Commission to open up the EU’s defence market

EU member states’ ability to dodge public procurement rules on the grounds of national security will be curtailed under plans prepared by the European Commission.

Thousands of defence contracts could be opened up to market rules under a new Commission directive on defence procurement, which is to be presented before the end of the year. Industry observers put the value of goods covered by the directive at around €30 billion.

Günter Verheugen, commissioner for industry and enterprise, will today (1 February) tell a conference organised by the European Defence Agency (EDA) in Brussels that the Commission will present a package (in the autumn) aimed at opening up the EU’s defence market to more competition. This will include a directive on defence procurement and a regulation on intra-EU defence transfers.

Current EU rules give ministries of defence the choice between applying public procurement rules and invoking Article 296, which allows governments to select a company based on national security interest.

The Commission’s directive will establish a third set of rules that apply to defence contracts that are not deemed sensitive to national security, such as for purchasing paint, furniture, or some vehicles.

One EU official described the directive as covering "everything between boots and tanks".

Around 50% of defence contracts in the EU today are not subject to normal procurement rules, but academics such as Keith Hartley at the University of York have said the EU could save 20% of procurement costs if markets were substantial opened.

According to Ulf Hammarström, head of the industry and market directorate at the EDA, governments are reluctant to use public procurement rules, even for contracts that are not normally deemed sensitive.

"There is a sense that public procurement rules do not consider the specificities of defence. For example there are security of supply concerns that do not normally exist in a commercial market," he said.

But Hammarström added that the directive would not stop countries from being able to invoke national security concerns in awarding public contracts.

"The Commission only hopes to achieve less use of Article 296," said Hammarström. "Once a government chooses to invoke Article 296 a directive automatically does not apply."

Last July, 22 member states signed up to an EDA code of conduct, which covers contracts under Article 296. This establishes more transparent rules for contracts of more than €1 million. Since August 2006, more than 130 such contracts worth more than €6.5 billion have been posted on the EDA’s website.

Industry representatives welcomed the Commission’s move. Gert Runde, director for security and defence at the AeroSpace and Defence Industries Association of Europe, said: "Once [the directive] is agreed, signed, drafted and implemented it will create an appropriate regulatory environment for defence procurement outside Article 296."

But questions are being raised about whether the directive will go far enough.

According to Daniel Keohane of the Paris-based EU Institute of Security Studies, the success of the Commission’s directive will depend on the response of the six member states - France, Germany, Italy, Sweden, Spain and the UK - that account for 90% of defence purchasing.

Keohane suggested that some member states used Article 296 to favour their national defence industries.

"Some member states, to be frank, treat procurement as an industrial policy rather than a defence policy," he explained.

The directive is the latest in a series of attempts to open up the defence market to more competition.

Last year the Commission tried to clarify the conditions in which Article 296 is invoked.

The EDA and the Commission are keen to assuage fears that niche and small manufacturers will be hurt by opening the market too quickly.

In May the EDA will produce a report on the development of the European defence industry which will include measures to protect small- and medium-sized firms and niche producers.

EU member states’ ability to dodge public procurement rules on the grounds of national security will be curtailed under plans prepared by the European Commission.

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