Reports that the UK had recently joined the EU’s defence mobility scheme were picked up by a small number of outlets. Some have attempted to interpret the significance of this for the future of the EU-UK relationship in a period in which defence relations are plainly significant. In order to provide context to this important and complex topic, I am delighted to say that Luke Butler has agreed to provide a guest blog on this topic. You won’t find a better person to guide you through current complexities in order to understand how things are developing.
Luke Butler is Associate Professor in Law and Director of the Executive Programme in Public Procurement Law & Policy, University of Nottingham. Luke is the author of Transatlantic Defence Procurement: EU and US Defence Procurement Regulation in the Transatlantic Defence Market (Cambridge University Press 2017).
Introduction
Defence procurement regulation is a niche within the niche of public procurement. It requires knowledge of a complex, high-tech industry with a distinct culture that protects vital security and industrial interests. This is reflected in the nature and form of adapted regulation. That said, it perhaps receives too little discussion within the legal community in Europe (contrast the United States). However, it merits equal concern given the public interests at stake in securing value for money for taxpayers, transparency and its role in international trade.
This blog focuses on just one aspect – defence procurement cooperation within the EU. Why the EU? Well, the EEC/EC/EU has always sought to play an active role in defence but is confronted by an existential question: can it be a credible defence actor in its own right? After all, there is already NATO. Many Member States have limited defence capability. Most importantly, defence remains at the core of national sovereignty. The EU’s defence procurement initiatives are an expression of its ambitions and ambivalence in this regard. Two recent events put these initiatives in the spotlight. One is Brexit: what happens when a nuclear power in Europe and major defence spender leaves? Another is Ukraine: how does the EU facilitate cooperation in a crisis? The EU’s new 2022 “Strategic Compass Plan” (https://www.eeas.europa.eu/eeas/strategic-compass-eu-0_en) provides an opportunity to briefly consider where the EU is headed.
Context
We begin with a brief potted history. At the outset, it should be emphasised that whilst we tend to attribute an internal market imperative to European integration, we often overlook the centrality of defence as a driver. Before the 1957 EEC Treaty, in 1952, the Treaty establishing the European Defence Community was drafted. It was, in part, a response to calls for rearmament of West Germany. Imagine European defence forces, European military institutions and even a Court of Justice for defence! It failed to achieve ratification and is why so few probably know about it. As we do know, the EEC Treaty focused supranational efforts on an internal market with defence and security assigned (substitute “relegated”) to intergovernmental processes under a Common Foreign and Security Policy (“CFSP”). As threats of conventional warfare and the Cold War receded, the EU shifted mainly to a peacekeeping role through a Common Security and Defence Policy (“CSDP”). Moreover, the nature of warfare also changed with a global “war on terror” and “cyber warfare”.
In relative peacetime, the EU encouraged development of a European Defence Technological Industrial Base (EDTIB) mainly to reduce reliance on the US. A European Defence Agency was created to coordinate defence programmes (with projects also managed through the Organisation Conjointe de Coopération en matière d'Armement (“OCCAR”)). It also sought to address the fact that Member states invoked national security exemptions to prefer awards to national contractors, resulting in fragmentation of defence markets along national lines. The EU leveraged its internal market competences in public procurement by adapting the public sector Directive 2004/18/EC to accommodate defence and security interests in the form of Directive 2009/81/EC, thus opening procurement markets to EU-wide competition.
We turn now to look at more recent initiatives.
Permanent Structured Cooperation (PESCO)
The EU Treaties provide legal bases for defence cooperation. Articles 42, 46 and Protocol No.10 TEU provide that Member States which have made mutual commitments to one another can develop defence capabilities through national and European programmes by means of permanent structured cooperation (“PESCO”). PESCO is also said to be a response to repeated demands for stronger transatlantic burden sharing.
This more structured cooperation needs funding. From 2017 the EU has developed several funding streams. In 2017 and 2018, two precursors to a European Defence Fund were established, namely, the Preparatory Action on Defence Research (“PADR”) and Regulation 2018/1092 establishing the European Defence Industrial Development Programme (“EDIDP”). The EDIDP has funded a number of PESCO projects (https://defence-industry-space.ec.europa.eu/eu-defence-industry/european-defence-industrial-development-programme-edidp_en). More recently, the European Defence Fund (“EDF”) has provided a surer structure for financing. This supports projects throughout the R&D cycle but importantly excludes acquisition. It is, therefore, perhaps more accurately characterised as a starter grant scheme than end-to-end financing of procurement and management of programmes. The EDF finances up to 100% of research costs and between 20-80% of development (e.g. prototyping). For 2021-2027, €8 billion (€2.7 billion for research; €5.3 billion for development) has been allocated (https://defence-industry-space.ec.europa.eu/eu-defence-industry/european-defence-fund-edf_en).
Structured cooperation also needs coordinating. Council Decision (CFSP) 2017/22315 formally established PESCO commitments and governance. What is said to distinguish PESCO is the legally binding nature of the commitments undertaken, albeit in a skeletal form. Without going into too much detail, the Decision identifies who has signed up to participation, namely 25 Member States. Participation is voluntary and is said not to affect national sovereignty or the specific character of Member States’ security and defence policies. The Decision provides a means by which participating states can initiate project proposals. The participants set the scope and arrangements for cooperation and project management. The European Council provides strategic direction on various matters e.g. establishing governance rules for projects and the general conditions for exceptional third state participation (on which see below). There is also oversight and administration by others e.g. the High Representative, European External Action Service (EEAS) and EU Military Staff. In terms of financing, operating expenditure arising from projects is supported primarily by participating Member States. Contributions from the general EU budget may be made to such projects. However, PESCO assets remain Member State owned. More broadly, the Decision also sets out 20 so-called “more binding commitments” e.g. to increase national defence spend. There are currently 60 PESCO projects being developed (https://www.pesco.europa.eu/).
An obvious question is: where do third states fit within PESCO? The answer is that they don’t unless participation can be exceptionally permitted. This did lead the US to indicate potential retaliation in the form of reciprocal restrictions on EU companies operating in the US. However, in 2020, Council Decision (CFSP) 2020/1639 established the general conditions under which third states could exceptionally be invited. The EU has also acknowledged Ukraine's wish to join PESCO projects.
As these initiatives are set at the level of general commitment to defence cooperation, unsurprisingly, they do not address the specifics of how projects will be administered within and across participating states, including their procurement at the national level.
Common Procurement
Whilst, as indicated, there have been a number of general initiatives aimed at cooperation, there have been few procurement-specific initiatives. For example, Directive 2009/81/EC remains stuck in a time warp with the EU instead focusing on improving its implementation. In any event, the Directive has largely excluded most major forms of European cooperative procurement from its scope to facilitate flexibility (https://defence-industry-space.ec.europa.eu/eu-defence-industry/defence-procurement_en).
However, in March 2022, the EU published its Strategic Compass Plan setting out the EU’s ambition for defence and security. Interestingly, it makes no reference to Directive 2009/81/EC which is surprising, even acknowledging that the Compass is not about market access per se but high-level strategy. In terms of specifics, firstly, it references a May 2022 Communication published on joint acquisition of military equipment, strategic defence programming and supporting the European industrial base. An EU Defence Joint Procurement Task Force has been established to work with Member States to support coordination of their procurement needs and military assistance to Ukraine. This includes a proposal for a Regulation establishing the European Defence Industry Reinforcement through Common Procurement Act (“EDIRPA”) for 2022-24 (https://ec.europa.eu/commission/presscorner/detail/en/IP_22_4491). In contrast to the EDF (although sharing the same legal basis), this short legal instrument, aims at supporting cooperation in “common procurement” defined as a cooperative procurement jointly conducted by at least three Member States. It has a budget of £500M and is open to third states. It prescribes eligible actions e.g. those involving cooperation for common procurement of the most urgent and critical defence products (excepting lethal autonomous weapons), the appointment of a procurement agent on behalf of members, and award criteria which are stated in broad terms, and implementation through a work programme.
Secondly, the EU has stated that by early 2023, it will publish a Commission proposal to enable a VAT waiver to support the joint procurement and ownership of defence capabilities which are the result of collaboration within the EU. This looks like the first publicised tax relief measure to incentivise EU collaborative procurement. Relatedly, the EDF may be adjusted including reinforcement of its bonus system applicable when Member States commit to jointly acquire and/or own the defence capabilities under development.
Thirdly, by mid-2023, the EU will provide details on upcoming proposals for new financing solutions to facilitate Member States’ joint procurement of EU strategic defence capabilities.
Wider Reflections
These developments merit careful reflection and cannot be reduced to a few pithy observations here. However, to express a few immediate thoughts:
- Beware!Acronyms and abbreviations abound. The sense is that there are just too many emerging in this space. This simple point may say something more fundamental about current EU initiatives. To state the obvious, behind each acronym/abbreviation is a policy involving a number of institutions with particular implications. Does this proliferation represent a number of quick and agile responses to changeable geopolitical circumstances? Or does it suggest potential problems of trying out too many policies introduced in quick succession without clear strategy and coordination?
- The EU’s policy ambitions may be creditable but what do these actually deliver in substance? Few would disagree that if defence and security cooperation must fall within EU competences, it makes sense for the EU to develop its own initiatives. However, these do not constitute a complete levelling up of defence standards across Member States. PESCO may have the commitment of most but is an acknowledgement that only some can really drive cooperation forward. Further, despite the attempt to signal increasing EU autonomy by rendering third state participation exceptional, an instrument almost as long as that establishing PESCO was quickly adopted to enable third state participation. In May 2021, the US, Canada and Norway were invited to join the PESCO military mobility project to facilitate cross-border troop and equipment movement and harmonise transportation rules. In addition, EU co-funding of projects over coming years is symbolically important but actually dwarfed by annual national defence spend in a number of European countries. In reality, the EU needs core joint acquisition between Member States on big programmes not starter R&D grants for novel projects. This is reflected in the joint EU common procurement initiative but even then there is only a £500M spend envelope. Anything less than multi-billions (pounds/dollars/Euros) is a drop in the defence spend ocean.
- The legacy of Brexit also looms particularly large in the defence context. An entire blog could be written on the UK’s position in defence procurement post-Brexit (e.g. no mention in the EU-UK Trade Cooperation Agreement, an industrial policy reorientation away from global competition to strategic sourcing, post-Brexit reform of defence procurement regulation – the list goes on). Relevant to this blog, a careful eye must be kept on the extent to which the UK is involved in EU defence cooperation. Whatever anyone’s view on the rights or wrongs of Brexit, the UK is just too important in defence terms to ignore. Recent signs may be more encouraging if still uncertain. The UK did not initially sign up to PESCO with some of the more sensationalist claims being a fear that it would be a slippery slope to joining an EU army. However, the UK has recently joined the PESCO mobility scheme. Of course, the UK may well need to be seen to ensure that it is not lagging on its commitments in Ukraine and the EU knows it needs all the help it can get. This is likely to be perceived as a positive development for UK-EU relations borne of pragmatism.
- Could we move towards a multi-speed European Political Community for Defence? President Macron recently launched the “European Political Community” (“EPC”), a looser constellation of European membership which brings into the fold prospective EU applicants and recalcitrant states (https://ukandeu.ac.uk/the-european-political-community-is-born-now-what/). It is understood that defence was excluded from discussions. The UK did not initially support EPC, seeing NATO as a key guarantor of European security. These complex dynamics with increasingly assertive defence actors outside the EU but on its doorstep (e.g. Turkey) make it very difficult to predict the environment in which defence procurement will be undertaken in coming years.
- A final question is: what do our Americans colleagues think about the latest EU developments? The US is an extraordinarily powerful magnet with the power to take defence cooperation in a number of directions. How does that affect the EU’s compass?
Postscript
The topic of reform of Defence Procurement Law in the UK merits another separate blog. In the meantime this recent research briefing from the House of Commons Library is a useful source: “Defence procurement reform: The Defence and Security Public Contract Regulations” (4 Nov 2022) - https://commonslibrary.parliament.uk/research-briefings/cbp-9666/
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