Considerations on COM(2022)349 - Establishing the European defence industry Reinforcement through common Procurement Act

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dossier COM(2022)349 - Establishing the European defence industry Reinforcement through common Procurement Act.
document COM(2022)349 EN
date October 18, 2023
 
table>(1)The EU Heads of State or Government, meeting in Versailles on 11 March 2022, committed themselves to bolstering European defence capabilities in light of Russia’s war of aggression against Ukraine. They agreed to increase defence expenditures substantially, to develop further incentives to stimulate Member States’ collaborative investments in joint projects and the joint procurement of defence capabilities, to invest further in the capabilities necessary to conduct the full range of missions and operations, to foster synergies and boost innovation, and to strengthen and develop the European defence industry, including small and medium-sized enterprises (SMEs).
(2)Russia’s unjustified invasion of Ukraine on 24 February 2022 and its ongoing war of aggression have made it clear that it is critical to act urgently to address existing shortfalls. The return of high-intensity warfare and territorial conflict to Europe has a negative impact on the security of the Union and the Member States and requires a significant increase in the capacity of Member States to fill the most urgent and critical gaps, especially those exacerbated by the transfer of defence products to Ukraine.

(3)Russia’s war of aggression against Ukraine has dramatically underlined the need to adapt the European Defence Technological and Industrial Base (EDTIB) to structural changes, to enhance the Union’s military research and development, to modernise military equipment, and to strengthen cooperation between Member States in the framework of procurement in the field of defence.

(4)On 18 May 2022, the Commission and the High Representative of the Union for Foreign Affairs and Security Policy (High Representative) presented a joint communication on ‘the Defence Investment Gaps Analysis and Way Forward’. The joint communication highlighted the effects of years of defence underspending and the existence of financial, industrial and capability gaps in the Union’s defence sector. The joint communication specified that the return of warfare to Europe had revealed an accumulation of gaps and shortfalls in military inventories, reduced industrial production capacity, and limited joint procurement and collaboration. The joint communication also highlighted gaps immediately affecting the freedom of action of Member States’ armed forces as well as the urgent need to replenish certain stockpiles, to replace obsolete military equipment, for example equipment designed or produced in the former Soviet Union, and to reinforce strategic capabilities.

(5)The joint communication also proposed a dedicated short-term instrument, designed in a spirit of solidarity, as a tool to incentivise Member States to pursue, on a voluntary basis, common procurement to fill the most urgent and critical gaps, especially those created by the response to Russia’s war of aggression against Ukraine, in a collaborative way.

(6)The proposed new dedicated short-term instrument is intended to contribute to reinforcing common defence procurement and, through associated Union financing, to strengthening Union defence industrial capabilities, including by increasing the production of defence products. It will also contribute to the collective benchmark of 35 % of total equipment procurement expenditure for European collaborative equipment procurement identified by the European Defence Agency Steering Board in 2007.

(7)Reinforcing the EDTIB should therefore be at the core of those efforts. Indeed, difficulties and gaps still exist and fragmentation remains, causing a lack of sufficient collaborative action and interoperability between products.

(8)The specific structure, eligibility conditions and criteria laid down in this Regulation are particular to the dedicated short-term instrument and are determined by specific circumstances and the current emergency situation.

(9)In the current defence market context, marked by an increased security threat and the realistic perspective of a high-intensity conflict, Member States are rapidly increasing their defence budgets and aiming to carry out similar purchases of defence products. This has resulted in a level of demand which could exceed EDTIB manufacturing capacities, which are currently tailored for peacetime production.

(10)As a result, strong price inflation can be anticipated, as well as longer delays in delivery time, potentially harming the security of the Union and the Member States. Defence industries need to secure the production capacity necessary to process orders, as well as critical raw materials and sub-components. In that context, producers might privilege major orders, potentially leaving the most vulnerable countries, which lack the critical size and financial means to ensure large orders, exposed.

(11)The current geopolitical situation in the Eastern neighbourhood countries has shown that, whereas a duplication of efforts should be avoided, a diversified defence market can contribute to the variety of products immediately available on the market and can therefore be beneficial to an adequate satisfaction of Member States’ urgent needs.

(12)Furthermore, efforts should be made so that the increased spending results in a much stronger EDTIB throughout the Union. Indeed, increased national investments, made without coordination or cooperation, can deepen fragmentation.

(13)In light of the above challenges and related structural changes, it appears necessary to speed up the adjustment of the EDTIB, to enhance its competitiveness and efficiency, in accordance with Article 173 of the Treaty on the Functioning of the European Union (TFEU), and thereby to contribute to strengthening and reforming Member States’ defence industrial capabilities. Addressing industrial shortfalls should include promptly tackling the most urgent gaps.

(14)Common investment and defence procurement should, in particular, be incentivised, as such collaborative actions would ensure that the necessary change in the EDTIB takes place in a collaborative manner, avoiding further fragmentation and increasing interoperability.

(15)To that end, a dedicated short-term instrument for increasing collaboration by Member States in the defence procurement phase (the ‘Instrument’) should be established. The Instrument should incentivise Member States to pursue collaborative actions and, in particular, when they procure in order to fill those gaps, to do so jointly, increasing interoperability and strengthening and reforming their defence industrial capabilities.

(16)Without prejudice to the prerogatives of the budgetary authority, the resources allocated to the Instrument will be financed within the existing multiannual financial framework without impacting funding already committed to specific Union actions.

(17)The Instrument should offset the complexity and risks associated with common procurement while allowing for economies of scale in the actions undertaken by Member States to reinforce and modernise the EDTIB, with a particular focus on SMEs and mid-capitalisation companies (mid-caps), thereby increasing the Union’s capacity, resilience and security of supply. Incentivising common procurement would also result in reduced costs in respect of the administrative burden and lifecycle management of relevant systems. The Instrument should be accompanied by efforts to strengthen the European defence and security markets, services and systems, and to create a level playing-field for suppliers from all Member States. Common procurement on a common market for the EDTIB allows for economies of scale and assures innovation and efficiency in production and technology.

(18)The Instrument builds on and considers the work of the Defence Joint Procurement Task Force established by the Commission and the High Representative and Head of the European Defence Agency, in line with the joint communication of 18 May 2022, to coordinate very short-term defence procurement needs and to engage with Member States and Union defence manufacturers to support joint procurement in order to replenish stocks, in particular in light of the support provided to Ukraine.

(19)The security situation in Europe requires urgent reflection as to how to reduce excessive fragmentation via stand-alone Union initiatives and how to strategically link relevant instruments. The Instrument is intended to ensure coherence with existing collaborative Union defence-related initiatives, such as the Capability Development Plan, the Coordinated Annual Review on Defence, the European Defence Fund as well as the Permanent Structured Cooperation, and to generate synergies with other Union programmes. The Instrument is fully coherent with the ambition of the Strategic Compass for Security and Defence. Where appropriate, regional and international priorities, including those established in the North Atlantic Treaty Organization context, can also be taken into account if they are in line with Union priorities and do not prevent any Member State or associated country from participating, while seeking to avoid unnecessary duplication.

(20)As the Instrument aims to enhance the competitiveness and efficiency of the Union’s defence industry, common procurement contracts will, in order to benefit from it, need to be placed with contractors or subcontractors which are established in the Union or in associated countries and are not subject to control by non-associated third countries or by non-associated third-country entities. In that context, control over a contractor or subcontractor should be understood to mean the ability to exercise a decisive influence on a contractor or subcontractor directly, or indirectly through one or more intermediate legal entities. Additionally, in order to ensure the protection of security and defence interests of the Union and the Member States, the infrastructure, facilities, assets and resources of the contractors and subcontractors involved in the common procurement which are used for the purposes of that procurement should be located on the territory of a Member State or of an associated country.

(21)In certain circumstances, it should be possible to derogate from the principle that contractors and subcontractors involved in a common procurement supported by the Instrument are not subject to control by non-associated third countries or non-associated third-country entities. In that context, a contractor or subcontractor established in the Union or in an associated country and controlled by a non-associated third country or a non-associated third-country entity should be able to participate as contractor or subcontractor involved in the common procurement, provided that strict conditions relating to the security and defence interests of the Union and its Member States, as established in the framework of the common foreign and security policy pursuant to Title V of the Treaty on European Union (TEU), including in respect of strengthening the EDTIB, are fulfilled.

(22)Furthermore, common procurement procedures and contracts should also include a requirement that the defence product not be subject to a restriction by a non-associated third country or a non-associated third-country entity that limits Member States’ ability to use that defence product. In urgent cases, where the capacity of the EDTIB to fill the most urgent and critical gaps in the stocks of Member States is not sufficient or where the EDTIB is not able to provide the necessary defence products in an adequate timeframe, that requirement should not apply if the procured products were in use prior to 24 February 2022 within the armed forces of a majority of the Member States participating in the common procurement. Where that derogation applies, countries participating in the common procurement should study the feasibility of replacing the components causing the restriction with restriction-free components from the Union or associated countries.

(23)Grants provided under the Instrument should take the form of financing not linked to cost and should be based on the achievement of results by reference to work packages, milestones or targets of the common procurement process in order to create the necessary incentive effect.

(24)In order to ensure uniform conditions for the implementation of this Regulation, implementing powers should be conferred on the Commission with respect to the adoption of a multiannual work programme to set out the funding priorities and the applicable funding conditions. Those powers should be exercised in accordance with Regulation (EU) No 182/2011 of the European Parliament and of the Council (3).

(25)To generate an incentive effect, the level of Union contribution for each action should be able to be differentiated based on factors such as the complexity of the common procurement, the characteristics of the cooperation or the number of participating Member States or associated countries or the inclusion of additional Member States or associated countries in existing cooperations, but should not exceed 15 % of the overall budget of the Instrument and should be capped at 15 % of the estimated value of the common procurement contract per consortium of Member States and associated countries. Due to the higher costs usually associated with conducting procurement procedures including large numbers of contractors, or which entail transfers of purchased equipment to third countries, that cap should be raised to 20 % of the overall budget and 20 % of the estimated value of the common procurement contract per consortium of Member States and associated countries, where Ukraine or Moldova is one of the recipients of additional quantities of defence products in the procurement action or where at least 15 % of the estimated value of the common procurement contract is allocated to SMEs or mid-caps as contractors or subcontractors. The procurement of additional quantities of defence products for Ukraine and Moldova should be possible, with the agreement of participating Member States, given the particular security situation of those two Union candidate countries in light of Russia’s war of aggression against Ukraine.

(26)Member States and associated countries should appoint a procurement agent to conduct a common procurement on their behalf. The procurement agent should be a contracting authority as defined in Article 2(1), point (1), of Directive 2014/24/EU (4) and Article 3(1) of Directive 2014/25/EU (5) of the European Parliament and of the Council that is established in a Member State or an associated country, the European Defence Agency, or an international organisation.

(27)In accordance with Article 193(2) of Regulation (EU, Euratom) 2018/1046 the European Parliament and of the Council (6) (the ‘Financial Regulation’), a grant may be awarded for an action which has already begun, provided that the applicant can demonstrate the need for starting the action prior to signature of the grant agreement. Russia’s war of aggression against Ukraine has caused a drastic change in the defence market conditions to which the EDTIB has to adapt in a very time-constrained environment. Given the urgency and the seriousness of that adaptation as well as the existence of a risk of further fragmentation of the internal market and of the supply chains of relevant defence products, actions by Member States starting cooperation for joint procurement were immediately needed to send a significant signal to the market and the EDTIB. As a consequence, early financial support from the Union should be possible. By way of derogation from Article 193 of the Financial Regulation, it should thus be possible, in the financing decision, to provide for financial contributions to actions that cover periods from 24 February 2022 even if they started before the grant application was submitted, provided that they are not finished before the signature of the grant agreement.

(28)This Regulation is without prejudice to the rules laid down in Directive 2009/81/EC of the European Parliament and of the Council (7). However, this Regulation provides for more specific eligibility requirements. Directive 2009/81/EC provides that Member States may include in their legislation the possibility to impose, in the contract documentation, requirements related to the protection of security of supply or the security of information. This Regulation builds upon those provisions of Directive 2009/81/EC and creates obligations for procurement agents regarding eligibility requirements to be included in contract documentation. Such obligations should prevail over conflicting legislation of the Member State and associated countries in which the procurement agent concerned is established.

(29)Commission Recommendation (EU) 2018/624 (8) aims to facilitate cross-border market access for SMEs and intermediate companies in the defence sector. In particular, it calls on Member States to use the flexibility offered by Directive 2009/81/EC, such as that introduced in Article 21 thereof or that offered by the increased recourse to lots or electronic procurement. It also calls on Member States to alleviate the administrative burden related to procurement, in particular by keeping requests for information or selection criteria proportionate. In the context of this Regulation, procurement agents appointed by Member States and associated countries should make best use of the Commission recommendations in the conduct of common procurement actions in order to ensure fair access for SMEs to supported procurement.

(30)This Regulation lays down a financial envelope for the Instrument for the period from 27 October 2023 to 31 December 2025, which is to constitute the prime reference amount within the meaning of point 18 of the Interinstitutional Agreement of 16 December 2020 between the European Parliament, the Council and the European Commission on budgetary discipline, on cooperation in budgetary matters and on sound financial management, as well as on new own resources, including a roadmap towards the introduction of new own resources (9), for the European Parliament and for the Council during the annual budgetary procedure.

(31)In accordance with the Financial Regulation, Regulation (EU, Euratom) No 883/2013 of the European Parliament and of the Council (10) and Council Regulations (EC, Euratom) No 2988/95 (11), (Euratom, EC) No 2185/96 (12) and (EU) 2017/1939 (13), the financial interests of the Union are to be protected through proportionate measures, including measures relating to the prevention, detection, correction and investigation of irregularities, including fraud, to the recovery of funds lost, wrongly paid or incorrectly used, and, where appropriate, to the imposition of administrative penalties. In particular, in accordance with Regulations (Euratom, EC) No 2185/96 and (EU, Euratom) No 883/2013, the European Anti-Fraud Office (OLAF) has the power to carry out investigations, including on-the-spot checks and inspections, with a view to establishing whether there has been fraud, corruption or any other illegal activity affecting the financial interests of the Union. The European Public Prosecutor’s Office (EPPO) is empowered, in accordance with Regulation (EU) 2017/1939, to investigate and prosecute criminal offences affecting the financial interests of the Union as provided for in Directive (EU) 2017/1371 of the European Parliament and of the Council (14). In accordance with the Financial Regulation, any person or entity receiving Union funds is to fully cooperate in the protection of the financial interests of the Union, grant the necessary rights and access to the Commission, OLAF, the Court of Auditors and, in respect of those Member States participating in enhanced cooperation pursuant to Regulation (EU) 2017/1939, the EPPO, and to ensure that any third parties involved in the implementation of Union funds grant equivalent rights.

(32)Pursuant to Article 85(1) of Council Decision (EU) 2021/1764 (15), persons and entities established in overseas countries or territories are eligible for funding subject to the rules and objectives of the Instrument and possible arrangements applicable to the Member State to which the relevant overseas country or territory is linked.

(33)For the purposes of this Regulation, defence products should be understood to mean products within the scope of Directive 2009/81/EC, as set out in Article 2 of that Directive, in particular as product types included in the list of arms, munitions and war material set out in Council Decision 255/58 of 15 April 1958 (16). That list includes only equipment which is designed, developed and produced for specifically military purposes. However, the list is generic and is to be interpreted in a broad way in light of the evolving character of technology, procurement policies and military requirements leading to the development of new types of equipment, for instance on the basis of the Common Military List of the Union. For the purposes of this Regulation, defence products should also be understood to cover products which, although initially designed for civilian use, are later adapted to military purposes to be used as arms, munitions or war material.

(34)Pursuant to Article 4(2) TEU, national security remains the sole responsibility of each Member State. Member States determine among themselves the arrangements applicable to the protection of classified information for the purposes of the common procurements, in accordance with national laws and regulations.

(35)The Commission protects EU classified information in accordance with the security rules set out in Commission Decision (EU, Euratom) 2015/444 (17). In line with the Agreement of 4 May 2011 between the Member States of the European Union, meeting within the Council, regarding the protection of classified information exchanged in the interests of the European Union (18) and Council Decision 2013/488/EU (19), Member States provide an equivalent degree of protection to EU classified information to that provided by the security rules of the Council set out in Decision 2013/488/EU.

(36)The Commission should draw up an evaluation report for the Instrument and submit it to the European Parliament and to the Council no later than 31 December 2026. The evaluation report should evaluate the impact and effectiveness of the actions taken under the Instrument, while also thinking critically ahead about ways to secure all the components needed in the Union defence supply chain with due regard to the importance of security of supply arrangements, and the functioning of the EDTIB. Furthermore, the evaluation report should identify shortfalls and critical dependencies on non-associated third countries in respect of raw materials, components and production capacities, building on work undertaken in the context of the Observatory of Critical Technologies. The evaluation report should inform the Commission’s work on technology roadmaps, including mitigation measures to address those shortfalls and critical dependencies.

(37)This Regulation is without prejudice to Member States’ discretion in respect of their policy on the export of defence-related products.

(38)Since the objectives of this Regulation cannot be sufficiently achieved by the Member States but can rather be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 TEU. In accordance with the principle of proportionality as set out in that Article, this Regulation does not go beyond what is necessary in order to achieve those objectives.

(39)In order to allow for the implementation of this Regulation to start as soon as possible, it should enter into force as a matter of urgency,