/ecannex/ann_c1.htm21

A revision of the 1958 list was rejected as an option by the European Commission as it was considered to be

a politically difficult and awkward exercise with a high potential for an unsatisfactory outcome (CommissionStaff Working Document: Impact Assessment Summary, COM (2006) 779/SEC (2006) 1555). A fullerexplanation is also available in SEC 92006) 1554

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basis of Article 296 (1) (b) TEC. The reference to essential security interests also

makes clear that the specific military nature of a piece of equipment is not by itself

sufficient to justify exemption from EU procurement rules and as such possible

exemptions are limited to procurements which are of the highest importance for a

Member States military capability.

Therefore, in determining whether an exemption under Article 296 is justified,

Member States should, on a case-by-case basis apply the following questions:

o Which essential security interest is concerned?

o What is the connection between this security interest and the specific

procurement decision?

o Why is the non-application of the Public Procurement Directive in this case

necessary for the protection of this essential security interest?

As the guardian of the Treaty, the Commission may verify whether the conditions forexempting procurement contracts on the basis of Article 296 TEC are fulfilled. In such

cases the Commission may request information from Member States to prove that

exemption is necessary for the protection of their essential security interests. General

references to the geographic and political situation, history and Alliance commitments

are not sufficient in this context. The Commission may bring a matter directly before

the European Court of Justice if it considers that a Member State is making improper

use of the powers provided for in Article 296. The burden of proof that an exemption

is justified lies with the Member States.

A copy of the EC Interpretative Communication is available at:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2006:0779:FIN:EN:PDF

Following publication of the Interpretative Communication then Chief Executive of the EDA,

Nick Witney, welcomed the measure:

Every initiative that contributes to the breaking down of protectionist barriers in

European defence procurement is to be welcomed.22

The European Scrutiny Committee examined the Interpretative Communication in the first

half of 2007. Noting the comments of the MOD in February 2005 (see above) the Committee

sought to clarify the governments position following the publication of the Communication on

Article 296 and the possible creation of a directive concerning the procurement of defencegoods and services where Article 296 does not apply. In its report of May 2007 the

Committee noted:

In response to our question as to whether he [the Minister] continues to subscribe to

the position set out by the Minister for the Armed Forces in the debate two years ago,

the Minister said that the Governments position remained consistent; it remained to be

seen whether the potential benefits of a Defence Directive would outweigh the

disadvantages; meanwhile he was working constructively with the Commission, UK

industry and other Member States to identify what benefits to defence procurement

might be derived from a Directive, and without commitment to support the adoption of a

22EU girds to enforce competition rules, Defense News, 11 December 2006

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Directive at Council, whether a balance of advantage can be achieved which would

allow us to support the introduction of Commission proposals.

We noted that, despite his view as to its consistency, it seemed to us that the

Governments position had shifted, from not supporting the development of a new

Directive, to seeking to identify what benefits to defence procurement might be derived

from one; that alternative interpretation might be that, with the Commission intent onpursuing this matter, he had concluded that damage limitation was the right approach;

and that though he said that UK involvement was without commitment to supporting

the adoption of a Directive, it seemed to us unlikely that, once produced, it would not in

due course become law.23

The Committee subsequently concluded:

We understand the purpose of the IC and the [EDA] code of conduct in relation to

Article 296 EC [] our concern, however, is that no case has been made for fresh

regulation of those areas of procurement in which Article 296 EC is not invoked []

We have seen nothing so far to justify the apparent change in the Governmentsposition. Perhaps this will become clearer as and when the commission concludes its

consultations and proposals are put forward. If that transpires [] they will need to be

able to demonstrate clearly and persuasively why further legislation is the right way of

making defence markets more effective and efficient and that it is not an additional

regulatory burden on top of those already in place.24

3 EU Package of Defence Measures December 2007

In December 2007 the European Commission published a package of measures entitled A

Strategy for a Stronger and more Competitive European Defence Industry. The measures

contain three elements:

1. A communication with recommendations for fostering competitiveness in the

European defence sector.

2. A proposal for a Directive on defence procurement to enhance openness and

competition in the defence sector.

3. A proposal for a Directive on intra-EU transfers of defence products designed to

alleviate obstacles to intra-Community trade.

Announcing the measures, EU Internal Market and Services Commissioner Charlie

McCreevy commented:

Introducing transparent and competitive procurement rules applicable throughout the

Union is crucial for the establishment of a common defence market. This will lead to

greater openness of defence markets between Member States to the benefit of all:

armed forces, taxpayers and industries.25

The European Defence Agency also welcomed the efforts of the Commission to develop an

effective European Defence Equipment Market, an initiative complementary to the EDAs

own harmonisation agenda. In a press release issued on 5 December 2007 it went on to

note, however, that:

23

European Scrutiny Committee, Twentieth Report of Session 2006-07, HC 41-xx, p.30-3124European Scrutiny Committee, Twentieth Report of Session 2006-07, HC 41-xx, p.32

25Commission proposes new competitive measures for defence industries and markets. IP/07/1860

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The Agency believes that competition is one key tool in a larger set that includes other

important initiatives such as agreements on security of supply and security of

information, issues on which the EDA is currently working. Competition is not a cure-all

and cooperation is in some instances more appropriate to shape the EDTIB [European

defence technological and industrial base] of the future.26

3.1 Policies to Support the Competitiveness of the Defence Sector

In addition to the publication of the two proposed Directives (set out below), the Commission

has also issued an overarching Communication, entitled A strategy for a stronger and more

competitive European defence industry, which sets out a number of general policies and

principles intended to support the competitiveness of the EDEM.27 In doing so, the

Commission has supported its position by arguing that:

The time has come to take vigorous action to enhance the competitiveness of Europes

defence industries. Simply put, if we remain on the current path, European citizens will

continue to pay too much and receive too little in terms of their defence and security

and Europes defence industry will lose its competitive edge.

The strategy presented in this Communication will create better conditions for Europes

defence industry to prepare for future challenges by increasing its competitiveness,

promoting innovation, and building upon existing strengths, creating a fairer market

place, and preserving and creating high quality jobs. This strategy is designed to

ensure that Europes defence industry can deliver the best capabilities for the ESDP.28

Therefore, in support of the two defence Directives set out below, the Commission also

proposes a number of non-legislative measures:

Promote the use of common standards by encouraging, in conjunction with the EDA,

Member States to make full use of the Defence Standardisation Handbook.29

Examine the merits of establishing an EU system of security of information that would

allow exchange of sensitive information between Member States and European

companies. The Commission will begin preparatory work on the potential scope,

contents and form of such a system in 2008. The Commission acknowledges that

such a regime may have to be built progressively starting with those States who are

already prepared to accept mutual dependence. However it is envisaged that this

scheme will eventually apply to all Member States.

Launch a study in 2008 into how the control of strategic defence assets may be

undertaken in the future in order to ensure competitive supply at the European level.

The Commission recognises, however, that it will be necessary to strike a balancebetween freedom of investment and protection of security interests regarding control

of material and other assets that are considered essential.

Continue to use, as necessary, relevant Treaty provisions and legal instruments at its

disposal in order to ensure fair competition for defence industry goods and to avoid

distortion of competition on non-military markets. The aim is to create the market

26EDA welcomes Commission Communication on EU defence industry and market, 5 December 2007

27COM (2007) 0764. A copy is available at:

http://ec.europa.eu/enterprise/defence/defence_docs/COMM_NATIVE_COM_2007_0764_F_EN_ACTE.pdf28 A strategy for a stronger and more competitive European defence industry, COM (2007) 764, p.10

29A copy of the handbook can be accessed online at: http://www.defense-handbook.org/

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conditions necessary to ensure that the practice of offsetting in defence contracts is

no longer required.

Foster greater overall coordination with and between Member States in order to

provide ESDP with the industrial and technological tools that are required. While it is

accepted that military capability is a matter for Member States, better and more costeffective performance could be achieved through the sharing and pooling of

resources for European civil and military programmes. The Commission argues that a

permanent exchange of ideas on defence planning and investment; an alignment of

procurement timing by Member States and the identification of synergies between

civil and military R&D are therefore required. The EDA is already taking forward a

work programme on the harmonisation of requirements and procurement.30

The Commission also argued in this paper that:

The full potential of the EU can only be exploited if there is effective co-operation

between all interested parties. The solution lies in a structured dialogue with the

competent bodies of the Member States, within the EU second pillar and the EDA,within the framework of the existing attribution of competences, to optimise synergies

between all aspects of policy affecting the defence industrys competitiveness.31

Therefore the Commission proposes to explore options for bringing all interested parties

together, along with other sources of national expertise such as think tanks, to allow for

effective dialogue in this area.

In its Thirteenth Report of February 2008 the European Scrutiny Committee set out the

Governments views on this package of measures, including the Commission

Communication. As an overview, the Committee reported:

1.24 The Secretary of State notes that the Communication proposes a raft of non-

legislative measures in addition to the two Directives, such as promoting common

standards, investigating possibilities for common EU approaches to security of

information and control of strategic assets, pooling of demand and R&D investment

and opening up foreign markets. The Secretary of State comments that few of these

ideas are new, having been raised in a previous Communication in 2003, and that

many of them are being addressed by the European Defence Agency, and that the

Government believes that the emphasis for action should lie with that organisation to

ensure a holistic approach to improving European defence capabilities []

1.26 On the question of subsidiarity, the Secretary of State explains that whilst many of

the measures, such as use of common standards, offsets, level playing field and

strengthening the position of small and medium-sized undertakings may be justifiable

under the single market policies, others such as defence planning and investment and

the proportion of defence spending allocated to R&D appear to sit squarely in the

second pillar. The Secretary of State comments that the Commissions thinking in

these more questionable areas is, admittedly, in line with strategies being implemented

by the EDA but nonetheless the Government will monitor carefully the Commissions

approach to action in the defence domain.32

30

See http://www.eda.europa.eu/genericitem.aspx?area=Organisation&id=108 for further detail.31COM (2007) 764, p.10

32European Scrutiny Committee, Thirteenth Report of Session 2007-08, HC 16-xi, Session 2007-08

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Further detail on the Governments views on each of the non-legislative areas proposed by

the Commission is set out on pages 9-13 of that report. The Committee itself concluded:

1.29 It is apparent from the Explanatory Memorandum that the Communication suffers

from defects in the analysis of the market and its context, notably in relation to

research and development. As the Secretary of State tellingly observes, the

Communication looks at issues through a single market lens.

1.30 In this connection, it is passing strange, even inexplicable, that the

Communication should not once mention NATO, even in the context of standardisation

and quality assurance, and in our view this must seriously undermine the value of the

Communication.

1.31 The Communication (document (b)) raises a number of general issues about the

structure of the defence equipment market, the respective roles of the Member States,

the EDA and of the Commission. Whilst we think it right to hold the two proposed

Directives under scrutiny, pending further examination of their scope and likely effect,

we consider that the general issues raised in the Communication and explained in the

Governments Explanatory Memorandum should be debated in European StandingCommittee (along with the Head of the Agencys Report and the guidelines for 2008,

which we consider elsewhere in this report).33

European Standing Committee B debated the Commission Communication on 10 March

2008. The Committee resolved:

That the Committee takes note of European Union documents No. 14937/07, Report

by the Head of the European Defence Agency on its activity in 2007, No. 15413/07, the

Councils guidelines for the European Defence Agencys work in 2008, and No.

16682/07 and Addenda 1-2, Commission Communication on a Strategy for a Stronger

and More Competitive European Defence Industry; and endorses the Governments

approach to the development of the European Defence Agency and its view that theanalysis and proposed solutions in the Commissions Communication need further

refinement before they could be supported.34

A copy of that debate is available online at:

http://www.publications.parliament.uk/pa/cm200708/cmgeneral/euro/080310/80310s01.htm

3.2 EU Draft Directives

Proposal for a Directive on Defence and Sensitive Security Procurement

Full Title: Proposal for a Directive of the European Parliament and of the Council on the

coordination of procedures for the award of certain public works contracts, public supplycontracts and public service contracts in the fields of defence and security (COM (2007)

766).35

Legal BasisThis proposal was made under Articles 47(2), 55 and 95 TEC, and is subject to the co-

decision procedure with QMV.


34European Standing Committee, European Defence Equipment Market and European Defence Agency, 10March 2008

35 A copy of the proposed Directive and an explanatory memorandum is available at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2007:0766:FIN:EN:PDF(Council of Ministers reference:16488/2007)

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Aims of the Proposed DirectiveAs a follow-up to the Interpretative Communication of December 2006, the intention of this

proposed Directive is to introduce harmonised EC rules on the procurement of defence and

sensitive non-military security equipment where exemptions under Article 296 TEC do not

apply. In principle, therefore, the procurement of all military equipment on the 1958 list, and

related works and services, will come under the remit of this new Directive. Only where it isdeemed that the protections provided in this new Directive are insufficient to safeguard a

Member States essential security interests, will the State in question be able to invoke the

procurement exemptions provided under Article 296.

The express aim of this new Directive is to encourage EU Member States to limit the use of

Article 296 to exceptional circumstances, by providing a procurement framework unique to

the defence and security sector which takes into consideration issues which will not

contravene a states essential security interests during the procurement process. Security of

supply and the security of information have been highlighted as two such issues. Whether

the inclusion of such considerations would be enough, however, to warrant the UKs

procurement of crucial technologies such as those that have been highlighted for retentiononshore in the UKs Defence industrial Strategy36 under the provisions of this Directive

remains to be seen.

For the most part this Directive will be based on the design and rationale of Directive

2004/18/EC, in particular with respect to the value thresholds for the application of the

Directives provisions, and the rules on technical specifications, advertising, award

procedures and criteria. An outline of the procurement tendering process under Directive

2004/18/EC is set out at: http://www.ogc.gov.uk/documents/Intro_to_EU.pdf. However, this

new directive will also introduce a number of specific features which reflect the unique

characteristics of public defence and security contracts. Specifically the Directive proposes:

Scope the new Directive will apply to the procurement of arms, munitions and war

material and related works and services. In addition, Member States can apply its

principles to the procurement of sensitive non-military goods such as counter-

terrorism equipment or goods for combating organised crime. Procurement of non-

sensitive and non-military equipment will remain covered by Directive 2004/18/EC

even if those goods are procured by awarding authorities in the field of defence and

security.

Procedure Awarding authorities may use the negotiated procedure with

publication of a contract notice as standard which will give them the flexibility to

negotiate all details of a contract with suppliers. However the Directive recognisesthat this may be impossible or inappropriate in certain exceptional circumstances.

Therefore in very specific cases the use of the negotiated procedure without

publication can be used, for example contracts for additional deliveries or the

modernisation of technically complex existing systems. The restricted procedure and

competitive dialogue may also be used if desired. However, the open procedure is not

considered appropriate given the confidentiality and security requirements attached to

such contracts (articles 17-20).

The awarding authority may also oblige contractors to make specific contractual provision for

the security of information (article 14) and security of supply, particularly in times of crisis and

36A copy of the DIS is available at: http://www.mod.uk/NR/rdonlyres/F530ED6C-F80C-4F24-8438-0B587CC4BF4D/0/def_industrial_strategy_wp_cm6697.pdf

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armed conflict (article 15). Both provisions can also be used in the criteria for selecting

suppliers. Contracts will be awarded on the basis of two criteria: the lowest cost or the most

economically advantageous tender (article 37).

Any decision to exempt a contract on the basis of Article 296 must be taken on a case-by-

case basis and against the guidance set down in the Interpretative Communication. Thegeneral principles of the proposed text of the Directive also states:

non-application of the Directive should be proportionate to the aims pursued and cause

as little disturbance as possible to the free movement of goods and/or the provision of

services.37

The Directive will not, however, impact on defence trade with third countries which will

continue to be governed by WTO rules and in particular the Government Procurement

Agreement.38 It will remain the decision of a Member State whether to open up any

competition to non-EU suppliers. The Commission has also made clear that the Directive

does not allow for, or regulate, offset agreements. However, it has also stated:

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.39

Urgent Operational Requirements in support of an operation conducted outside of the EU will

be specifically excluded from the provisions of this Directive (article 9).

The Directive will also have an impact on the Communitys budget. Financing will be needed

for the daily publication of notices in the Official Journal of the European Union; annual

monitoring of the Directives implementation; medium-term assessment of the administrative

impact of the Directive (not before 5 years have elapsed) and a longer term assessment (notbefore 10 years) of the economic impact of the Directive. However, the European

Commissions impact assessment concluded that there would be limited cost implications for

contracting authorities and businesses themselves. Any increase in costs would be tied to

the initial introduction of the new rules, while in the medium or longer term administrative

costs for business, and SMEs in particular, would be lower.40

Importantly the adoption of this Directive would introduce the ability of suppliers or

contractors to take individual purchasers, i.e. the MOD, to the High Court if they considered

them to be in breach of the regulations set down under this Directive. The European

Commission would also have the right to take the UK to the ECJ over defence procurement

matters that related to the implementation of this Directive.

The Directive is also intended to be entirely complementary to the EDA Code of Conduct on

defence procurement.

In response to concerns that the Directive will lead to the indirect adoption of a buy

European policy on the part of the EU Member States, the Commission has sought to

reassure that:

37COM (2007) 766, para. 7

38

Further information is available at: http://www.wto.org/english/tratop_e/gproc_e/gproc_e.htm39European Commission, MEMO/07/547

40European Commission, Explanatory Memorandum

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The objective of the Commissions initiative is not to introduce a Buy European policy,

but to foster transparency and openness of defence markets between Member States

[] 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.41

The Commission has also stated:

This proposal does not in any way interfere with the right of member States to

cooperate on defence procurement []

The Directive does not in any way interfere with Member State sovereignty on security

and defence issues: it does not seek to determine what they should procure, or how

much they will spend on defence. It merely offers them a more flexible tool which

allows them to protect their security interests during the procurement process without

violating their Treaty obligations.42

Current EU Legislative Status

The proposal was adopted by the Commission on 5 December 2007 and sent to the Counciland European Parliament on 7 December.

European Parliament:

The Internal Market and Consumer Protection Committee in the EP considered the proposal

during the first half of 2008. Opinions were also sought from the Foreign Affairs Committee

and the Industry, Research and Energy Committee.43 The Internal Market Committee made a

significant number of recommendations for amendments in its draft report of July 2008 which

were subsequently adopted on 7 October 2008. In summary, the main first reading

amendments were as follows:

An amendment which would prevent awarding authorities from dividing contracts that

span a relatively long period of time into separate contracts covering different periods

in order to circumvent the contract value threshold which would invoke the

requirement for a public procurement procedure.

The provision for derogations under Article 296 should be incorporated into article 9

of the proposed directive in a form appropriate to public procurement law in order to

improve legal certainty and prevent abuse of Article 296.

The introduction of an obligation on the European Commission to submit to the EP

and the Council, within one year of the publication of this Directive, proposals for an

EU security of information system that allows the exchange of information between

contractors and the contracting authorities and a common regime of appropriate

guarantees relating to security of supply.

The introduction of a review procedure along the lines of Directive 2007/66/EC, to

provide effective legal protection for companies and ensure transparency and non-

discrimination in the award of contracts, albeit taking into account the special interests

of the Member States.

41

European Commission, MEMO/07/54742European Commission, DG for Internal Market and Services, press conference, 5 December 2007

43The Industry, Research and Energy Committee agreed on 29 January 2008 not to submit an opinion.

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A copy of the tabled first reading legislative report, with a full detailed list of amendments and

the opinion of the Foreign Affairs Committee is available at (ref: A6-0415/2008):

http://www.europarl.europa.eu/oeil/file.jsp?id=5573442&noticeType=null&language=en

The amended proposals are scheduled to be debated in the European Parliament Plenary

Session on 19 November 2008.44

It is worth noting that the next European Parliament elections are due in June 2009.

Although the proposals wouldnt be dropped if the Directive is not agreed and adopted before

this date, it is likely that they would be delayed quite significantly while the new Parliament

was established.

Council of Ministers:

According to the EUs legislative observatory the proposal was raised in the Council of

Ministers on 25 February 2008.45 Under the co-decision procedure the Council will have to

debate and approve the European Parliaments first reading amendments before issuing acommon position. The proposals will then be subject to a second reading in the European

Parliament and the Council. If there is still no agreement between the two bodies after

second reading, a Conciliation Committee will be convened.

CommentsThe proposal was considered by the European Scrutiny Committee in its Thirteenth Report of

February 2008. In that report the Committee set out the view of the British Government:

in mid-2007 the Commission decided to opt for a free-standing Directive which would

repeat much of Directive 2004/18/EC but with added provision for defence and

security, rather than devising a new set of rules to operate alongside the existing public

procurement regime. Whereas the then Minister for the Armed Forces expressed theconcern in 200540 that an additional regulatory burden on top of those already in place

was unlikely to support the Governments aim of making defence markets more

effective and efficient, the Secretary of State points out that the proposal now is that

defence and security activity should fall under only one Directive so that the regime

thus created should be no more complex than is the case today []

However, the Secretary of State also comments that the way in which other, existing

provisions have been reflected into this Directive, the fact that some have not been

reflected at all or the way that some new provisions have been drafted, gives cause for

concern and that the Governments view is that if these are not appropriately dealt

with either by amendment or deletion, the Government would need to assess whether

the benefits above are outweighed. These concerns include the following:

Deletion of the security and secrecy exemption (i.e. equivalent of Article 14, EC

Public Procurement Directive 2004/18/EC) currently used to protect very sensitive

information. The new rules covering security of information make no provision for

Member States to take special measures where information is, for example, too

sensitive to release to non-national companies. The Commission argues that other

Treaty exemptions (relating to free movement) afford this option. However, whilst it is

technically possible to rely on those, legal advice is that harmonisation of Community

rules (i.e. relating to security of information) would remove the ability to use the

derogations in such contexts.

44 http://www.europarl.europa.eu/oeil/FindByProcnum.do?lang=2&procnum=COD/2007/0280

45 http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/intm/98919.pdf

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Ensuring this Directive does not lead to the ECJ becoming involved in resolving

differences of view concerning whether or not something is necessary for Member

States security, despite Member State competence on national security (currently and

under the Reform Treaty).

Deletion of the research and development exemption. Such contracts are now

included in the scope of the general (albeit improved) provisions, with only one specific

article added for special treatment of R&D contracts.

The omission of a reserved contracts provision to support sheltered workshops

where more than 50% of employees are disabled.

The Secretary of State adds that, more importantly, the Government will wish to ensure

that this proposal will not lead to the possibility that what it considers as its legitimate

use of Articles 30, 39, 46 and 55 (public security in respect of the free movement

provisions of the EC Treaty) and Article 296(1)(b) EC (the national security exemption)

may be eroded over time, but acknowledges that it is conceivable that the UK maynonetheless find it more difficult to use such derogations (both domestically and

internationally) once ECJ jurisprudence is developed. Despite the fact that the UK

defence market is one of the most open in the EU, the Government continues to

foresee the need to use Treaty exemptions in appropriate circumstances.

The Secretary of State also explains that the Government is concerned about the

inclusion of security in the scope of this measure, and believes this to be premature

since the impacts of amending the procurement regime for defence have been the

subject of discussion for many years, unlike security. Moreover, under this Directive

the Government believes that some sensitive procurements would not be dealt with

appropriately, potentially jeopardising the security interests of Member States. The

Secretary of State adds that these concerns, together with an absence of consensuson a definition of security for the scope of the Directive, may hold up overall progress.

The Government therefore believes, and will argue, that security should be taken out

of scope to avoid this and to ensure rapid progress towards a more competitive

defence market.46

The Committee thus concluded:

We agree with the Secretary of States analysis of the risks of the present proposal if it

is not amended. We particularly agree with his comments on the likely erosion of the

existing safeguards under the EC Treaty which may be the result of this proposal.

6.19 We note with concern the ambiguity of some of the definitions used, particularly inrelation to sensitive information where it is not clear if the Member States view on

whether information should be protected against disclosure is to be conclusive. We

also draw attention to the attempt to define terrorism and criminal organisation in an

EC instrument, when these matters are within the scope of the EU Treaty, and ask the

Secretary of State if these might better be deleted.

6.20 We note the exclusion of certain contracts awarded in third countries, but question

whether the proposed Directive should have any application where the contract is

awarded in a country outside the European Union and we ask the Secretary of State to

explain the degree to which extra-territorial jurisdiction is intended by this provision.47



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The Committee did not clear the proposal and highlighted its relevance to the debate with

European Committee B on the European defence industry on 10 March 2008. 48 Following a

request for further information the Committee is due to re-examine these proposals again on

24 November 2008.

While expressing its support for the overall package of defence measures presented by the

Commission, the Aerospace and Defence Industries Association of Europe has also voiced

concern that regulating the EU marked in a non-regulated world market could cause

competitive disadvantage, especially in a sector where political, military and diplomatic

involvement is sometimes called upon to support sales to governments. 49 The Society of

British Aerospace Companies has also commented:

The UK already practices open defence procurement and it is good to see that the

Commission is seeking to encourage greater competition across national borders in

Europe. This package is in the very early stages of development and UK industry

hopes this will be a process that results in greater efficiency in defence procurementacross Europe. Industry is keen to play its part in shaping the proposal and it is

important that the right balance is struck between the benefits of open markets and the

retention of national industrial defence capability.

Industry is concerned to ensure that the proposed Directive has the effect of

encouraging investment in Research & Development and will be playing close attention

to this aspect of the proposals.50

Proposal for a Directive on Intra-Community Defence Transfers

Full Title: Proposal for a Directive of the European Parliament and of the Council on

simplifying terms and conditions of transfers of defence-related products within the

Community (COM (2007) 765).51

Legal BasisThe proposal is based on Treaty Article 95 TEC and is subject to the Co-decision procedure

using Qualified Majority Voting (QMV).

Aims of the Proposed DirectiveFollowing on from the 2006 consultation on intra-community defence exports (see above),

the Commission has proposed to introduce a Directive simplifying national licensing

procedures governing the movement of defence products and services within the EU. The

Commission has argued that the introduction of such legislation will increase the

competitiveness of the defence industry; facilitate participation in prime contractors supplychains, particularly by SMEs; benefit large industrial groups with subsidiaries in several

Member States and enable those States to meet military needs at lower cost and enhance

security of supply. Facilitating intra-community transfers is also regarded as essential for

making the defence Directive more effective by eradicating the theoretical risk that sourcing

48A copy of that debate is available online at:http://www.publications.parliament.uk/pa/cm200708/cmgeneral/euro/080310/80310s01.htm

49ASD broadly welcomes the European Commissions defence directives, 5 December 2007

50SBAC, European Commissions defence package, 5 December 2007

51

Text of the proposed Directive is available at:http://ec.europa.eu/enterprise/defence/defence_docs/COMM_2007_0765_F_EN.pdf. (Council reference16534/07)

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from a European competitor instead of a national producer would carry an administrative

burden thereby persuading a Member State to procure from the latter.

The Directive does not propose to abolish licensing requirements for intra-community

transfers.52 Indeed the right to issue or reject an export licence will remain at the discretion of

the Member State in line with its export control policies. Instead it proposes to introduce astreamlined framework of general and global licences for intra-community transfers teamed

with confidence building measures for the protection of national security such as certification

of defence companies and guarantees to prevent the re-export of goods to third countries.

Individual licensing will remain an option in exceptional circumstances in line with the

prerogative of Member States with respect to safeguarding its essential national interests

and the determination of its defence and export policies and obligations under international

arms control agreements and other treaties.

Specifically the Directive will:

Apply to all defencerelated products covered by the Common Military List of the

European Union,53 including sub-systems, components, technology transfer,

maintenance and repair with is reflected in the Annex to this Directive. Member States

will also be able to apply the provisions of this Directive to other defence-related

products not included in the Annex and in doing so must publish a list of those

products and inform the Commission and other Member States (article 2).

Establish a system of general licences for two types of transfer: government-to-

government transfers and transfers to certified recipients in another Member State

(article 5). Suppliers in the territory of the Member State issuing a general licence and

who meet the terms and conditions of that licence will thus be able to transfer

defence-related products without the need for an individual licence every time.

Establish global licences which may be granted to an individual supplier, at its

request, for the transfer of one or several defence-related products to one or more

recipients in another Member State (article 6). A global licence will be valid for a

minimum of three years.

Place a requirement on Member States to authorise and determine the terms and

conditions of each licence, including the defence products that the licence covers, the

possible uses of those products and the reporting obligations of companies using

those licences (articles 4 and 6 (2)).

Require Member States to certify companies who wish to source goods under generallicences issued in other Member States (article 9). It will be for the individual

companies to determine whether to request certification. The duration of a certificate

will not exceed five years.

Include a safeguard clause whereby a Member State may revoke or limit the use of

such licences at any time for the protection of essential security interests (article 4

(7)). Where a Member State issuing a licence has reason to doubt whether a certified

company would respect any conditions attached to its general licence it will be able to

suspend those licences with the company concerned. Such action will be reported to

52This option was considered as part of the Impact Assessment (see SEC (2007) 1593).

53See Official Journal L 88, 29 March 2007, p.58

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both the Commission and the other Member States (article 15). Certification may also

be revoked (article 9 (7)).

Oblige companies to guarantee respect for the export limitations which may be

imposed by the originating Member State (article 10).

Include a safeguard clause whereby Member States in the interests of safeguarding

essential security interests or compliance with its arms export control obligations

could choose to alternatively grant an individual export licence (article 7).

Establish a Co-operation Group composed of representatives of each Member State

and chaired by a representative of the Commission. The tasks of the group will be to

examine any issue concerning the application of the Directive which may be raised by

the Chairman or any Member State representative, and in addition evaluate

implementing measures in each Member State; the use of the safeguard clause;

measures which should be taken by Member States to inform companies of their

obligations under the Directive and provide guidance concerning licence forms.

In addition, Member States will be entitled to pursue other intergovernmental arrangements

such as the Six Nation Framework Agreement. The Commission will also be tasked with

producing a report on the implementation of this Directive which may be accompanied by

recommendations for legislation, where appropriate (article 16). Member States will also

have 18 months following the entry into force of this Directive to adopt the legislation

necessary for compliance with this Directive and within three years apply the necessary

administrative provisions for this framework (article 17).

As a result of these provisions the Directive will subsequently have implications for the

Community budget as the Commission will be required to co-operate in work with the council

on Updates to the Common Military List; report on the measures being taken by Member

States to implement this Directive; report on the functioning of the Directive and its impact on

the development of the EDEM; to organise the work of the Cooperation Group and monitor

compliance.

EU Legislative StatusIt was adopted by the Commission on 5 December and sent to the Council and the European

Parliament (EP) on 7 December 2007.

European Parliament:

The Internal Market and Consumer Protection Committee in the EP examined the proposalsin the first half of 2008. Opinions were also sought from the Committee on Foreign Affairs

and the Committee on Industry, Research and Energy. The Internal Market committee made

several recommendations for amendments in its draft report of June 2008 which were

subsequently adopted in its first reading report on 7 October 2008. The main amendments

agreed were intended to reinforce the following points:

The sanctions to be applied in cases of violation of licensing conditions need to be

laid down in more detail. In particular the violation of export limitations on defence

products, specifically to third countries, should be established as a criminal offence.

A comprehensive assessment of the Directive and its implementation should be

undertaken by the Commission after 5 years. If necessary proposals should be

presented to the Parliament and the Council in order to amend the Directive. That

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assessment should also include an evaluation of the impact of the directive on

SMEs.

Company certification should be limited to three, instead of five, years.

A copy of the tabled first reading legislative report, with a full list of amendments and the

opinions of the Foreign Affairs and the Industry, Research and Energy Committees is

available at (ref: A6-04 10/2008):

http://www.europarl.europa.eu/oeil/file.jsp?id=5573632&noticeType=null&language=en

The amended proposals are scheduled to be debated in plenary session on 13 January

2009.

Council of Ministers:

According to the EU legislative observatory, the proposal was raised in the Council on 25

February 2008.

54

Under the co-decision procedure the Council will have to debate andapprove the European Parliaments first reading amendments before issuing a common

position. The proposals will then be subject to a second reading in the European parliament

and the Council. If there is still no agreement between the two bodies after second reading, a

Conciliation Committee will be convened.

CommentsGiving evidence to the Quadripartite Select Committee on 17 January 2008 the then

Secretary of State for Defence, Des Browne, set out the Governments position with respect

to this Directive, thus far. He stated:

There is a document published and we are considering our position in relation to this

document that has come out and there will be further discussions with the councilworking group but by and large our view is that this area of work addresses an

objective that we have which is that our licensing practices in our view were ahead of

most other Member States and we are trying to get them to bring their licensing

practices to where we believe ours are. That manifestly would be in our interests []

As I recollect-although I do not remember the detail-we did not agree with the early

proposals. We argued for a set of proposals which were much more akin to the

scheme that we have in this country. Those proposals have broadly been accepted,

which we are pleased about. They are reflected in the current document which is out

for consideration by other countries, including some who supported the earlier

proposals. So this is a dynamic process. Insofar as the actual documentation, it shows

that we have been persuasive in our arguments; we have won a lot of the argumentsand we are pleased about that. Broadly we welcome the direction of this but we are

alert to the possibility that it could slip back at any time and we will make sure that we

try to prevent that from happening.55

However, in a discussion of the Governments views in its Thirteenth Report published on 6

February 2008, the European Scrutiny Committee noted:

However, the Minister also points out that the proposal restricts the scope for

determining national policy on licence conditions, on when open licences should be

54

http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/intm/98919.pdf55

Quadripartite Select Committee, Corrected Transcript of Oral Evidence: Strategic Export Controls, HC 254-i,Session 2007-08

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made available and on when licences may be revoked, and that in this respect HMG

would lose some of the discretion it currently has. As an example, the Minister refers

to the fact that the UK might currently argue that restrictive licence conditions on

exports of military equipment to Member States would be justified under Articles 30 or

296 EC, but that Articles 4(4) and (5) of the proposal leave conditions to be determined

having regard to the risks for preservation of human rights, peace, security and

stability created by the transfer which the Minister describes as potentially narrower.

3.22 The Minister also points out a number of risks in relation to external competence,

as follows:

Equally, although the draft would not extend the Communitys external competence in

relation to trade in military goods (already theoretically covered by the Common

Commercial Policy), the Commission might become more willing to challenge Member

States use of Article 296 of the EC Treaty to justify bilateral treaties in this area. Given

the impact that this could have on our ongoing efforts to ease the conduct of defence

trade with non-EU nations, the Government will pay special attention to this aspect

during the Council Working Groups. We will also need to ensure that the provisions of

the Directive allow the UK to conclude bilateral treaties containing provisions on re-export.

56

The Committee concluded:

3.23 We share the concerns the Minister has raised over the loss of national discretion

occasioned by this proposal and the extension of external Community competence

which may be derived from it. It seems to us that there is considerable risk that the UK

would find itself no longer able to rely on Article 296 EC to justify the making of bilateral

agreements with third countries (including NATO Members) in relation to the licensing

of exports of military equipment and supplies. We ask the Minister to explain how the

proposal could be amended to avoid this consequence.

3.24 Having regard to these risks, we also ask the Minister for the Governments view

on whether the subject-matter of the proposal might not better be dealt with by the

European Defence Agency than by a proposal under the EC Treaty.

3.25 We have a number of further issues of principle on which we would be grateful for

the Ministers comments. The first is to ask if any limitation on Member States freedom

to engage in intergovernmental cooperation is intended by Article 4(4). The second is

to ask what is meant by the requirement in Article 4(8) to determine the recipients of

transfer licences in a non-discriminatory way and, in particular, what is meant by

discrimination in this context.

3.26 Thirdly, we ask if any assessment has been made of the consequences ofreproducing the Common Military List of the European Union, which has been adopted

intergovernmentally under the EU Treaty, as an Annex to a measure adopted under

the EC Treaty. In this context, we ask if the objective of defining the material scope of

the Directive could not have been better achieved, simply by a reference to the EU

instrument.

3.27 Fourthly, we draw attention to the wide delegation of powers to the Commission,

which is empowered, not only to amend the list of defence-related products in the

Annex, but also to amend non-essential parts of the Directive, with the Commission


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apparently the judge of what is essential for these purposes. We ask the Minister

if the Government is content with such a wide delegation of legislative authority.57

On the basis of these concerns the Committee did not clear the proposal and highlighted its

relevance to the debate with European Committee B on the European defence industry on

10 March 2008.58

The Committee on Arms Export Controls (formerly known as the Quadripartite Committee)

concluded in a report published in July 2008 that:

On the basis of the evidence given by the Secretary of State for Defence and by the

Foreign and Commonwealth Office we conclude that the Government has reached the

view that neither the Defence and Security Procurement Directive nor the Intra-

Community Transfers Directive as published on 5 December 2007 will lead to a

weakening of the UK's export control system. This is an issue that we shall keep under

review.59

In answer to a parliamentary Question on 28 October 2008, the Minister for Defence

Procurement, Quentin Davies, stated:

We share the Commission's desire for the creation of a more effective European

defence equipment market that is open, transparent and competitive. We are working

positively with the Commission and other member states to reach agreement on

directives which would provide benefit to the conduct of defence business for all

stakeholders while protecting the UK's strategic interests. A defence and security

procurement directive also has the potential to improve British industry's access to

European defence markets and to improve its competitiveness worldwide. The

proposed terms of the transfers directive are consistent with the way in which the UK

export licensing system currently operates.60


58A copy of that debate is available online at:

http://www.publications.parliament.uk/pa/cm200708/cmgeneral/euro/080310/80310s01.htm59Committee on Arms Export Controls, Scrutiny of Arms Export Control 2008, HC 254, Session 2007-08

60HC Deb 28 October 2008, c810W
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ec defence procurement

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