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Defence procurement exemptions

Outline of the Community (European Union) legislation about Defence procurement exemptions

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Internal market > Businesses in the internal market > Public procurement

Defence procurement exemptions

Document or Iniciative

Commission interpretative communication of 7 December 2006 on the application of Article 296 of the Treaty in the field of defence procurement [COM(2006) 779 final – Not published in the Official Journal].

Summary

Internal market rules do not apply to defence acquisitions for trade in arms, munitions and war material; the legal basis for this exemption is Article 296. The scope of this exemption is, however, limited by the concept of “essential security interests” and by the list of military equipment mentioned in Article 296(2).

Any exemption authorised by Article 296 goes to the very heart of the fundamental principles and objectives of the internal market. Such exceptions should therefore be strictly confined to cases where Member States have no other choice than to protect their security interests nationally.

The list of military equipment mentioned in Article 296 was adapted in 1958 by Council Decision 255 / 58. The nature of the products on the 1958 list and the explicit reference in Article 296 to “specifically military purposes” confirm that only the procurement of equipment which is designed, developed and produced for specifically military purposes can be exempted from Community rules (Article 296(1)(b) EC).

Nevertheless, Article 296 can also cover the procurement of dual-use equipment for both military and non-military purposes, but only if the application of Community rules would oblige a Member State to disclose information prejudicial to its essential security interests (Article 296(1)(a)).

Military items included in the 1958 list are not automatically exempted from internal market rules. Any Member State seeking exemption under Article 296 must demonstrate that the exemption in question is necessary for the protection of its essential security interests, this being the only objective which may justify such an exemption. General references to the country’s geographical and political situation, history and alliance commitments are not sufficient.

The concept of essential security interests gives Member States flexibility in the choice of measures to protect those interests. It is essential for contracting authorities to assess each procurement contract with great care.

As guardian of the Treaty, the Commission may verify – with due regard to the sensitive nature of the defence sector – whether the conditions for exempting procurement contracts on the basis of Article 296 are fulfilled.

The Commission may also bring the matter directly before the Court of Justice if it considers that a Member State is making improper use of the powers provided for in Article 296.

Background

The majority of defence contracts are exempted from internal market rules and awarded on the basis of widely differing national procurement rules. With a view to the establishment of a European defence equipment market, the 2004 Green Paper on Defence Procurement (link) launches a debate on how to improve transparency and openness of defence markets between EU Member States. In December 2005 the Commission announced two separate initiatives (link to COM(2005) 626 final): the adoption of an “Interpretative Communication on the application of Article 296 EC” (analysed above) and the preparation of a possible new directive on the procurement of defence equipment to which Article 296 exemptions do not apply.

This summary is for information only. It is not designed to interpret or replace the reference document, which remains the only binding legal text.

Defence procurement

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Defence procurement

Outline of the Community (European Union) legislation about Defence procurement

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These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Businesses in the internal market > Public procurement

Defence procurement

This Green Paper develops the debate on the case for Community action to establish a European market for defence equipment. It presents the main characteristics of defence procurement markets (their fragmentation, specific features, and limits to their legal framework) to justify Community action in this field. It then puts forward some ideas which could be considered when defining actions at European level.

Document or Iniciative

Commission Green Paper of 23 September 2004 on defence procurement [COM(2004) 608 final- Not published in the Official Journal]

Summary

This Green Paper is one of the measures announced by the Commission with a view to the gradual creation of a competitive European defence equipment market (EDEM). It opens an official consultation process lasting four months from 23 September 2004 onwards.

The Green Paper emphasises three characteristics of these markets:

the major fragmentation of markets along national lines;
the specific features which distinguish them from other types of public procurement;
a complex legal framework.

The particular characteristics of defence markets are not only economic and technological, but are also related to the security and defence policies of each Member State. As sole clients, States play a dominant role in defining the market. They control the arms trade by means of export licences and the granting of authorisations to tender for contracts. In addition, security of supply and confidentiality requirements in the defence sector often lead to the use of purely national procedures. Finally, arms development programmes are complex due, in particular, to their limited production volumes, high risk of commercial failure, and the length of their life cycles.

As for the applicable legal framework, Directive 2004/18/EC specifies that Community rules on public procurement apply to contracts awarded in the field of defence, subject to the exemption system laid down in Article 296 of the Treaty establishing the European Communities (EC Treaty). This system allows Member States to invoke the essential interests of their security. The case law of the Court of Justice of the European Communities has developed a restrictive interpretation of the possibility of using this derogation. However, several difficulties of implementation do remain, due mainly to the absence of a precise interpretation of these provisions and a definition of the concept of essential interests of security.

Defence procurement is still, therefore, largely covered by national legislation, most of which provides for exemptions to the rules governing public procurement, with differing degrees of transparency. This legislation displays a lack of uniformity in a number of areas: the publication of contract notices, the potential for non-publication, the criteria for selecting suppliers, the tendering procedures and the basis on which contracts are awarded.

In addition to these national systems, there are the rules arising from intergovernmental agreements relating to joint arms programmes. Since, however, these agreements have not achieved satisfactory results, the recently-created European Defence Agency should, under the authority of the Council and in consultation with the Commission, help set up a competitive European defence market.

The Green Paper identifies two possible instruments to overcome these obstacles which limit the access of European industries to Member States’ defence markets:

clarification of the existing legal framework: the Green paper proposes drawing up a non-binding instrument, such as an interpretative Communication from the Commission. This Communication could give a further explanation of the principles defined by the Court on the interpretation of Article 296 of the EC Treaty;
the creation of a special instrument to supplement the EU’s legal framework. It is proposed that a new directive be drawn up to coordinate the procedures for awarding contracts by ensuring greater legal certainty, more information on the contracts at Community level and the introduction of the necessary flexibility in awarding these contracts. The Green Paper also details the contents of such a Directive.

Whilst these instruments cannot provide exhaustive answers to all the specific aspects of defence markets, they would nonetheless constitute a useful tool for successful cooperation between Member States.

Related Acts

Interpretative Communication from the Commission of 7 December 2006 on the application of Article 296 of the Treaty in the field of defence procurement [COM(2006) 779 final – Not published in the Official Journal].

Communication from the Commission to the Council and the European Parliament on the results of the consultation launched by the Green Paper on Defence Procurement and on the future Commission initiatives [COM(2005) 626 final – Not published in the Official Journal]

Communication from the Commission of 11 March 2003. “European defence – Industrial and market issues – Towards an EU Defence Equipment Policy” [COM(2003) 113 final – Official Journal C76 of 25.03.2003]

This communication presents proposals for action in various areas of the European Union defence equipment policy.

Strategy for a more competitive European defence industry

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Strategy for a more competitive European defence industry

Outline of the Community (European Union) legislation about Strategy for a more competitive European defence industry

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These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Enterprise > Industry

Strategy for a more competitive European defence industry

Document or Iniciative

Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions of 5 December 2007 – A strategy for a stronger and more competitive European defence industry [COM(2007) 764 final – Not published in the Official Journal].

Summary

The European security and defence policy (ESDP) needs a strong European defence industry. However, this sector’s performance and competitiveness are being held back by an inadequate policy and legal framework, resulting in red tape and duplication, hampering innovation and increasing prices. For example, the co-existence of different national regulations on procurement, slow licensing procedures for the free movement of defence components and goods within the EU, lack of information sharing, etc. are obstacles to this sector’s competitiveness. With a view to improving the situation in the European defence industry, the Commission puts forward several recommendations.

Improving the functioning of the internal market for defence products

In order to improve the functioning of the internal market in defence, the Commission proposes that Member States adopt two directives. The first is designed to facilitate intra-EU transfers of defence products by eliminating unnecessary paperwork. It will thus reduce obstacles to trade in these products in the EU, for example by significantly simplifying national licensing procedures and costly and lengthy administrative formalities which could act as a deterrent to some companies. The second directive is designed to enhance the openness and competitiveness of defence procurement. Member States too often use Article 296 of the Treaty establishing the European Community, which allows them to be exempt from Community rules if their essential security interests are threatened. This directive will therefore effectively introduce intra-EU competition in the Member States’ defence markets.

In addition to these legislative initiatives, the Commission is considering a whole series of measures, including:

the use of a handbook of common standards to facilitate the opening of defence markets;
examination of the current regime on security of information for the exchange of sensitive information between Member States and European companies in order to determine whether it would be useful to introduce a European system;
a study on control of strategic defence assets;
the use of legal instruments at the Commission’s disposal to ensure fair competition in defence markets.

Improving overall coordination

Together with the European Defence Agency (EDA), the Commission wishes to encourage better overall coordination with the Member States and among Member States, so that the weapons systems needed by European armed forces can be produced cost-effectively and with the highest level of performance. Coordination between Member States can be improved in three areas: pooling of demand for military equipment, research and technological development, and strengthening the position of small and medium-sized enterprises (SMEs).

It is in Member States’ interest to coordinate their investments and pool demand in order to create synergies. This can be done by adjusting the timetables of their development and procurement programmes and by collecting information on Member States’ investments.

Defence is a technology-intensive sector. Yet, in Europe, investment in research is fragmented, leading to duplication and a waste of scarce resources. It therefore makes sense to find ways to pool research and network resources at all levels. Defence-related research creates a spillover in many other areas and creates growth in civil sectors, which in turn contribute a great deal to defence. The Commission therefore recommends pooling the resources of civil and military programmes at both national and European levels. The Commission is also conducting a specific security research programme.

The position of SMEs in the sector needs to be strengthened. They will be able to benefit from the two directives mentioned above but also from other initiatives, including the 7th Framework Programme for Research, or for example the Code of Best Practice and the e-portal developed by the EDA.

Supporting the adjustment and modernisation process in Europe by means of accompanying policies

The defence sector can be stimulated not only by industrial policy but also by other policies. The opening of foreign markets is thus essential to the competitiveness of the European industry. For Europe to improve its access to the US market, which is practically non-existent, it is important to ensure that the European defence industry can match its competitors in the US in terms of innovation and quality. It is also important not to lose sight of other stakeholders from the emerging economies for which it is necessary to analyse the competition challenges and the conditions of access to their markets.

Further market integration in the defence sector could lead to structural changes and restructuring, and it is necessary to anticipate and address any such structural changes, for example by means of an active social dialogue. These changes can be managed financially with the help of the Structural Funds and the European Social Fund in particular.

Finally, it is necessary to improve European defence industry market governance. In order to fully exploit the measures to increase competition which are set out in this Communication, a structured dialogue with all interested parties is essential, in particular with the competent bodies of the Member States and the EDA. The EU should also set up a European think-tank to reflect on the challenges and key issues in the defence sector.

Towards a European Union Defence Equipment Policy

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Towards a European Union Defence Equipment Policy

Outline of the Community (European Union) legislation about Towards a European Union Defence Equipment Policy

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Enterprise > Industry

Towards a European Union Defence Equipment Policy

Document or Iniciative

Communication from the Commission of 11 March 2003: Towards a European Union Defence Equipment Policy [COM(2003) 113 final – Not published in the Official Journal].

Summary

Background

The countries of the European Union devote a combined total of 160 billion euros per year to military spending whereas the annual figure for the US is some $390 billion. This means that the EU Member States combined spend less than half as much as the United States on defence. In addition, the “real military capability” of the EU is estimated to be just 10% of that of the USA. This Communication seeks to improve the effectiveness and value for money of public spending on armaments.

A proper defence industrial base could not just help redress the EU’s position in relation to the USA, but could also improve collective security within NATO. All the more so in that the efficiency of multinational European corps such as Eurocorps, Eurofor, Euromarfor and the future Rapid Reaction Force, requires greater interoperability between national armaments, or even the use of similar equipment.

The European Councils of Cologne and Helsinki (1999) led to progress in the move towards a European Security and Defence Policy (ESDP). New structures have thus been created, such as a Political and Security Committee and a Military Committee and Military Staff. Closer cooperation with NATO was also formalised at the beginning of 2003 by the “Berlin +” agreements, so that the EU can have access to NATO capacity for operations initiated under the ESDP.

To make the European Union the most competitive and prosperous knowledge-based economy in the world, as advocated at the Lisbon Council in March 2000, all policies must lend a hand. The dynamism of industry, and thus also of the defence industry, is vital in this respect. The defence industry does, however, require the development of “effective accompanying policies” such as those on trade, the internal market, research and competition.

This should be done in compliance with Article 296 of the EC Treaty. This Article restricts the opening of the market in defence equipment and trade by giving the Member States the right to protect their essential interests in security-related areas. A clearer distinction between the rules which fall under the Community pillar or under the common foreign and security policy pillar would make it easier to frame a common set of rules on defence equipment.

Gradual implementation of a European armaments policy

The gradual implementation of a European armaments policy alongside corresponding national policies requires Europeanisation in four fields:

Defence equipment demand: military needs and other security-related requirements need to be harmonised in order to harmonise the planning and procurement of military equipment;
Defence equipment supply: the industrial consolidation process (primarily the responsibility of industries themselves) needs to be completed. Supportive policies and actions by the Commission and Member States are also needed to create and maintain a competitive industrial structure in Europe;
Defence equipment market: there is a need firstly for an appropriate regulatory framework addressing internal and external aspects; secondly to establish rules for more cost-efficient procurement of goods and services both by the different Member States’ defence procurement agencies and by any future European agency or agencies, and for economically effective export controls;
Research: intra-European cooperation must be encouraged. There is only the Western European Armaments Organisation (WEAO) to manage European research programmes, and its budget accounts for only 2.5% of European investment in the field of defence. Also, technology transfers between the civilian sector and the defence sector remain minimal. To remedy this, there is a need to improve the coordination and coherence of security-related research at European level through the exploitation of civil-military synergies.

The communication proposes carrying out this process of Europeanisation through the following actions:

compiling a standardisation handbook: in order to improve the interoperability of national armaments, it would help if the same standards were used on a European scale. A “Defence Standardisation Handbook” would be an appropriate tool to meet this objective. The Commission is currently working together with the ministries of defence and the industry within the CEN on such a handbook, a first operational version of which is scheduled for 2004;
monitoring the activity of defence-related companies: in order to measure the performance of European companies in the area of defence and to supply producers with better information on market conditions, the European Commission should be able to regularly review the situation in all sectors of the industry. The Commission will utilise the data available from Eurostat and the European statistical system, as well as information collected from defence industry associations, in order to conduct an examination of their situation;
simplification of intra-Community transfer procedures: given the desire of Member States to control the final destination of exports of defence equipment, intra-Community transfers of defence products can involve a lot of red tape and a large number of national procedures, such as the issue of individual licences. The Commission, together with the Member States, is currently trying to work on simplifying these procedures. It would be useful therefore to launch an impact study on the effects of simpler legislation in this field. The Commission plans to draw up a proposal by 2005;
definition of a competition policy tuned to the specific needs of the military sector: competition policy in the military sector should focus on safeguarding innovation by avoiding potentially damaging vertical mergers. Given the specific characteristics of the defence sector, the Member States’ prerogatives with regard to State aid are beyond dispute, provided that the competitive conditions in the common market for goods which do not have a specific military purpose are not altered;
rationalisation of the award of contracts in the defence sector: there is a need for greater competition in defence equipment procurement at Community level. Above all, there is a need to develop a single set of rules for defence equipment procurement in Europe, taking into account the role of the future European Defence Agency;
export control of dual-use goods and technologies: a Community Regulation from 2000, based on Article 133 of the EC Treaty concerning external trade, establishes legally binding principles for the export of dual-use goods set out in a precise list. However, care should be taken in future to ensure that these controls do not hamper the competitiveness of the EU defence industries;
coherent advanced research: the EU and the Member States would derive greater benefits from their research programmes if they were better coordinated. The Commission will therefore ask representatives of national administrations, the industry and research institutions to identify, by the end of 2003, a European agenda for security-related research. To this end, the Commission intends to launch a preparatory project that it will implement with the Member States and industry.

In a wider context, the EU and its Member States are asked to consider other themes for reflection, such as the EU Defence Equipment Agency proposals, the question of the security of supply and other defence trade issues.

With regard to the EU Defence Equipment Agency proposals, the Convention’s defence working group included among its recommendations the creation of an agency for cooperation in strategic research in the field of armaments. Even though this agency would operate on an intergovernmental basis, the Member States would probably increase the Community’s role when the Community framework seemed more appropriate (market mechanisms, experience with civil research framework programmes, etc.).

Furthermore, since the development of the European defence industry sector will involve greater mutual dependency in the supply of defence goods and equipment, it will be necessary to envisage procuring supplies not just nationally, but under programmes developed either within the EU or abroad.

Finally, with regard to defence trade issues, the EU should also take action to gain fairer access to armaments markets outside Europe, and particularly in the USA, since European companies are at a disadvantage in that European markets remain open to non-European products whereas the US market remains closed.

Related Acts

Commission Green Paper of 23 September 2004 on defence procurement [COM (2004) 608 final – Not published in the Official Journal]

Communication, of 4 December 1997: Implementing the European Union strategy on defence-related industries [COM (97) 583 final – Not published in the Official Journal]

The Commission aims to facilitate the restructuring of the defence sector. It urges the Council to adopt a joint position so as to open a debate on the main issues concerning the development of a European armaments policy. It proposes the creation of a simplified system for intra-EU transfers and rules and mechanisms for transparency and non-discrimination in procurement. The Commission has put together an action plan for industries in the defence sector. This plan proposes the adoption of standards for defence procurement, customs duties, arms exports and industry standards in this sector.

Communication, of 24 January 1996: The challenges facing the European defence-related industry – A contribution for action at European level [COM (96) 10 – Not published in the Official Journal]
The Commission emphasises the need to rationalise the defence sector. It proposes to apply EU rules on public procurement to military equipment, whilst reserving the possibility for Member States to benefit from derogations that allow them to protect their national interests, to facilitate intra-Community exchanges in the arms trade, to progressively harmonise the control of exports of military equipment, to apply the rules on competition policy to the defence industries and to develop an EU mechanism to support the restructuring of industries of this type.

Suspension of import duties on certain weapons and military equipment

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Suspension of import duties on certain weapons and military equipment

Outline of the Community (European Union) legislation about Suspension of import duties on certain weapons and military equipment

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Customs

Suspension of import duties on certain weapons and military equipment

Document or Iniciative

Council Regulation (EC) No 150/2003 of 21 January 2003 suspending import duties on certain weapons and military equipment [Official Journal L 25 of 30.01.2003].

Summary

The Customs Union requires the consistent application of the Common Customs Tariff. It is in the interests of the Member States and the Community for the armed forces of the Member States to be equipped with the most technologically advanced weapons and military equipment available. Given that some of these weapons and military materials are supplied by third countries, it would be advisable to eliminate customs duties on these products, subject to certain conditions, and to set up common rules for these exemptions. This Regulation lays down the necessary conditions for the autonomous suspension of import duties on goods imported by or on behalf of the authorities in charge of defence in the Member States.

Suspension of duties.

The Regulation provides for the duties of the Common Customs Tariff applicable to weapons and military materials to be suspended, on condition that the goods are used by or on behalf of the armed forces of a Member State, for example in the territorial defence of Member States, participation in international peace keeping or other missions, e.g. the protection of European citizens. Annex I of the Regulation lays down the list of goods which are eligible for this exemption. Any material that is not listed in Article 2 and in the annexes is subject to customs duties, even if it is imported by the armed forces of a Member State.

Goods concerned.

3.The goods on which the duties are suspended are arms and ammunition, including parts and accessories, certain rare gases, explosives, detonators, certain photographic materials and certain chemical products.

The Regulation also applies the suspension of customs duties to imported parts, components and sub-assemblies that are to be incorporated into or fitted to the goods in the annexes or which are necessary for training or testing.

Private companies.

Private companies established in the EU will only be able to import the goods duty-free provided that that they manufacture the relevant military equipment, and that they supply final products to the authorities in charge of defence in the Member States. All other uses are liable for customs duties.

PROCEDURES AND CONTROLS

Certificate.

The request for entry for free circulation of these goods must be accompanied by a certificate issued by the competent authority of the Member State for whose armed forces the goods are destined. The model for this certificate is reproduced in Annex III to the Regulation. It is to be submitted to the customs authorities of the importing Member State with the goods to which it refers.

Military confidentiality.

To ensure military confidentiality, the Regulation lays down a specific administrative procedure for granting duty suspension, namely the authorities responsible for national defence may deliver the certificate instead of the customs services. The authorities must be notified accordingly.

Customs supervision.

The goods concerned are subject to end use conditions laid down by the Community Customs Code, i.e. their use will be supervised. Customs supervision of the end use ends three years after the date of release for free circulation.

For the purposes of customs supervision, the competent authority delivering the certificate or using the goods must notify the customs authorities of its Member State of any diversion of the goods from the use specified in the Regulation.

Exchanging information.

The names of the authorities authorised to issue the certificate must be communicated to the Commission by the Member States. The Commission will forward this information to the customs authorities of the other Member States.

The Member States must inform the Commission of the administrative implementation of the Regulation, and send information each year to the Commission on the number of certificates issued, together with the total value and gross weight of goods imported under the Regulation.

References

Act	Entry into force	Deadline for transposition in the Member States	Official Journal
Regulation (EC) No 150/2003	31.1.2003	–	OJ L 25 of 30.1.2003

Iceland – External relations, Common Foreign and Security Policy

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Iceland – External relations, Common Foreign and Security Policy

Outline of the Community (European Union) legislation about Iceland – External relations, Common Foreign and Security Policy

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Enlargement > Ongoing enlargement > Iceland

Iceland – External relations, Common Foreign and Security Policy

acquis) and, more specifically, the priorities identified jointly by the Commission and the candidate countries in the analytical assessment (or ‘screening’) of the EU’s political and legislative acquis. Each year, the Commission reviews the progress made by candidates and evaluates the efforts required before their accession. This monitoring is the subject of annual reports presented to the Council and the European Parliament.

Document or Iniciative

Commission Report [COM(2011) 666 final – SEC(2011) 1202 final – Not published in the Official Journal].

Summary

The 2011 Report presents the progress achieved by Iceland, particularly on policies relating to development aid and humanitarian aid. The country must pursue regular dialogue with the European Union (EU) on matters relating to foreign affairs.

EUROPEAN UNION ACQUIS (according to the Commission’s words)

In this field the Community acquis mainly comprises directly binding legislation which does not require transposition into national law. EU legislation results from the Union’s multi-lateral and bi-lateral agreements on matters of trade policy as well as from a certain number of autonomous preferential trade measures. In the fields of development and humanitarian aid, Member States must comply with the relevant EU legislation and international commitments and equip themselves with the capacities required to participate in EU policies in these sectors. Candidate countries are invited to progressively align their policies with regard to third countries, and their positions within international organisations, with the policies and positions adopted by the Union and its Member States.

The Common Foreign and Security Policy (CFSP) and the Common Security and Defence Policy (CSDP) are based on legal acts, legally binding international agreements in particular, and on policy documents. The acquis comprises declarations, actions and policy agreements. Member States must be in a position to conduct political dialogue under the framework of the CFSP, to align with the EU’s declarations, to take part in EU action and to apply the appropriate sanctions and restrictive measures. Candidate countries are invited to progressively align with the EU’s declarations and to apply sanctions and restrictive measures if required.

ASSESSMENT (according to the Commission’s words)

Iceland has already achieved a high level of alignment with the European rules in the area of external relations. Nevertheless, the country has made further progress, particularly in the areas of development aid and humanitarian aid. In particular, a new strategy has been adopted to increase its official development assistance in the medium term. The country has also undertaken an evaluation of its international agreements which need to be amended or repealed. However, progress must be made in order to align the country’s positions with those of the EU within the World Trade Organization (WTO).

Similarly, Iceland has achieved a high level of alignment in the field of foreign, security and defence policy. The country has aligned with the majority of the EU’s declarations and Council decisions when it has been invited to do so. The adoption of a resolution on an Arctic policy highlights its commitment to active participation in the regional organisations of Northern Europe and the Arctic region.