Explanatory Memorandum to COM(2022)349 - Establishing the European defence industry Reinforcement through common Procurement Act - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2022)349 - Establishing the European defence industry Reinforcement through common Procurement Act. |
|---|---|
| source | COM(2022)349  |
| date | 19-07-2022 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
Already characterised by an unstable situation in Europe’s neighbouring regions for many years and a complex and challenging environment, the Union’s geopolitical context has changed dramatically in light of the Russia’s military aggression against Ukraine. The return of territorial conflict and high-intensity warfare on European soil requires Member States to rethink their defence plans and capacities.
EU Heads of State or Government, meeting in Versailles on 11 March 2022, committed to “bolster European defence capabilities” in light of the Russia’s military aggression against Ukraine. The Versailles declaration notably states that Member States should increase defence expenditures; step up cooperation through joint projects; close shortfalls and meet capability objectives; boost innovation including through civil/military synergies; and strengthen and develop the EU defence industry, including SMEs. Moreover, the Council invited “the Commission, in coordination with the European Defence Agency, to put forward an analysis of the defence investment gaps by mid-May and to propose any further initiative necessary to strengthen the European defence industrial and technological base.”
In response to this invitation, the European Commission and the High Representative presented a Joint Communication on the Defence Investment Gaps Analysis and Way Forward (the “Joint Communication”) on 18 May 2022. It provided insights on three main types of gaps: a financial gap, an industrial one, and a capability gap. The Joint Communication notes that Member States’ recent budgetary increases come after years of substantial cuts and severe underinvestment. Such underinvestment in defence expenditure led to industrial and capability gaps in the EU and to the current low levels of defence equipment stocks. The transfers of defence equipment to Ukraine, combined with a level of stocks tailored to peacetime, has resulted into the emergence of urgent and critical gaps in terms of military equipment.
The Joint Communication recalls that Member States need to restore defence combat readiness as a matter of urgency in light of the security situation and of transfers already made to Ukraine. In particular, a replenishment of stocks of material would also enable them to provide further assistance to Ukraine.
The Joint Communication indicates that as Member States will proceed to replenish their stockpiles and increase the quantity of their defence equipment, they should seize the opportunity to do so in a collaborative way. This would provide greater value for money, enhance interoperability and avoid that the most exposed EU Member States face an impossibility to obtain what they need, because of conflicting demands on the defence industry, which cannot respond to such a demand surge in the short term.
Without coordination and cooperation, increased Member State investments into defence risk to deepen the fragmentation of the European defence sector, to limit the potential for cooperation throughout the life cycle of the equipment, to intensify external dependencies and to hamper interoperability. Choices made as regards of short-term acquisitions will have a longer-term impact on the market strength of European Defence Technological and Industrial Base (EDTIB) and opportunities for the next decades.
Given the need to support in a timely and targeted manner the Member States for reinforcing their defence capacities in this emergency situation, the European Commission proposed to incentivise common procurement via the EU budget through a dedicated Short Term Instrument establishing the European Defence industry Reinforcement through Common Procurement Act (the ‘Instrument’).
The EU financial support brought through the Instrument should stimulate cooperative defence procurement process from Member States and benefit the EDTIB while ensuring EU Member States’ armed forces’ ability to act, security of supply and increased interoperability.
Such an Instrument should be established to incentivise those Member States who are willing to pursue common procurement to fill these gaps. The Instrument should be a dedicated tool designed to tackle the adverse effects and consequences of the Ukraine war in the Union.
The Instrument will follow the establishment of a Defence Joint Procurement Task Force supporting the coordination of their very short-term procurement needs to face the new security situation. Following the creation of the Instrument, the Commission will propose a European Defence Investment Programme (EDIP) regulation. The EDIP Regulation could serve as the anchor for future joint development and procurement projects of high common interest to the security of the Member States and the Union, and by extension of the logic of the short-term instrument, for possible associated Union financial intervention for the reinforcement of the European defence industrial base, in particular for projects which no single Member State could develop or procure alone.
• Consistency with existing policy provisions in the policy area
The Instrument is consistent with the European Defence Fund. It complements the latter and relies on the same legal basis. While the EDF incentivises cooperation of legal entities on defence Research and Development projects, the Instrument will support cooperation on common defence procurement. The Instrument also takes up the European Defence Fund’s approach when it comes to forbidding support for goods or services, which are prohibited by applicable international law, or lethal autonomous weapons without the possibility for meaningful human control over selection and engagement decisions when carrying out strikes against humans.
• Consistency with other Union policies
The Instrument will complement existing collaborative EU defence initiatives such as the Permanent Structured Cooperation (PESCO), and generate synergies with the implementation of the Strategic Compass for Security and Defence, and other EU programmes, such as the European Defence Fund.
The Instrument will also be implemented in full consistency with the EU capability development plan (CDP) identifying the defence capability priorities at EU level, as well as with the EU coordinated annual review on defence (CARD), which inter alia identifies new opportunities for defence cooperation. In this context, account may also be taken of relevant activities carried out by the North Atlantic Treaty Organisation (NATO) and other partners where they serve the Union's security and defence interests and do not exclude any Member State from participating.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
Aimed at fostering the competitiveness of the EDTIB by supporting cooperation between Member States in the field of defence common procurement, the proposal is based on Article 173 TFEU (support to competitiveness of the European Industry).
• Subsidiarity (for non-exclusive competence)
While cooperation presents several obvious advantages (increased interoperability, reduced unit and maintenance costs) EU Member States continue to procure defence systems in a mostly national manner.
–Increased complexity and administrative burden of cooperation;
–different national requirements;
–different procurement calendars and lack of budgetary synchronisation;
–security of Information considerations;
–national defence industrial policy considerations;
–lack of national expertise in procurement agencies.
According to EDA Defence Data for 2020, EU Member States invested only €4.1bn in collaborative defence equipment procurement (11% of their total spending), a 13% decrease compared to 2019.
This is far below the 35% benchmark to which Member States committed. Fragmentation of the demand side of the defence market results into a series of problems and inefficiencies, including on the supply side, while increasing maintenance costs of a plethora of different systems.
If this current trend is not addressed, it will continue to significantly undermine the competitiveness of the EDTIB and risks affecting its market prospects in the next decade.
At the same time, the current defence market context, marked by an increased security threat and the realistic prospect of a high intensity conflict, sees Member States rapidly increasing their defence budgets and aiming at similar equipment purchases. This results in an amount of demand which exceeds EDTIB manufacturing capacities, currently tailored for peacetime.
Consequently, strong price inflation can be anticipated, as well as longer delays in delivery time, potentially harming the security of EU citizens. Defence industries need to secure the production capacity necessary to process orders, as well as critical raw materials and sub-components. In this context, defence manufacturers might privilege major orders, potentially leaving exposed the most vulnerable countries, lacking the critical size and financial means to ensure large orders.
Fragmented orders placed individually by Member States would result in more limited market prospects for defence companies, and necessarily translate into an increased fragmentation of the offer, thus significantly harming the economic efficiency of the sector and worsening the EDTIB competitiveness.
Incentivising joint procurement is therefore a necessity, and would present the advantage of ensuring that, while the defence industry can more rapidly adapt to current market structural changes, national Armed Forces would obtain better conditions and delivery timelines by cooperating in the acquisition phase. On top of this, cooperation in the field of acquisition would result in diminished costs in terms of exploitation, maintenance and withdrawal of the systems (costs estimated at 55% of the total cost of an equipment).
Consequently, the current situation requires a policy intervention at EU level to improve the level of cooperation by incentivising financial cooperation between Member States in the defence procurement process. Such intervention is beneficial for the security of EU citizens as well as for the EDTIB.
• Proportionality
The proposed policy approach is proportionate to the scale and gravity of the problems that have been identified, i.e. need to speed up the adjustment of industry to structural changes and encourage an environment favourable to cooperation between undertakings within a system of open and competitive markets by incentivising cooperation and coordination between Member States. It respects the limits of possible Union intervention under the Treaties.
The initiative is limited to goals that Member States cannot achieve satisfactorily on their own and where the Union can be expected to do better.
• Choice of the instrument
The Commission proposes a Regulation of the European Parliament and of the Council in order to set up the Instrument. This is the most suitable legal instrument as only a Regulation, with its directly applicable legal provisions, can provide the necessary degree of uniformity needed for the establishment and operation of a Union Instrument aiming at promoting the reinforcement of an industrial sector across Europe.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Ex-post evaluations/fitness checks of existing legislation
There is no prior existing legislation covering or pertaining to this specific action. To date, there was no other Union legislative initiatives in the area of defence with the objective of enhancing the competitiveness of the EDTIB in particular by speeding up, in a collaborative manner, the adjustment of industry to structural changes, including ramp-up of its manufacturing capacities. There was also no other Union legislative initiatives in the area of defence with the objective of fostering cooperation in the defence procurement process between participating Member States. Therefore, there is no previous ex-post evaluation or fitness check of existing legislation that took place for this legislative initiative.
• Impact assessment
European Council conclusions of 30-31 May 2022 invited the Council to examine as a matter of urgency, the short-term instrument. Therefore, Commission tables the proposal for a regulation establishing the instrument without including an impact assessment, in order to allow the co-legislators to receive it as early as possible.
• Regulatory fitness and simplification
The Instrument is not expected to increase the administrative burden.
The proposed performance-based approach, relying on the conditionality between the disbursement of payments and the achievement of milestones and targets by the consortium, is also an element of simplification in the implementation of the instrument.
• Fundamental rights
Enhancing the security of EU citizens can contribute to safeguarding their fundamental rights.
In addition, actions for defence common procurement of goods or services, which are prohibited by applicable international law, shall not be eligible for support from the Instrument.
Moreover, actions with a view to the common procurement of lethal autonomous weapons without the possibility for meaningful human control over selection and engagement decisions when carrying out strikes against humans shall not be eligible for support from the Instrument.
4. BUDGETARY IMPLICATIONS
The financial envelope for the implementation of the Instrument for the period from period XX 2022 to 31 December 2024 shall be EUR 500 million in current prices.
The impact on the multi-annual financial framework period in terms of required budget and human resources is detailed in the legislative financial statement annexed to the proposal.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
The Commission should regularly monitor its actions, review progress made towards delivering the expected results as well as examine synergies with other complementary Union programmes. The Commission should draw up an evaluation report for the Instrument and communicate it to the European Parliament and to the Council. This report will notably assess the progress made towards the achievement of the objectives set in the proposal.