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30 juin 2015 2 30 /06 /juin /2015 17:50
The Impact of the 'Defence Package' Directives on European Defence

19.06.2015 source SEDE

In its conclusions on the Common Security and Defence Policy, the December 2013 European Council stressed the importance of ensuring the full and correct implementation and application of the two defence Directives of 2009. The present study intends to provide the Parliament with an initial perspective regarding the state of implementation of the Directive 2009/81/EC on defence and security procurement (Part.1) and the Directive 2009/43/EC on intra-European Union transfers of defencerelated products (Part.2). It undertakes a first assessment of national practices, through qualitative and statistical analysis. It identifies the complex points and obstacles, which, if not overcome, may well call into question the Directives’ expected beneficial effects.


Executive summary


The directive 2009/81/EC on defence and security Procurement under scrutiny

In order to understand the evolution of Member States’ acquisition practices since the entry into force of the Directive, the first part of the study is structured around three main sections : (1) the situation before the Directive’s entry into force, an overview of the major principles introduced by the Directive and their implications for actors in the European defence sector, along with the process of transposition into national law; (2) An initial evaluation of national practices through qualitative analysis and statistical analysis (based on reprocessed data from the TED database, during the period from the 21st August 2011 to the 31st December 2014, covering all EU Member States) ; (3) An identification of the complex points and obstacles, which, if not overcome, may well call into question the Directives’ expected beneficial effects.

The Directive 2009/81/EC intends to provide procurement rules tailor-made for defence and security markets and is supposed to lead to more transparency and competition. Most importantly, it should limit the use of the exception clause of Article 346.

While the number of documents published on TED over these past two years has been increasing, this increase is not as significant as expected, and above all it is due to a small group of Member States (France, Germany, and the United Kingdom). This initial survey demonstrates an important disparity in the Member States’ publication practices (contract notices and contract awards). This poses the question of reciprocity. In value, contract awards notified between the 21st August 2011 and the 31st December 2014 represent around €10.53 billion. The year 2014 accounts for around 65% of the total, due to significant contracts notified by the United Kingdom in the field of services and facilities management, and by France on the segments covering Repair and maintenance services of military aircrafts.

The Directive 2009/81/EC is today favoured for contracts dealing with services, the acquisition of equipment deemed to be of a low strategic value, and sub-systems. Over the past three years, all of the major military equipment contracts, thus those that have had a structural effect on the DTIB, were notified without going via the Directive. Previous practices have continued, notably the use of Article 346.

When the contracting authorities/entities provide the name and address of the successful economic operators, in 84% of cases, the selected supplier is based on national territory. An analysis focused on the Member States that have published the most contract award notices (and if we consider non-specified addresses as national, as the European Commission does) demonstrates that the proportion of selected suppliers located on national territory reaches 98% for Germany, 97% for France, 96% for Italy, 96% for Poland, 92% for the United Kingdom, 90% for Romania, and 64% for Finland.

Concretely today acquisition practices seem to show an incomplete and incorrect application of the Directive, with de facto a limited or even non-existent impact on the DTIB. It is indeed too hasty and premature to draw conclusions from such a short period, all the more so given that it generally takes 5 to 10 years for a directive to be fully applied, and this is referring to the civilian sector. Although this new regime is not yet functioning satisfactorily at the present time, the Directive represents an important step in a sector such as defence, which is marked by a significant degree of opacity in acquisition practices.


The State of implementation of the Directive 2009/43/EC on Intra-EU transfers of defence- related products

In order to assess in details the current state of implementation o the Directive 2009/43/EC, the second part of the report proceeds in 3 steps and considers, first, the principles of the ICT Directive regarding the general licences, second, the state of the certification process and third the eventual impact of the Directive on the actors focusing specifically to topic of the end-use/end-user control.

The use of general licences appears to be quite limited considering its potential. This can be partially explained by the fact that the implementation of the new regulations is still in a transitional phase. However study reveals that the entire licensing process established by the EC suffers from major problems threatening the objective of simplification and harmonization. First, the report identifies a lack of availability of the relevant documents. Second, the general licences are too diversified in terms of scope and structure of the documents and conditions attached. Third Member states adopt different definitions of what sensitive products are, which is a corollary of the multiplicity of the defence-related product lists attached to the general licences.

To date, only 36 defence companies are registered on CERTIDER. The pace of certification is impacted by the relative complexity and diversity of the general licences, but there is obviously is some skepticism about the practical benefits of the enlisting process. It may not be considered worth the effort for the defence companies. The observation is even more valid for Small and Medium Enterprise.

Because of the slow pace on implementation of the Directive 2009/43/EC it is hazardous to analyze its effect on the European defence market. However, the actual trends allows the formulation of hypotheses notably on the eventual adaptation of the en use/end user control processes within the EU. States remain attached to their monitoring systems. It is an international or regional obligation for them but they also want to stay aware of any eventual re-export within the UE and of course, outside.

The benefits of the ICT Directive will not be felt similarly by all Member States, national authorities and defence companies. Their effects will certainly be different among Member States depending on the structure of their national defence sector and its reliance on exports. National factors and realities of the defence industry, as well as diverse perceptions of arms trade controls in Europe, can explain the current unequal level of implementation of the Directive and limit the overall benefits of the new regulatory system put in place by the Directive.


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21 octobre 2011 5 21 /10 /octobre /2011 07:45
Does EU Defence Initiative Mark the Beginning of a Truly Competitive Military Equipment Market?

Source: Atlantic Council


10/20/2011 Jonathan Dowdall - defenceiq.com


2011 is proving a momentous year for European militaries, with both spending cuts and new cooperative ties radically shaking-up the defence establishment. Yet whilst the austerity screws continue to tighten in national capitals, in the European Union’s corridors of power, something far more fundamental is coming into force. On the 21st of August, phase two of the EU’s “Defence Package” passed into binding law, beginning a paradigm shift for European defence industry relations. Indeed to put it simply - and in the words of an executive from one of Europe’s largest defence companies - “this is the biggest thing to happen to European defence ever.”


As always, Defence Dateline will take you through the key points of this landmark policy.


The need to “De-frag” EU defence


The Defence Package seeks to address the fragmentation and un-competitiveness of the EU’s defence industry. The core question is: how has a continent that spends a not-insignificant €200bn a year on defence ended up with so little “bang for its buck”?


The arguments about low overall investment are well known, but in addition, inefficiencies in EU member state defence spending are exasperated by the division of its defence industrial base into 27 national markets. This fragmentation creates additional costs for buyers – i.e. European militaries - in two ways.


Firstly, because nations must acquire and pay for a myriad array of export licenses for even the simplest inter-EU weapons sale, pan-European defence transactions incur significant overheads. In fact, the European Commission has estimated that individual national licensing regimes and a lack of uniformity in application processes generates €400m in costs a year.


Secondly, Europe’s defence industry has for many years remained outside of the EU free market, due to a key component of the EU’s Lisbon Treaty - Article 296. This article allows nations to exempt defence and sensitive military procurement contracts from EU open competition laws - under the banner of “national security interests”.

Unsurprisingly in an industrial sector populated by national champions and niche interests, in practice almost all defence contracts have been declared “Art. 296”, and thus closed to open tender. This has obvious implications for market transparency and supply-discrimination, but it also creates generally disadvantageous market conditions across the EU. In effect, most national companies have guaranteed first access to their government’s contracts, regardless of competitors just across the border. This is not good for market and pricing forces, and it is not good for European military effectiveness.


Leveling the playing field


To address these issues, the EU legislated a “two-for-one” package of laws in 2009 to tackle these systemic problems.

Part 1, which came into force on the 30th of June 2011, addresses the issue of export licenses. It induces member states to replace their existing individual licences with a general EU certificate for arms transfers between member state markets. If successfully implemented, this should reduce the bureaucratic overhead for inter-EU transfers to a simple and quick “rubberstamp”. Cross-border industrial transfers, as well as military procurement, will both stand to gain from such a move, at a fraction of the current export licensing cost.


Part 2, which entered into force on the 21st of August 2011, tackles the larger problem of national protectionism. This directive demands that national procurement agencies align their contract tender announcements into a common EU format. Yet more crucially, it also puts additional restrictions on the use of Art. 296, by demanding that most supply or service contracts above €412,000 or procurement contracts above €5.15mmust abide by EU free market laws, meaning that they must be publicly announced and left open to European bids.


It is this second provision which seeks to truly shake-up the old order. By pushing European defence procurement into the open market, the EU is seeking to break monopolistic and protectionist tendencies in the defence sector. Significantly more European defence bids should, under the Defence Package, be open to any company within the EU, without prejudice to their country of origin.


Testing times - theory and practice


Needless to say, this utopian vision of a truly open defence market will not manifest over-night. In fact, huge questions remain about the effectiveness and implementation of the Defence Package.

Firstly, Art. 296 is not dead or buried. Member states retain their sovereign “national security” opt-out, even under the new law, as this is enshrined in the Lisbon Treaty and transcends individual legislation. National capitals will still have the legal right to exempt certain contracts from foreign competition, and thus shield their national industries. The question will be how widely states choose to enact Art. 296 under the new law.


Pre-emptively, the EU has already tried to cover this eventuality. The package contains a specific technical annex categorising the types of defence equipment that can be declared “national security” sensitive. Member states have thus had their legal room for manoeuvre severely curtailed. Gone are the days where everything from ammunition to jeep tyres could be lumped into a safe bid guaranteed to be won by a national arms champion. The onus will now be on member states to justify why a contract is too sensitive to tender openly.


Indeed, should a national government refuse to open a contract to pan-European tender, they could be vulnerable to a legal challenge by member states who feel their defence companies are being discriminated against. The EU Court of Justice could then be asked to adjudicate against a transgression of the free market, with financial penalties if an infraction is deemed to have taken place. It is also likely this would incur a certain amount of political embarrassment for the transgressor.


Yet the above scenario presumes the basic mechanisms of the Defence Package will be observed - and this has also yet to be tested.


At the bottom line, there are political, and not legal, questions about these reforms. Would a smaller member state (Slovakia for example) be willing to risk a public duel on behalf of its national industry with Germany or France over a procurement bid worth, say,  €10m? And would the political fall-out be worth the cost, as recriminations fly and politicians pontificate?


We simply don’t know at this stage how honestly member states intend to deal with the new rules, and how willing others will be to challenge them if they don’t. Art. 296 is ultimately a red-line: something the EU cannot supplant completely through law. It will thus fall to bilateral politics to smooth out the details in practice.


Transatlantic implications?


Interestingly this inter-EU shake-up may also send shockwaves across the Atlantic, as the directive compels a larger number of bids to be tendered on the EU free market - but not necessarily to those outside of it.

For instance, effectively only two “categories” of contract existed in Europe in the past - open to the world (and thus the US) or closed to national champions only. However with the addition of “open EU market” to that list - and the legal compulsion to push more bids into this category it entails - it could transpire that European procurement agencies will, whilst opening up to the EU27, simultaneously reduce the number of truly global open bids. After all, member states have simultaneously been granted cheaper and easier arms export licences to their European neighbours, an advantage the US cannot match.


Thus, whilst strongly denied publicly by the European Commission, the incentives to “buy European” have certainly de facto increased. It is difficult to imagine the US being “locked out”, but these fundamental changes in procurement could certainly alter the buying preferences of EU member states regarding US military equipment.


“The biggest thing to happen to European defence ever”


As this analysis indicates, the sources of Europe’s defence woes have industrial and bureaucratic, as well as spending, roots. The EU has aggressively set out to rectify these deficiencies, highlighting an increased readiness to legislate on defence matters and to introduce greater competitiveness in the last “closed shop” in town.

Yet whether the efficiencies and reduction in fragmentation that lies at the heart of these efforts can realistically be achieved is, as has been explained, an open question. It must also be remembered that a key component of market “de-frag” is a reduction in the number of defence primes. A truly open EU defence market would naturally begin to more closely resemble the national market of the US - with almost all bids fought over by a small number of multi-sector conglomerates.


The loss of national champions this would entail across Europe will almost certainly send governments dashing for the Art. 296 card. It is the biggest potential show-stopper for these reforms.

It will therefore be the willingness of national capitals to negotiate between themselves the loss of national capacities, in the name of greater EU efficiency, that will make or break a truly open European defence market.


Jonathan Dowdell writes for  Defence Dateline Group.

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