EN    EN  COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 7.12.2006 
SEC(2006) 1554 
  
COMMISSION STAFF WORKING DOCUMENT  
Accompanying document to the 
 
INTERPRETATIVE COMMUNICATION 
 
on the application of Article 296 of the Trea ty in the field of defence procurement  
  
Impact assessment 
  
{COM(2006) 779 final} 
{SEC(2006) 1555} 
 
EN 2   EN IMPACT ASSESSMENT 
0. Procedural issues and consulta tion of interested parties.............................................. 3 
1. Background information and problem definition......................................................... 4 1.1. Background information .............................................................................................. 4 1.1.1. Specificities of defence markets................................................................................... 4 1.1.2. Market fragmentation................................................................................................... 4  
1.1.3. Defence spending........................................................................................................ .5  
1.1.4. Industrial landscape.................................................................................................... .. 8 
1.1.5. Procurement law......................................................................................................... .. 9 
1.2. Problem definition........................................................................................................ 9 
1.2.1. Specific problem: extensive use of Article 296 ........................................................... 9 1.2.2. Causes of the problem................................................................................................ 10 1.2.3. Consequences of the problem .................................................................................... 10 2. Objectives.................................................................................................................. . 11 
3. Subsidiarity ................................................................................................................ 11 
4. Policy options............................................................................................................. 1 1 
4.1. Option 1: No action at Community level ................................................................... 11 4.2. Option 2: Revision of the 1958 list ............................................................................ 12 4.3. Option 3: Specifying "essenti al security interests" .................................................... 12 
4.4. Option 4: Clarifying the use of Article 296 by an Interpretative Communication .... 13 
4.5. Conclusion................................................................................................................ .. 13 
5. Analysis of the impact................................................................................................ 13 5.1. Legal impact.............................................................................................................. . 13 
5.2. Economic and financial impact.................................................................................. 13 5.3. Impact on comp etitiveness......................................................................................... 14 
5.4. Impact on administrative costs................................................................................... 14 5.5. Political aand institional impact................................................................................. 14 6. monitoring and evaluation.......................................................................................... 15 7. Conclusion.................................................................................................................. 15 
 
EN 3   EN INTRODUCTION  
The present Impact Assessment accompanies th e draft "Interpretative Communication on the 
application of Article 296 of the Treaty in the field of defe nce procurement". The study first 
recalls the context of the Commission's current in itiatives in the field of defence procurement. 
The analytical part starts with a description of the situation in Europe's defence markets, with 
a special focus on market fragmentation and its negative consequences. This serves as the 
background for the identification of the prob lem and the definition of the Commission's 
objectives. In the following part, various options  for tackling the problem are discussed and 
the impact of an Interpretative Communication assessed. The focus of this Impact Assessment 
lies on the problem analysis, the objectives a nd the policy options. It remains essentially 
qualitative. 
0. PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES 
In 2003, the Commission issued a Communication "European defe nce – Industrial and market 
issues – Towards an EU defence equipment policy",1 which launched a set of seven initiatives 
aimed at gradually setting up a European Defence Equipment Market (EDEM) in support of 
the European Security and Defence Policy (ESDP). 
In the area of defence procurement, this le d to the publication in 2004 of a Green Paper2 
which invited stakeholders to comment on optio ns for enhancing transparency and openness 
of defence markets between EU Member States. In  parallel a series of meetings and contacts 
took place. At the end of the consultation pe riod, 40 contributions were received, including 
from 16 Member States, European institutions (Parliament), bodies (the Economic and Social Committee) and agencies (Institute of Secu rity Studies, European Defence Agency), 
representative organisations of industrie s (UNICE, ASD Aeronautic Space and Defence 
Industries Association of Europe ), and experts in the field. 
The findings of the Green Paper consultati on, published in a Communication in December 
2005,
3 confirmed that the legal framework for defence procurement at European level is not 
working properly. This leads in particular to an extensive use of Article 296 TEC, which 
allows Member states to exempt defence pr ocurement from community rules if this is 
necessary for the protection of their essential se curity interests. Acco rding to stakeholders, 
there are mainly two reasons for this: 
1) the conditions for the use of  Article 296 TEC are not clear, 
2) the current Public Procurement Directiv e is ill-suited to many defence contracts. 
Based on these findings, the Communication announced two further initiatives: an 
Interpretative Communication to  clarify the conditions for th e use of Article 296 TEC, and, 
considering that a clarification may not be  sufficient, a possible new sector-specific 
procurement Directive adapted to the specificities of defence contracts. 
According to the principles of better regula tion, both initiatives will be accompanied by the 
relevant Impact Assessments: 
                                                 
1 COM(2003) 113, 11 March 2003. 
2 COM(2004) 608, 23 September 2004. 
3 COM(2005) 626, 6 December 2005. 
 
EN 4   EN – the present Impact Assessment accompanies th e Interpretative Communication. It analyses 
in particular how the conditions for the us e of Article 296 TEC can be clarified, and 
whether such clarification can enhance the openness of defence markets. 
– a further Impact Assessment will be comple ted for the beginning of 2007, prior to any 
decision to undertake the drafting of a specific di rective. It will ask in particular whether 
new, defence specific European procurem ent rules can improve compliance with the 
Treaty and enhance intra-European competition for defence contracts not covered by Article 296 TEC. Studies aimed at collecting fa cts and figures on the administrative costs 
and economic benefits of a directive have been outsourced and ar e currently ongoing. The 
findings of those studies will be integrat ed into the future Impact Assessment. 
The Interpretative Communication on the appli cation of Article 296 TEC will be adopted by 
the end of 2006. A proposal for a defence speci fic directive could be drafted by the end of 
2007, subject to the outcome of th e future Impact Assessment. 
1. BACKGROUND INFORMATION AND PROBLEM DEFINITION 
Defence procurement law is one element of de fence markets. The follo wing section gives an 
overview of the characteristics a nd problems of European defen ce markets, before entering 
into the main issue of the present Impact a ssessment, namely the use of Article 296 TEC and 
its implications for the openness of defence markets in the EU.  
1.1. Background information 
1.1.1. Specificities of defence markets Defence markets cover a broad spectrum of  products and services, ranging from non-war 
material, such as office equipment and catering, to complex weapon systems and highly sensitive material, such as nuc lear, biological and chemical e quipment. The sensitivity of 
defence equipment for Member States' security  interests can vary de pending on political and 
military circumstances. In general, however, its sensitivity is proportiona l to its technological 
and strategic importance. 
At the upper end of the technol ogical spectrum, weapon systems are often developed for the 
specific demands of a very small number of customers. These systems normally have long 
development and life cycles and high non-recurri ng costs. This, in turn, makes it necessary for 
governments of producing countries to bear a larg e share of research and development costs. 
Given the importance of military equipment for security, national governments play a 
predominant role in the organisation and operation of defence markets. As sole clients, they 
determine the demand for products and thus de fine both the size of the market and the 
technological portfolio of the industry. As regu lators, they control ar ms trade via export 
licences and shape the way companies operate and organise themselves. State control can also include industrial restructuring and ownership. In many cases, Stat es are still shareholders in 
defence companies and/or hold "golden shares ", which provide influence over strategic 
business decisions. 
1.1.2. Market fragmentation 
 
EN 5   EN Defence expenditure in the EU is worth about €170 billion (1.7% of GDP),4 which includes 
about €82 billion for defence procurement in general and about €30 billion for the acquisition of new equipment. Most of this expenditure is  split into relatively small and closed national 
markets; fragmentation at nationa l level remains the main feature of Europe's defence sector:  
(1) on the demand side, 25 national customer s have great difficulties in harmonising 
their military requirements and pooling their purchasing power into common procurement projects; 
(2) the regulatory framework consists of  25 different sets of national rules and 
procedures for all relevant ar eas (exports, transfers, procur ement, etc.), plus specific 
arrangements for cooperative programmes; 
(3) on the supply side, defence industries remain  fragmented along the lines of (national) 
market structures. 
Given the relatively small size of Europe's defe nce markets, this fragmentation is increasingly 
problematic. It is generally rega rded as a costly and ineffici ent obstacle to both competition 
and cooperation. It hinders industry from re structuring and cooperating across national 
borders, accessing other EU markets and reach ing production volumes big enough to remain 
competitive. This, in turn, makes it difficult fo r governments to maintain a sound and viable 
Defence Industrial and Technological Base (D TIB), but also to develop the military 
capabilities necessary for implementing the ESDP.  
The growing awareness of these problems has le d to various initiatives  under both the first 
and the second pillar: in March 2003, the Commission launched seven Community initiatives in defence-related areas (standardisation, in tra-Community transfers, mapping/monitoring, 
research, public procurement, export of dual- use goods and competition). All these initiatives 
are aimed at supporting the gradual establishmen t of a European Defence Equipment Market. 
A few months later, at the Eu ropean Council meeting in Thessa loniki, Member States decided 
to create an intergovernmental  agency to support the developm ent of military capabilities in 
the framework of the ESDP. This European De fence Agency (EDA) wa s set up in July 2004, 
working in particular on military capabil ities, armaments cooperation, research and 
technology, and defence industr ial and market issues. 
1.1.3. Defence spending 
Defence expenditure in the European Union is not only limited, but also unevenly distributed 
across the EU Member States. The four Member States with the largest defence procurement 
budget in nominal terms - UK, FR, DE, IT - acc ount for approximately €61 billion, which is 
around 75% of overall defence procurement in the EU. On the other hand, the combined defence procurement of the ten new Member Stat es amounts to little mo re than 3.3% of the 
total for the EU25. The large diffe rences in the nominal values  of defence procurement are 
related to the size of the economy, but also to divergi ng political priorities.  
Figure 1: National defence procurement 2004
5 
                                                 
4 Source : ESTAT and Commission calculations. 
5 Source: ESTAT; calculations by DG MARKT. 
 
EN 6   EN Defence procurement28.159,9
15.938,0
11.110,0
5.995,0
4.303,0
3.348,0
3.101,0
1.940,0
1.518,7
1.497,0
804,6
769,2
454,0
158,5
17,7
905,5
593,4
486,5
205,4
153,3
115,3
105,0
88,9
64,9
15,30,05.000,010.000,015.000,020.000,025.000,030.000,0
United Kingdom
France
GermanyItalySpain
Sweden
Netherlands
Greece
Denmark
FinlandBelgium
Austria
PortugalIreland
Luxembourg
Poland
Czech Republic
Hungary
Slovakia
Slovenia
Cyprus
Lithuania
Estonia
Latvia Maltamill. €
 
Table 1 shows that most EU Member States  spend less than 1%  of GDP on defence 
procurement. Only in the UK, SE and HE is the share higher (ranging from 1.2% to 1.6% of 
GDP). Moreover, considerable differences exist between the four largest countries, the share 
being three times higher in the UK and two times hi gher in FR than in DE or IT. Last but not 
least, the ratio between defence procuremen t expenditure and GDP does not change much 
over time. Even in those countries where the ab solute value of defence procurement increased 
considerably between 2001 and 2004 (like the UK), the defence expenditure/GDP ratio 
remained fairly constant. Thus the development of defence procurement appears to be closely 
connected to changes in GDP. 
 
EN 7   EN Table 1: Defence procurement in the EU6 
  Defence procurement  Defence procurement 
  (mill. of current EUR)  (percentage of GDP) 
  2000 2001 2002 2003 2004  2000 2001 2002 2003 2004 
                  
United Kingdom  27.909,1 25.268,8 26.670,1 27.803,7 28.159,9  1,8% 1,6% 1,6% 1,7% 1,6% 
France   13.190,0 14.284,0 15.039,0 14.657,0 15.938,0   0,9% 1,0% 1,0% 0,9% 1,0% 
Germany  11.050,0 11.160,0 11.440,0 11.250,0 11.110,0  0,5% 0,5% 0,5% 0,5% 0,5% 
Italy   5.616,0 5.871,0 6.036,0 7.601,0 5.995,0   0,5% 0,5% 0,5% 0,6% 0,4% 
Spain  2.633,0 2.887,0 3.419,0 3.700,0 4.303,0  0,4% 0,4% 0,5% 0,5% 0,5% 
Sweden   4.079,6 3.645,1 3.545,2 3.457,6 3.348,0   1,6% 1,5% 1,4% 1,3% 1,2% 
Netherlands  3.189,0 3.136,0 3.027,0 3.086,0 3.101,0  0,8% 0,7% 0,7% 0,6% 0,6% 
Greece   4.308,1 3.204,0 3.727,0 3.115,0 1.940,0   3,4% 2,4% 2,6% 2,0% 1,2% 
Denmark  1.281,5 1.457,3 1.403,4 1.423,7 1.518,7  0,7% 0,8% 0,8% 0,8% 0,8% 
Finland   1.162,0 1.087,0 1.196,0 1.315,0 1.497,0   0,9% 0,8% 0,8% 0,9% 1,0% 
Belgium  931,7 952,8 899,4 804,6 804,6  0,4% 0,4% 0,3% 0,3% 0,3% 
Austria   706,7 635,0 649,5 711,3 769,2   0,3% 0,3% 0,3% 0,3% 0,3% 
Portugal  749,4 584,0 443,1 423,5 454,0  0,6% 0,5% 0,3% 0,3% 0,3% 
Ireland   158,2 229,0 170,8 152,9 158,5   0,2% 0,2% 0,1% 0,1% 0,1% 
Luxembourg  15,1 14,1 17,9 19,1 17,7  0,1% 0,1% 0,1% 0,1% 0,1% 
EU-15 Total   76.979,4 74.415,1 77.683,4 79.520,4 79.114,6             
EU-15 Average             0,9% 0,8% 0,8% 0,8% 0,8% 
             
Poland         1.042,4 905,5         0,5% 0,4% 
Czech Republic        856,1 593,4        1,1% 0,7% 
Hungary         474,4 486,5         0,6% 0,6% 
Slovakia        284,1 205,4        1,0% 0,6% 
Slovenia         133,5 153,3         0,5% 0,6% 
Cyprus        218,1 115,3        1,9% 0,9% 
Lithuania         111,9 105,0         0,7% 0,6% 
Estonia        89,7 88,9        1,1% 1,0% 
Latvia         50,1 64,9         0,5% 0,6% 
Malta        9,4 15,3        0,2% 0,4% 
NMS-10 Total         3.269,7 2.733,5             
NMS-10 
Average                   0,7% 0,6% 
             
EU-25 Total         82.790,1 81.848,1             
EU-25 Average                    0,8% 0,8% 
 
Differences between countries are even mo re striking when it comes to military R&D 
spending (see Table 2). In 2001, the combined  R&D budget in DE, FR and UK accounted for 
more than 90% of overall R&D expenditure in th e EU15; for the six signatories of the Letter-
                                                 
6 Source: ESTAT; calculations by DG MARKT.* For Belgium, no data was available for 2004. 
However, the values for the previous year (2003) ca n serve as a conservative estimate for procurement 
in 2004. 
 
EN 8   EN of-Intent (LoI)7 Framework Agreement – FR, DE, IT, ES , SE and UK – the share is almost 
99%. 
Table 2: Military R&D spending8 
1998 1999 2000 2001 1998 1999 2000 2001 1998 1999 2000 2001
United Kingdom 2,619 2,488 2,197 2,158 4,165 3,595 3,237 3,184 3.27 2.62 2.07 1.99
France 3,580 2,674 2,454 2,512 3,580 2,674 2,454 2,512 2.72 1.96 1.70 1.68Germany 1,551 1,161 1,044 1,027 1,551 1,161 1,044 1,027 0.79 0.58 0.51 0.49Italy 587 274 175 232 587 274 175 232 0.55 0.25 0.15 0.19
Spain 218 156 141 139 218 156 141 139 0.41 0.28 0.22 0.20
Sweden 1,618 790 763 757 177 87 84 82 0.80 0.37 0.32 0.34Netherlands 109 58 53 52 109 58 53 52 0.31 0.16 0.13 0.12Greece 25 19 19 21 25 19 19 21 0.18 0.13 0.12 0.12
A u s t r i a  1 19881 1988 0 . 0 6 0 . 0 4 0 . 0 4 0 . 0 4
Finland 11 12 6 6 11 12 6 6 0.09 0.10 0.05 0.05P o r t u g a l  4433 4433 0 . 0 4 0 . 0 3 0 . 0 3 0 . 0 3B e l g i u m 1211 1211 0 . 0 0 0 . 0 1 0 . 0 0 0 . 0 0
D e n m a r k 3 9 3 366 5411 0 . 0 3 0 . 0 3 0 . 0 0 0 . 0 0
I r e l a n d 0000 0000 0 . 0 0 0 . 0 0 0 . 0 0 0 . 0 0L u x e m b o u r g 0000 0000 0 . 0 0 0 . 0 0 0 . 0 0 0 . 0 0
EU-15 Total 10,443 8,056 7,226 7,268
EU-15 Average 696 537 482 485 0.09 0.07 0.06 0.05Military R&D Spending 
(mill of current national currenc y)Military R&D Spending 
(mill of current EUR )Military R&D 
(in ‰ of GDP )
 
1.1.4. Industrial landscape 
The high concentration of R&D spending is dir ectly related to the distribution of defence 
industrial capabilities, with th e six LoI countries representing more than 90% of European 
production. In particular, research-intensi ve high-technology and system integration 
capabilities are concentr ated in the LoI countries, whereas many other Member States have 
only some small and technologically less sophisticated industr ial capabilities. 
Driven by rising costs for complex weapon syst ems, on the one hand, and shrinking – or at 
best stagnating – defence budgets  on the other, defence indus tries in Europe have gone 
through a major consolidation process over the last 10 years. All sectors have witnessed 
downsizing and restructuring, but only in aero space and electronics have companies merged 
across national borders (BAE Sy stems, Thales and EADS, plus a dense network of joint 
ventures). However, the fragme ntation of the market makes it difficult for these companies to 
optimise their internal processes and to function as truly transnational companies. In naval and land armaments, consolidation is less advan ced and cross-border indust rial ties remain an 
exception.  
The "right" balance between cons olidation (necessary to reach the critical mass to become 
competitive on a global scale) and competition (desirable to avoid the negative effects of oligopolies or monopolies) varies between the sectors and depends on the specific market 
situation. It is generally agreed, however, that  Member States' defence budgets are too small 
for them individually to maintain a viable indust rial base. Access to other markets is therefore 
crucial for most producers, th rough either coopera tion (joint programme s, subcontracting, 
                                                
 
7 The Framework Agreement was signed in July 2000 between the six main arms producing countries in 
Europe. It is an international Treaty outside the EU  context and is aimed at facilitating cross-border 
cooperation and restructuring of defence industries. 
8 Source: International Institute for Strategic St udies (IISS); calculations by DG MARKT. Data was 
available for EU15 and until 2001 only. For Euro zo ne countries, “national currency” refers to “euro 
fixed” series. 
 
EN 9   EN etc.) or competition (participation in foreign tenders). Here again, market fragmentation 
becomes the major obstacle. 
The existence and importance of defence indu strial capabilities are also key determining 
factors for Member States' procurement policie s. If Member States have the industrial 
capabilities within their terr itory to develop and produce w eapon systems they need, they 
normally give preference to loca l manufacturers (which can also be in foreign ownership). For 
low-tech products, many Member States have  national capabilities and often pursue a policy 
of national preference. For complex systems, the situation is different: only the LoI countries 
have the necessary assets to de velop (individually or collectiv ely) these systems. The other 
Member States buy them off-the-shelf and on a competitive basis from non-national suppliers, 
often from the United States. However, this does not mean that competition is necessarily transparent and fair, since procurement rules di ffer considerably between Member States, and 
procurement decisions are often influenced by po litical considerations with offsets playing a 
crucial role.
9 
1.1.5. Procurement law 
At Community level, there is – in contrast to othe r sectors such as en ergy or transport – no 
specific directive coordinating na tional procurement rules in the defence sector. It is thus 
Directive 2004/18/EC on the procurement of goods, works and services which applies to 
public contracts awarded by authori ties in the field of defence, subject to Article 296 of the 
Treaty.  
Article 296 TEC allows Member States to exempt the procurement of arms, ammunition and 
war material from Community rules, if this is  necessary for the protect ion of their essential 
security interests.  
Defence contracts exempted under Article 296 TEC are awarded on the basis of national 
legislation. For defence procurement, most natio nal legislation provides for exemptions from 
the application of public procurement rules, w ith differing degrees of transparency. Defence 
specific procurement rules, however, differ grea tly between Member States with regard to 
publication systems, standards for technical specifications, selection criteria, tendering 
procedures and award criteria. On top of that come special  procedures for cooperative 
programmes. This diversity of regulatory frameworks is an important factor in Europe's 
market fragmentation.  
1.2. Problem definition  
The previous section has shown that fragment ation of defence markets in the EU creates 
problems with major financial and economic c onsequences in a variety of areas. The 
following sections will focus on one area – defe nce procurement – and one specific problem, 
namely the extensive use of Article 296 TEC.  
1.2.1. Specific problem: extensive use of Article 296 
                                                 
9 Offsets are compensations that governments require from non-national contractors as a condition for 
purchasing defence articles or services. These co mpensations can cover a wide range of activities 
directly or indirectly related to the object of the pr ocurement contract. Indirect offsets, in turn, can be 
defence related or non-defence related. 
 
EN 10   EN According to the Court, the exemption prov ided under Article 296 TEC is limited to 
exceptional cases and does not lend itself to a wide interpretation. In practice, however, many 
Member States have used Article 296 TEC extensively, exempting from Community rules 
also defence contracts which do not fulfil the conditions for the use of Article 296 TEC, 
namely non-war material and equipment which does  not concern essential security interests.  
One indicator for the extensive use of Article 296 TEC is the low publication rate for defence 
procurement (an average ratio of 10 between th e value of defence contracts published in the 
OJEU and the total amount of defence procurem ent expenditure). Even more telling, however, 
are the great differences in publication rates between Member States, ranging from 1% to 
20%. This clearly illustrates that (a) Member States have very different views on how to 
interpret the possibility of exempting defence contracts from Community rules, and (b) many 
of them could probably use the exemption more  restrictively without putting their essential 
security interests at risk. 
1.2.2. Causes of the problem 
According to the findings of the Green Paper c onsultation, application of  Article 296 TEC is 
problematic mainly for two reasons: 
(1) The conditions for the use of Article 296  TEC are not clear. There are several 
reasons for this: 
(a) The concept of "essential security intere sts" is vague and can lead to different 
judgments on the strategic and military importance of equipment; 
(b) Paragraph 2 of Article 296 TEC mentions  a list of war material which can be 
exempted. However, this list is not very  precise and has never been published 
or revised since it wa s established in 1958; 
© New threats and technologies have blu rred the dividing line between military 
and non-military security. This makes th e decision on what is "defence" and 
what is "essential for secu rity" even more complex. 
As a result of all this, there is an important  grey zone in defence markets where it is 
not clear whether procurement contracts fu lfil the conditions for the use of Article 
296 TEC or not. 
(2) The current Public Procurement Directive , even in its revised version 
(2004/18/EC), is considered ill-suited to many defence contracts , since it does not 
take into account defence specific features. This c oncerns in particular the 
publication system, award procedures and selection criteria. Consequently, many 
Member States are reluctant to use the PP Directive for defence equipment. In order 
to be able to incorporate those special f eatures in defence contracts, they declare 
them exempt from public procurement rule s on the basis of Article 296 TEC, even if 
the conditions for the app lication of that provisio n are in fact not met. 
1.2.3. Consequences of the problem 
As a result of the excessive application of Artic le 296, the majority of defence contracts in the 
EU are awarded on the basis of  national procurement rules, which differ greatly between 
Member States. This hampers transparency an d creates extra transaction costs for foreign 
 
EN 11   EN bidders (identification of calls  for tender, adaptation to loca l contracting conditions). The 
result is less openness than there should (and c ould) be in those defence market segments 
which are de jure  not covered by the exemption pr ovided for in Article 296 TEC.  
This has a negative impact for both the s upply and the demand side: production volumes 
remain limited, which reduces economies of s cale and has a negative impact on industries' 
competitiveness. For Member States, the lack of competition causes overspending in defence procurement. Higher prices for specific procuremen ts, in turn, can lead to reductions of orders 
and, consequently, further reduction of producti on (either under the programme concerned or 
under other procurement programmes). Last but not least, lack of competition can also lead to 
lower quality, which means that Europe's armed forces risk not getting the best value for 
money.  
2. OBJECTIVES 
The Commission's overall objective is graduall y to establish a common European Defence 
Equipment Market (EDEM).  
The Commission's activities in the area of defence procurement are part of this wider 
initiative. Their objective is to ensure complianc e with the principles of the Treaty and foster 
transparency, equality of treatment and non-di scrimination in those parts of the defence 
markets where Community rules (should) apply.  
To achieve this objective, the Commission's polic y is to make sure that the legal framework 
for defence procurement at Community level works properly. This makes it necessary to 
tackle the two causes of the problem, i.e. the l ack of certainty regarding the scope of Article 
296 TEC and the lack of Community rule s suited to defence procurement.  
As a first step, the Commission will therefore clarify the conditions for the use of the 
exemption provided for by Article 296 TEC. The present Impact Assessment focuses on this 
initiative. 
3. SUBSIDIARITY 
As guardian of the Treaty, it is the Commissi on's duty to ensure compliance with European 
law. This is also the case for Article 296 TEC  and its application in the field of defence 
procurement. It is thus for the Commission to examine, if necessary, in specific procurement 
cases whether the conditions for the use of Artic le 296 TEC are met, but also to ensure that 
the provisions of th at Article are applie d throughout the Union. 
It is the Member States' prerogative to define th eir security interests a nd their duty to protect 
them. However, the differences in their way of using the exemption from Community rules 
show the need to clarify the legal framework at  EU level and give some guidance on how to 
interpret Article 296 TEC. Given its role as guardian of the Treaty, only the Commission can 
do this. 
4. POLICY OPTIONS 
4.1. Option 1: No action at Community level 
Without an initiative from the Commission, the only remaining initiatives to foster openness 
of defence markets in Europe would be th e "Code of Conduct" (C oC) of the European 
 
EN 12   EN Defence Agency (EDA), which entered into fo rce on 1 July 2006. The Co C is a non-legally 
binding instrument aimed at se curing greater transparency (t hrough publication on the so-
called Electronic Bulletin Board) and accountability  (through an obligation of reporting to the 
Steering Board of the Agency) for certain natio nal procurement contracts covered by Article 
296 TEC.  
However, the scope of the CoC is limited to certain defence equipment covered by Article 
296 TEC. In other words, it applies only to co ntracts which are exempted from Community 
rules and does not clarify the conditi ons for the use of Article 296 TEC.  
Without action at Community level, the current uncertainty and all its negative consequences 
would thus persist. It therefor e comes as no surprise  that, in the Green Paper consultation, all 
stakeholders ruled out "no Co mmunity action" as an option. 
4.2. Option 2: Revision of the 1958 list 
The list mentioned in Article 296(2) TEC includes military equi pment to which the exemption 
can apply if the conditions for the use of that Article are met.  Although the list has never been 
officially published, it is availa ble in the public domain. It is generally acknowledged that this 
list is not very precise. Moreover, being esta blished in 1958, it has never been adapted to 
technological developments and is theref ore often considered somewhat outdated.  
In principle, the Commission c ould present a proposal for a mo re precise and possibly more 
exhaustive list in order to better define the scope of Article 296 TEC. However, the 
stakeholder consultation confirmed that this approach is not advisable:  
• First, the Council would have to approve the Commission's proposal by unanimity, which 
seems unlikely, since many Member States see no need for a revision.  
• An updated and more precise list on which all 25 Member States could agree could 
become very comprehensive, since each Memb er State would probably try to include as 
many (of its national industrial) products as possi ble in order to keep at least the option of 
exempting them from Community rules. A modificat ion of the list could thus turn out to be 
counter-productive, potentially  leading to even less intr a-European competition.  
• The more technological details a list contains, the sooner it would be outdated again. From 
that point of view, the vagueness of the current list is an advantage, since it allows for a 
flexible interpretation covering new technological developments. 
• The current list may be rather generic, but it clearly includes only equipment of specific 
military nature and purpose. This appears sufficient to limit the type of equipment which can be exempted on the basis of Article 296 TEC. The question is then whether an 
exemption is necessary to protect essential security interests. 
To sum up: revision of the 1958 list would be a politically difficult and awkward exercise 
with high potential for an unsatisfactory outcome.  
4.3. Option 3: Specifying "esse ntial security interests" 
Another possibility to clarify the conditions for the use of Article 296 TEC would be to 
establish a commonly agreed and precise definition of "essential security interests". However, 
 
EN 13   EN since defence policy is not a Community policy, it  is the Member States' prerogative to define 
their essential security interests. It is ther efore not within the Commission's remit to propose 
such specification.  
4.4. Option 4: Clarifying the use of Articl e 296 by an Interpretative Communication 
Recalling the principles of the Trea ty and the relevant case law of  the Court, an Interpretative 
Communication can explain the conditions for th e use of Article 296 TEC and give guidance 
to awarding authorities for assess ing the applicability of the exem ption. It can it make clear, in 
particular, that: 
• the use of Article 296 TEC for the exemption of defence contracts from Community rules 
should be limited to exceptional cases; 
• Article 296 TEC allows exemption from Comm unity rules only for purely military items 
included in the 1958 list and only if the exemp tion is necessary for the protection of a 
Member State's essential security interests; 
• it is within the competence of Member States to  define and protect thei r security interests. 
To reconcile this prerogative with their Treaty obligations, they must assess carefully case 
by case whether the exemption is necessary; 
• as guardian of the Treaty, the Commission may ve rify whether the cond itions for the use of 
Article 296 TEC are fulfilled. In this case, Memb er States have to demonstrate that the 
exception from Community rules is necessary fo r the protection of their essential security 
interests. 
4.5. Conclusion 
The Interpretative Communication is thus the only  available instrument to shed some light on 
the conditions for the use of Article 296 TEC. It could be adopted by the Commission on its 
own. Naturally, consultation of the Member Stat es is politically desirable, albeit not 
mandatory. 
5. ANALYSIS OF THE IMPACT 
5.1. Legal impact 
The Interpretative Communicati on clarifies the conditions for the use of the derogation under 
Article 296 TEC, as defined by the relevant case law.  
As a non-legislative measure, the Interpretative Co mmunication does not modify existing law. 
It does not coordinate national procurement rule s and thus does not contribute to rationalising 
Europe's fragmented regulatory framework.  
5.2. Economic and financial impact 
The impact of the Interpretative Communicatio n on the openness of defence markets probably 
varies between the various market segments: 
– for non-warlike products , the Interpretative Communica tion may have a significant 
impact. Since this market segment lies at  the periphery of defence markets and 
 
EN 14   EN clearly outside the scope of  Article 296 TEC, the Communi cation can give sufficient 
guidance to make sure that contract awar ding authorities systematically use the 
existing PP Directive for such contracts.  This can enhance transparency and 
openness of markets. More competition certa inly results in better value for money, 
since this market segment covers a br oad spectrum of goods and services, ranging 
from catering and cleaning to uniforms and construction. However, actual cost 
savings also depend on a more rigorous enforcement policy being pursued by the 
Commission. 
– for warlike items not concerning essential security interests , the impact is 
probably limited. Faced with the choice between the use of Article 296 TEC or the 
PP Directive, which they consider ill-suit ed to the procurement of most military 
equipment, Member States may well try to  interpret Article 296 TEC as broadly as 
possible to cover all warlike items. In this market segment, the impact on transparency and openness will therefore be modest.  
– for warlike products concerning e ssential security interests , the impact is zero, 
because they fall within the scope of application of Article 296 TEC. 
5.3. Impact on competitiveness 
The Interpretative Communication would have an  impact mainly on non-warlike items, which 
represent normally the lower end of the techno logical spectrum. In consequence, it would 
contribute little to the competitiv eness of defence industries. 
5.4. Impact on administrative costs 
A more rigorous implementation of existing law should not involve organisational or 
structural changes for national administrati ons. Moreover, a case-by-case assessment of the 
applicability of Article 296 TEC is probably very similar to verification of the applicability of 
the CoC, on which Member States have al ready agreed. Administ rative costs should 
consequently be close to zero. The same is tr ue for industry, which will be only indirectly 
concerned and will therefore not face additional administrative burdens. 
5.5. Political and institutional impact 
Explaining how to use Article 296 TEC, the Interpretative Comm unication is a useful adjunct 
both to the EDA's attempt via the CoC to increas e transparency for defence market segments 
covered by Article 296 TEC, and to possible Commission measur es to improve the suitability 
of Community rules to defence cont racts not covered by Article 296 TEC.  
As such, the Interpretative Communication co ntributes to better f unctioning of the legal 
framework surrounding defence procurement in Eu rope and constitutes an important step on 
the way towards a future European Defence Equipment Market.  
From an institutional point of view, the Inte rpretative Communication is also useful for 
establishing a clear distribution of responsibil ities between the two pillars (EDA for defence 
contracts to which Article 296 TEC applies,  and the Commission for those to which 
community rules apply). Furthermore, the Comm unication demonstrates that the Commission 
plays its role as guardian of the Treaty, ensuri ng compliance with the provisions of Article 
296 TEC. 
 
EN 15   EN 6. MONITORING AND EVALUATION 
The Commission, assisted by the Advisory Comm ittee for Public Procurement, will monitor 
the implementation of the recommendations se t out in the Interpre tative Communication. It 
will in particular: 
– pay attention to developments in case law related to defence procurement, 
– follow the evolution of the rate of public ation as an indicator of transparency, 
– continue its dialogue with the relevant stakeholders, 
– verify, in the case of complaints, whether the use of the exemption is justified for 
specific procurement contracts. 
Moreover, possible exchange of information on the use of Article 296 TEC between the 
Commission and the EDA, which ha s established a monitoring sy stem in support of the CoC, 
may also be useful for actively monitoring compliance with the recommendations in the 
Communication.  
7. CONCLUSION 
Clarification of the use of Article 296 TEC is  a necessary first step towards a functioning 
legal framework for defence procurement at EU level. 
In particular, since the concept of essential security interests remains vague, the Interpretative 
Communication cannot clarify ex  ante to which procuremen t contracts Article 296 TEC 
applies. However, it reduces the uncertainty concerning the conditions for the use of the exemption and gives guidance to awarding authorit ies on how to use the possibility to exempt. 
As such, it is a useful co ntribution to ensuri ng better compliance with EU law.  
A Communication should be able to limit the worst cases of misuse of Article 296 TEC, 
namely the exemption of non-warlike material. Ho wever, it might not resolve the problem of 
equipment which is of military nature, but which does not (necessarily) concern essential security interests. As long as the use of th e current PP Directive is  the only alternative, 
Member States might continue to  exploit the flexibility which lies in the concept of essential 
security interests and stick to an extensiv e interpretation of Article 296 TEC for this 
equipment. A new Directive adapted to the sp ecificities of defence seems an appropriate 
instrument to tackle this problem. The Commi ssion will therefore con tinue its work on an 
Impact Assessment for such a Directive and, subj ect to the results of this Assessment, take 
further initiatives in 2007.