Green Paper - Defence procurement
Date: 2004-09-23
Institutions: European Commission
Subjects: European arms policy, arms industry, arms trade, public contract

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 23.09.2004 
COM(2004)608 final 

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GREEN PAPER  

Defence procurement 

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(presented by the Commission) 

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CONTENTS 

INTRODUCTION...................................................................................................................... 3 

I. 

1. 

2. 

2.1 

2.2 

2.3 

3. 

3.1 

3.2 

3.3 

II. 

1. 

2. 

REASONS FOR ACTION IN THE FIELD OF DEFENCE PROCUREMENT ........ 3 

Fragmented defence markets........................................................................................ 4 

Specific features of defence markets............................................................................ 4 

Dominant role of the state ............................................................................................ 4 

Security of supply and confidentiality requirements ................................................... 5 

Complexity of arms acquisition programmes .............................................................. 5 

Limits to the existing legal framework ........................................................................ 5 

Community exemption system..................................................................................... 5 

Differing national legislation ....................................................................................... 7 

Special procedures for cooperation programmes......................................................... 8 

DEFINING ACTION AT EU LEVEL – ISSUES FOR CONSIDERATION............. 8 

Clarification of the EU’s existing legal framework ..................................................... 9 

Supplementing the EU’s legal framework with a special instrument .......................... 9 

2.1. 

Objectives..................................................................................................................... 9 

2.2 

Content ....................................................................................................................... 10 

CONSULTATION ARRANGEMENTS ................................................................................. 12 

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INTRODUCTION 

This  Green  Paper  is  one  of  the  measures  announced  by  the  European  Commission  in  its 
Communication  “Towards  a  European  Union  defence  equipment  policy”,  adopted  on 
11  March  20031.  Through  these  measures,  the  Commission  intends  to  contribute  to  the 
gradual creation of a European defence equipment market (EDEM) which is more transparent 
and  open  between  Member  States  and  which,  whilst  respecting  the  sector’s  specific  nature, 
would increase economic efficiency. 

Moving towards a truly European market is crucial for strengthening the competitiveness of 
European  industry,  improving  the  allocation  of  defence  resources  and  supporting  the 
development  of  the  Union's  military  capabilities  under  the  European  Security  and  Defence 
Policy (ESDP). 

The  establishment  of  the  European  Defence  Agency  with  its  responsibilities  in  the  field  of 
defence capabilities, research, acquisition and armaments, makes the development of such a 
market even more important.  

Creating  an  EDEM  would  require  a  set  of  complementary  initiatives,  including  the 
establishment  of  an  appropriate  regulatory  framework  for  the  procurement  of  defence 
equipment.  The  opening  up  of  defence  markets,  which  are  currently  fragmented  along 
national  lines,  would  increase  the  commercial  opportunities  for  European  companies  in  the 
sector, including SMEs, and contribute to their growth and increase their competitiveness. 

The purpose of this Green Paper is to develop the debate on these issues, bearing in mind the 
principle  of  subsidiarity2.  For  this  purpose  the  Commission  set  up  two  working  parties 
consisting of representatives of the Member States and European industry to contribute to the 
preparatory stages of the Green Paper. 

In the first part, the Green Paper identifies the reasons for specific action by giving a summary 
of  the  current  state  of  defence  procurement  markets,  their  numerous  special  characteristics 
and  the  existing  regulatory  framework.  In  the  second  part,  on  the  basis  of  this  analysis,  it 
considers possible lines of action. 

I. 

REASONS FOR ACTION IN THE FIELD OF DEFENCE PROCUREMENT 

Defence expenditure constitutes a large part of Member States’ public spending, to the order 
of €160 billion for the 25 Member States, one fifth of which is used for the procurement of 
military equipment (acquisition plus research and development)3. 

1 
2 

3 

COM(2003) 113 final. 
Work  of  the  Council  Working  Party  on  Armaments  Policy  (POLARM),  the  Western  European 
Armaments  Group  (WEAG),  and  the  Agency  Establishment  Team  responsible  for  establishing  the 
European Defence Agency. 
Sources:  NATO  (North  Atlantic  Treaty  Organisation)  and  SIPRI  (Stockholm  International  Peace 
Research Institute) 2002. 

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Defence procurement is currently characterised by the fragmentation of markets along purely 
national lines (point 1), by the specific features which distinguish it from other types of public 
procurement (point 2) and by a complex legal framework (point 3). 

1. 

FRAGMENTED DEFENCE MARKETS 

Although Member States’ combined military expenditure is considerable, it remains split into 
national  markets.  This  fragmentation  poses  a  major  problem  for  all  Member  States  with 
defence industries. Following budgetary reductions and the restructuring of the armed forces, 
the size of national markets – including those of the large states – is no longer sufficient to 
allow  for  production  volumes  that  can  offset  the  high  R&D  costs  of  arms  systems.  This 
situation, along with the fragmentation of R&D spending in Europe, increases the cost to the 
taxpayer  and  damages  both  the  competitiveness  of  the  European  defence  industry  and  its 
ability  to  meet  the  requirements  of  the  ESDP.  Given  the  growing  dual  use  potential  of 
technologies  (military and  civilian), the global competitiveness  of European industry is also 
affected. 

Some progress has been made in the last ten years, particularly as a result of the increase in 
European armaments cooperation and an initial opening-up of national markets to European 
competition. These initiatives have had modest success, but have not resulted in the creation 
of a European defence market. As regards cooperative programmes, the still frequent use of 
the principle of fair return on investment (“juste retour”) generally limits any opening-up to 
the  participating  countries  and  implies  a  distribution  of  work  based  on  purely  national 
industrial  policy  criteria.  As  for  national  procurement,  the  share  of  contracts  awarded  by 
competitive procedure is still low. Irrespective of the procedures used, national suppliers are 
still generally awarded most of the contracts. 

2. 

SPECIFIC FEATURES OF DEFENCE MARKETS 

Defence  markets  have  particular  characteristics  because  of  the  very  nature  of  military 
products and related services. These characteristics are not only economic and technological; 
they  are  also  related  to  the  security  and  defence  policies  of  each  Member  State4.  Defence 
industries are therefore of a strategic nature and have special relations with the state. 

2.1 

Dominant role of the state 

Following privatisations and efforts to optimise procurement policies in recent years, the role 
of the state has been reduced, but it still remains dominant. As sole clients, states determine 
demand for products on the basis of military needs linked to their strategic objectives and thus 
define the size of the market. They participate, to varying degrees depending on the country, 
in  the  financing  of  R&D,  thus  influencing  the  technological  know-how  and  long-term 
competitiveness  of  industry.  As  regulators,  they  control  the  arms  trade  by  means  of  the 
licences  which  exporters  must  have,  including  for  the  delivery  of  equipment  within  the 
European Union, and the granting of authorisations to tender for contracts. State control also 
extends to industrial restructuring, although to a more limited degree, and even to the level of 
shareholding. 

4 

See  the  document  of  the  POLARM  Working  Party  of  the  Council,  annexed  to  communication 
COM(1997) 583 of 4.12.1997. 

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2.2 

Security of supply and confidentiality requirements  

The nature of defence requires sources of supply to be guaranteed for the entire duration of an 
arms programme from the time the equipment is designed until it is withdrawn from service, 
at times of peace and at times of war. States may, therefore, see fit to set up special supply 
guarantees. The maintenance of a purely national industrial capacity for defence may seem a 
reliable way of being able to respond to strategic interests and emergency situations (military 
operations). 

The  nature  of  defence  may  also  require  states  to  have  equipment  that  guarantees  the 
technological  superiority  of  their  military  forces.  This  superiority  depends,  in  particular,  on 
the confidentiality of programmes and their technical specifications. The obligation to protect 
this confidential information means companies must have special national security clearances. 

2.3 

Complexity of arms acquisition programmes 

Arms development programmes are complex. Since production volumes are limited and the 
risk  of  commercial  failure  high,  state  support  is  required.  Equipment  often  consists  of  new 
systems  which  incorporate  both  military  and  civilian  technologies.  It  has  also  a  long  life 
cycle: the time between the expression of an operational need and the end of a system’s life 
may be as long as 50 years. The quality/price ratio and risk management must be guaranteed 
throughout  this  period.  States  must,  therefore,  have  access  to  adequate  industrial  and 
technological  capacity  throughout  the  life  cycle  of  a  system  and  maintain  lasting,  reliable 
relations with suppliers. 

In  addition  to  this,  “off-the-shelf5”  arms  purchases  are  often  subject  to  offset  arrangements. 
This allows the purchasing country to require a return on investment that may exceed 100% of 
the value of the contract. Such offsets may be direct, in the form of orders for local companies 
or transfers of know-how and technology related to the original contract. Offsets may also be 
indirect and concern industrial sectors other than the one covered by the contract in question, 
even non-military ones. 

3. 

LIMITS TO THE EXISTING LEGAL FRAMEWORK 

3.1 

Community exemption system  

The special nature of the defence sector has been recognised ever since the establishment of 
the  Community  through  an  exemption  system  laid  down  in  Article  296  EC  of  the  Treaty. 
According to paragraph 1 of that Article: 

“(a) 

no  Member  State  shall  be  obliged  to  supply  information  the  disclosure  of  which  it 
considers contrary to the essential interests of its security; 

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Finished equipment already developed and available for purchase. 

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(b) 

any  Member  State  may  take  such  measures  as  it  considers  necessary  for  the 
protection  of  the  essential  interests  of  its  security  which  are  connected  with  the 
production of or trade in arms, munitions and war material; such measures shall not 
adversely  affect  the  conditions  of  competition  in  the  common  market  regarding 
products which are not intended for specifically military purposes.”6 

Given its wide scope, this article may also apply to public procurement. 

As  recently  clarified  in  Article  10  of  Directive  2004/18/EC,  Community  rules  on  public 
procurement  apply  to  contracts  awarded  by  the  awarding  authority  in  the  field  of  defence, 
subject  to  Article  296  EC  of  the  Treaty.  Consequently,  Community  rules  also  apply  in 
principle  to  the  defence  sector,  but  Member  States  may  derogate  from  them  in  the 
circumstances and subject to the conditions set out in the Treaty. In any event, the possibility 
of a derogation provided for under Article 296 EC cannot apply either to civilian goods or to 
those  not  intended  for  specific  military  purposes,  even  if  they  are  purchased  by  national 
defence ministries. 

The  Case  Law  of  the  Court  has  interpreted  the  conditions  of  use  of  this  derogation 
restrictively, stating that7 : 

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its  use  does  not  constitute  a  general,  automatic  exemption,  but  should  be  justified 
case by case. States thus have the possibility of secrecy regarding information which 
would undermine their security and the option of invoking an exemption to internal 
market rules for the arms trade. They are also obliged to assess whether or not each 
individual contract is covered by the derogation; 

use  by  states  of  national  derogation  measures  is  justified  only  if  it  is  necessary  for 
achieving the objective of safeguarding the essential security interests invoked; 

burden of proof lies with a Member State that intends to make use of the derogation; 

such  proof  is  to  be  supplied,  if  necessary,  to  the  national  courts  or,  where 
appropriate, the Court of Justice, to which the Commission may refer the matter in 
the performance of its duties as guardian of the Treaty. 

As a general rule, Member States may, therefore, derogate from the rules of the Treaty and 
Community  directives,  but  only  in  well  defined  circumstances.  Nevertheless,  several 
difficulties of implementation arise: 

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in  the  absence  of  a  precise  interpretation  of  these  provisions,  there  is  quasi-
systematic  use  of  the  derogation  in  the  area  of  public  procurement.  Despite  the 
Court’s clarifications, the low  number of  publications in the Official Journal  of the 
European Union appears to imply that some Member States believe they can apply 
the derogation automatically;  

In accordance with paragraph 2 of this Article, a list of products to which the provisions of paragraph 1 
apply was adopted by the Council in 1958. 
See  among others:  Johnston  judgment,  Case  222/84,  Commission v.  Spain judgment,  Case  C-414/97. 
Although the latter concerned VAT, it is applicable to public procurement. 

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– 

– 

since the concept of essential interests of security is not defined either in Community 
Law or in the Case Law of the Court of Justice, in practice states allow themselves 
wide discretion in determining which contracts could damage them; 

the list drawn up in 19588 is not an appropriate reference  for defining the scope of 
Article 296 EC, since it has never been officially published or revised since then.  

Defence  procurement  is  still,  therefore,  to  a  large  extent  covered  by  purely  national 
legislation. 

3.2 

Differing national legislation 

For defence procurement most national legislation provides for exemptions to the application 
of  public  procurement  rules,  with  differing  degrees  of  transparency.  This  constitutes  a 
potential difficulty for non-national suppliers. 

•  The publication of contract notice, if it happens at all, is in special national publications, 

the content, frequency and method of dissemination of which vary from state to state. 

•  The  potential  for  non-publication  provided  for  in  national  legislation  is  vast  and  differs 

depending on the country. 

•  Technical specifications are often very detailed and based on widely differing standards. 

•  The criteria for selecting suppliers take into account, in some states, the ability of offering 
industrial offsets, and for most states, confidentiality and security of supply, the definition 
of  which  remains  vague  and  the  assessment  of  which  does  not  take  account  of  the  same 
requirements,  sometimes  referring  to  the  origin  of  the  product  or  the  nationality  of  the 
supplier. 

•  Tendering is mainly through negotiated procedures which do not all follow the same rules, 
particularly as regards the extent of the negotiations and the possibilities for changing the 
subject of the contract.  

•  In  the  award  of  contracts  priority  is  given  to  best  value  for  money.  However,  in  some 

states security of supply and offsets are again taken into account at this stage.  

Because  of  these  obstacles  some  Member  States  have  undertaken,  under  an  inter-
governmental political agreement of the Western European Armaments Group (WEAG)9, to 
harmonise  the  content  and  publication  of  their  national  gazettes  and  to  follow  more  open 
tendering  rules.  Although  based  on  relevant  principles,  this  system  has  produced  limited 
results regarding both transparency and competition, because it is not legally binding. 

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See Footnote 6. 
The 16 member countries, including 14 EU Member States (BE, DK, DE, EL, ES, FR, IT, LU, NL, PT, 
UK, AT, FI, SE), adopted guidelines on open competition in 1990 and updated them in 1999. 

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3.3 

Special procedures for cooperation programmes 

Alongside national systems, ad hoc rules laid down in intergovernmental agreements are used 
for purchases related to joint arms programmes10. Generally speaking, because of the heavy 
investment agreed by the countries participating in these programmes, it is the principle of fair 
industrial return (“juste retour”) that determines who is awarded the contract. 

To offset the high costs resulting from this practice, the transnational agency OCCAR11 was 
set up in 1996 and given legal personality in 2000. Its contractual rules are more competition-
based and provide for replacing the system of a “juste retour” per programme by an “overall 
juste  retour”  covering  several  years  and  several  programmes.  However,  the  success  of  this 
system will depend on the number of new programmes managed by OCCAR. 

Since  these  efforts  have  failed  to  achieve  satisfactory  results,  the  Member  States  recently 
created  a  European  Defence  Agency  under  the  authority  of  the  Council  within  the  single 
institutional  framework  of  the  European  Union,  which  will  have  the  remit,  among  other 
things, to contribute, in consultation with the Commission, to the setting up of a competitive 
European defence market12.  

II. 

DEFINING ACTION AT EU LEVEL – ISSUES FOR CONSIDERATION 

The  above  considerations  relating  to  defence  procurement  show  that  a  number  of  obstacles 
limit the access of European industries to Member States’ defence markets and hence restrict 
their growth opportunities. 

The Commission therefore proposes pursuing the debate on the case or Community action in 
the  field  of  defence  procurement.  So  far  the  Commission  has  identified  two  possible 
instruments,  one  limited  to  clarifying  the  existing  legal  framework  (point  1)  and  the  other 
aimed  at  establishing  specific  rules  in  the  field  of  defence,  taking  into  account  the  sector’s 
characteristics (point 2). 

These  instruments  would  not  prejudice  any  complementary  measures  taken  by  the  Member 
States  in  the  appropriate  fora.  Indeed,  they  could  not  provide  exhaustive  answers  to  all  the 
specific  aspects  of  defence  markets.  This  is  the  case  in  particular  for  security  of  supply,  a 
concept  bound  to  change  with  the  growing  convergence  of  national  security  interests  in  the 
context  of  European  foreign,  security  and  defence  policy.  The  gradual  development  of  a 
common  approach  in  this  field  could  facilitate  application  of  Community  instruments. 
Equally,  these  instruments  would  constitute  a  useful  tool  for  the  success  of  cooperation 
between Member States.  

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12 

These  contracts  are  usually  awarded  by  ad  hoc  agencies  or  NATO  agencies  acting  on  behalf  of  the 
states participating in the programmes in question. 
Joint Organisation for Armaments Cooperation; open - subject to certain conditions - to all the Member 
States; at present only five states belong to it (DE, BE, FR, IT, UK). 
Joint action to set up a European Defence Agency (EDA) adopted by the Council on 12 July 2004. 

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1. 

CLARIFICATION OF THE EU’S EXISTING LEGAL FRAMEWORK 

The  legal  framework  could  be  clarified  by  a  non-legislative  instrument,  such  as  an 
interpretative  Communication  from  the  Commission.  This  instrument  would  aim  to  explain 
existing Community legislation in order to facilitate application by the competent authorities 
and to improve the operators’ understanding of it. An interpretative Communication could be 
adopted relatively quickly. By its very nature it could only confirm existing law. 

The Commission would give a further explanation of the principles defined by the Court on 
the interpretation of Article 296 EC, in particular their application to public procurement, to 
make  it  easier,  in  practice,  to  distinguish  between  contracts  covered  by  the  exemption  and 
those which are not. As regards the latter, the normal rules - public procurement directives- 
would remain applicable. 

The Communication would not be legally binding as such, but it would explain the principles 
and  rules  which  are.  Consequently,  the  Commission  would  be  obliged  to  abide  by  this 
interpretation in the performance of its functions as guardian of the Treaty. The Commission 
would also have to draw all the operational conclusions resulting from the adoption of such a 
clarification of existing law. 

Questions 

1. 

2. 

Do  you  think  it  would  be  useful/necessary/sufficient  to  explain  the  existing  legal 
framework in the way presented? 

Are  there  other  aspects  of  the  Community  system  in  question  that  should  be 
clarified? 

2. 

SUPPLEMENTING THE EU’S LEGAL FRAMEWORK WITH A SPECIAL INSTRUMENT 

2.1. 

Objectives 

The  EU’s  legal  framework  could  be  supplemented  by  a  new  specific  legal  instrument  for 
defence  procurement  (goods,  services  and  work),  such  as  a  directive  to  coordinate  the 
procedures for awarding such contracts13. The directive would establish a special set of rules 
for contracts falling within the scope ratione materiae of Article 296 EC, but for which use of 
the  derogation  is  not  justified  (conditions  defined  by  the  case  law  of  the  Court).  It  would 
apply  to  defence  procurement  currently  falling  within  the  scope  of  existing  directives  but  it 
would contain rules better suited to their specific nature. 

13 

This  would  be  a  similar  approach  to  that  taken  in  1990  to  accommodate  the  specific  nature  of 
procurement in the water, energy and transport sectors, by means of a special directive (which became 
93/38 and was amended by Directive 2004/17/EC of 31 March 2004). 

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It would pursue three main objectives: 

– 

– 

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greater  legal  certainty,  since  it  would  improve  the  classification  of  contracts: 
(a) those covered by current directives; (b) those covered by the new directive; and 
(c) those excluded from any Community rules; 

more  information  at  Community  level  on  the  contracts  in  question,  and  therefore 
greater  opening  of  the  markets,  which  would  allow  European  defence  industries  to 
participate equally in calls for tender in all the Member States; 

the  introduction  of  the  necessary  flexibility  for  the  award  of  these  contracts  by 
the creation of a body of rules suited to the specific features of such contracts. 

Such an instrument could also serve as a reference point should a Member State decide not to 
make use of the Article 296 EC derogation even when it would have been entitled to do so. 

2.2 

Content  

•  The  field  of  application  could  be  determined  on  the  basis  of  a  general  definition  of  the 
category  of  military  equipment  covered  and/or  a  list.  The  list  could  be  that  of  1958  or 
another more accurate, updated list such as that of the Code of Conduct on arms exports14.  

•  There would be a provision modelled on directives in other sectors stating that the directive 
would  not  prejudice  the  possibility  of  invoking  Article  296  EC  under  the  conditions 
defined by the Court. It would also identify cases in which the conditions for application of 
the exemption were clearly fulfilled (e.g. nuclear equipment). 

•  The awarding authorities would be the ministries of defence and agencies acting on their 
behalf and other ministries buying military equipment. Application of the directive to other 
bodies, such as the new Defence Agency, would have to be determined by the appropriate 
fora.  

•  Implementation  of  the  directive  would  not  prejudice  the  possibility  of  exemptions 
conferred  on  the  Member  States  under  WTO  agreements  such  as  the  Government 
Procurement Agreement. 

•  The  procedures  should  ensure  observance  of  the  principles  of  transparency  and  non-
discrimination,  bearing  in  mind  the  specific  characteristics  of  these  contracts.  The  rule 
could be general use of the negotiated procedure with prior publication of a contract notice. 
Use  of  an  unpublished  negotiated  procedure  could  be  envisaged  in  certain  cases 
determined  on  the  basis  of  exemptions  laid  down  in  existing  directives  and,  where 
appropriate, other cases based on national legislation. 

•  Publication could be through a centralised system at Community level using a harmonised 
publication  bulletin.  The  subject  of  the  contract  could  be  described  in  terms  of  technical 
performance in order to prevent potential discrimination between suppliers. 

14 

Annexed to the Council Declaration of 5 June 1998 (8675/2/98, CSFP) which sets up a mechanism for 
transparency of arms export policies. 

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•  The selection criteria approved should ensure non-discrimination and equal treatment of 
companies  and  take  account  of  the  specific  features  of  defence  contracts,  such  as 
confidentiality, security of supply. They should also take into consideration the clearance 
necessary under defence secrecy rules. 

•  The  award  of  the  contract  would  take  place  on  the  basis  of  defined  criteria.  This  would 
require  a  discussion  on  the  gradual  elimination  of  practices  such  as  direct  and  indirect 
offsets. 

Questions 

3. 

4. 

5. 

6. 

7. 

8. 

9. 

Do  you  consider  the  rules  of  existing  directives  suited/unsuited  to  the  specific 
characteristics of defence contracts? Please give your reasons. 

Would a specific directive be a useful/necessary instrument for creating a European 
defence equipment market and strengthening the industrial and technological base of 
European defence? 

What is your opinion regarding the use of a possible directive for purchases by other 
bodies, such as the European Defence Agency?  

Procedures:  do  you  believe  the  negotiated  procedure  with  prior  publication  to  be 
suitable for the specific needs of defence procurement? In what situations should use 
of the negotiated procedure without publication be allowed? 

Scope: what would be the most appropriate way of defining the field of application? 
A  general  definition?  If  so,  what?  A  new  list?  If  so,  what?  A  combination  of  a 
definition and a list? 

Exemptions:  do  you  think  it  would  be  useful/necessary  to  define  a  category  of 
products that would be excluded categorically from the directive? 

Publication: do you think a centralised publication system would be appropriate, and, 
if so, how should it function? 

10. 

Selection criteria: what criteria do you think should be taken into account in addition 
to  those  already  laid  down  in  existing  directives  to  take  account  of  the  specific 
features  of  the  defence  sector?  Confidentiality,  security  of  supply,  etc.?  And  how 
should they be defined? 

11. 

How do you think offset practices should be handled? 

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CONSULTATION ARRANGEMENTS 

This Green Paper is the start of an official consultation process lasting four months from the 
date  of  publication.  It  will  be  managed  by  the  Internal  Market  Directorate-General  of  the 
Commission. 

Green Paper 

Consultation process 

End of consultation: four months from the date of publication of the Green Paper 

The parties concerned are invited to send their answers to the questions asked and any 
comments or suggestions to the following address: 

c/o European Commission, Internal Market DG 
Consultation “Green Paper on defence procurement” 

Av. de Cortenbergh/Kortenberglaan 100 (1/100) 

B-1049 Brussels 

or by email to: 

(MARKT-D2-DPP@cec.eu.int) 

The Green Paper is also available at: 

http://europa.eu.int/comm/internal_market/consultations 

NB: Any contribution may be made public, unless the author specifically asks for it to remain 
confidential. 

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