Communication from the Commission to the Council and the European Parliament on the results of the consultation launched by the Green Paper on Defence Procurement and on the future Commission initiatives {SEC(2005) 1572}
Date: 2005-12-06
Institutions: European Commission
Subjects: European arms policy, arms industry, arms trade, public contract

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 6.12.2005 
COM(2005) 626 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE 
EUROPEAN PARLIAMENT 

on the results of the consultation launched by the Green Paper on Defence Procurement 
and on the future Commission initiatives 

{SEC(2005) 1572} 

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COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE 
EUROPEAN PARLIAMENT 

on the results of the consultation launched by the Green Paper on Defence Procurement 
and on the future Commission initiatives 

The purpose of this Communication from the Commission is to report on the contributions by 
stakeholders  to  the  consultation  launched  by  the  Green  Paper  on  defence  procurement1. 
Commission also presents the actions it intends to take as a follow-up to the Green Paper.  

I. 

1. 

BACKGROUND 

Political context 

In  connection  with  the  development  of  the  European  Security  and  Defence  Policy  (ESDP), 
Member  States  have  started  to  use  the  European  Union  as  a  framework  to  improve  the 
coordination of military capabilities, achieve better cost-effectiveness of defence expenditure 
and enhance the competitiveness of the European industrial and technological base in the area 
of defence. The establishment of the European Defence Agency (EDA) in July 2004 was an 
important step towards achieving these objectives.  

In  March  2003,  in  parallel  with  the  Member  States’  efforts,  the  European  Commission 
launched  an  initiative  towards  a  common  European  Defence  Equipment  Market  (EDEM)2, 
which  included  a  number  of  actions  in  areas  where  the  Community  has  competence  (for 
example procurement, intra-Community transfers, standardisation, research). 

The activities in the field of defence procurement are thus part of an overall initiative, being 
carried out at both Community and intergovernmental level.  

2. 

Defence market characteristics 

Defence equipment markets are specific markets. 

Member States’ combined defence budgets are worth about EUR 169 billion, which includes 
around  EUR  82  billion  for  procurement.  85%  of  defence  spending  and  90%  of  the  EU’s 
industrial capabilities are concentrated in the six major arms-producing countries3.  

Defence  markets  cover  a  broad  spectrum  of  products  and  services,  ranging  from  non-war 
material, such as office material and catering, to weapon system and highly sensitive material, 
such  as  encryption  equipment  or  nuclear,  biological  and  chemical  equipment  (NBC).  Many 
weapon  systems  are  complex  and  integrate  sophisticated  technologies.  Developed  for  the 
specific demands of a very small number of customers, they often have long development and 
life cycles and high non-recurring costs. This, in turn, makes it necessary for governments of 
producing  countries  to  bear  an  important  part  of  research  and  development  costs.  The 
sensitivity of defence equipment for Member States’ security interests can vary depending on 

1 
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3 

COM (2004) 608, 23 September 2004 
Communication of the Commission “Towards an EU Defence Equipment Policy”, 11 March 2003. 
UK, FR, DE, IT, ES, SV 

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political and military circumstances. In general, however, its sensitivity is proportional to its 
technological complexity and strategic importance. 

Due to the specificities of many defence products, governments play a predominant role both 
as customers and regulators. At the same time, they maintain a traditionally close relationship 
with  their  suppliers,  with  confidentiality  and  security  of  supply  being  particularly  important 
features. 

Since the organisation and operation of defence markets are closely related to the security and 
defence  policy  of  Member  States,  defence  markets  in  the  EU  remain  fragmented  at  the 
national  level.  Fragmentation  is  in  fact  the  main  feature  of  both  Europe’s  demand  side  (25 
national customers) and its regulatory framework (25 different sets of rules and procedures).  

3. 

The legal framework on defence procurement and its application  

Public  procurement  law,  and  especially  its  application,  is  also  an  important  feature  of  the 
market  fragmentation  in  Europe.  The  Green  Paper  and  the  present  Communication  are 
focused on this particular aspect of the problem. 

According  to  existing  EU  law,  defence  contracts  fall  under  internal  market  rules.  Thus, 
Directive  2004/18/EC4  for  public  procurement  of  goods,  works  and  services  (“the  PP 
Directive”)  applies  to  public  contracts  awarded  by  contracting  authorities  in  the  field  of 
defence, subject to Art. 296 of the Treaty (“Article 296”5). The latter allows Member States to 
derogate from Community rules for the procurement of arms, munitions and war material if 
Member  States’  essential  security  interests  are  concerned.  By  contrast,  the  contracts  for  the 
procurement  of  items  other  than  arms,  munitions  and  war  material,  as  well  as  for  arms, 
munitions  and  war  material  not  concerning  essential  security  interests,  are  covered  by 
Community rules. 

However, since the concept of essential security interests is rather vague, implementation of 
Article 296 has been always very difficult. Under paragraph 2 of that article, a list of arms, 
munitions  and  war  material  covered  in  principle  by  the  derogation  was  adopted  by  the 
Council in 1958. However, this list is rather generic, and it is therefore not always clear which 
rules should apply to which defence contracts. 

At one end of the spectrum, non-war material is not included in the list based on Article 296 
and  (normally)  does  not  concern  essential  security  interests;  as  a  result,  the  PP  Directive 
applies. At the other end, highly sensitive defence equipment is included in the list of 1958 
and  clearly  concerns  essential  security  interests;  in  these  cases,  the  use  of  Article  296  is 
legitimate. However, Member States also procure equipment which has the specific features 

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Directive  2004/18/EC  of  the  European  Parliament  and  of  the  Council  of  31  March  2004  on  the 
coordination of procedures for the award of public works contracts, public supply contracts and public 
service  contracts.  As  from  31  January  2006  this  Directive  will  replace  Directives  92/50/EEC, 
93/36/EEC and 93/98/EEC. The exception concerning Article 296 will remain unchanged in substance. 
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;  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.” 

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of  defence  material  but  which  is  not  (necessarily)  essential  for  their  security  interests.  This 
category forms a major “grey area” where the use of Article 296 is less clear.  

In practice, most Member States make almost automatic use of the possibility of exempting 
nearly  all  defence  procurement  contracts  from  Community  rules,  often  without  taking  into 
account the conditions defined  by the Treaty and the Court for the use of Article 2966. The 
rate  of  publication  by  Ministries  of  Defence  amounts  to  only  10%,  while  the  average 
publication  rate  of  central  governments  is  about  20%  (25%  excluding  defence)7.  As  a 
consequence, most defence contracts are awarded on the basis of national procurement rules, 
which have widely differing selection criteria, advertising procedures, etc. Member States do 
this  partly  because  they  consider  the  PP  Directive  not  always  suited  to  the  procurement  of 
defence material.  

It  is  generally  acknowledged  that  the  fragmentation  of  national  procurement  rules  and  their 
practical  application  have  the  effect  of  limiting  transparency  and  competition  on  defence 
markets.  This,  in  turn,  has  brought  negative  consequences  for  the  efficiency  of  public 
spending,  for  Member  States’  military  capabilities  and,  finally,  for  the  competitiveness  of 
Europe’s Defence Industrial and Technological Base (EDITB). 

The  Green  Paper  sought  to  identify  options  for  action  at  the  Community  level  in  order  to 
improve this situation.  

4. 

The Green Paper 

From January to April 2004, the Commission organised several workshops with government 
experts  and  industry  representatives  in  order  to  collect  technical  information  for  the 
preparation  of  the  Green  Paper  and  to  determine  the  expectations  of  the  various  parties 
concerned.  

On  23  September  2004,  the  Commission  adopted  the  Green  Paper  and  launched  the  public 
consultation,  inviting  all  interested  parties  to  comment  on  how  to  improve  the  EU  Defence 
Procurement Regulation. The Green Paper put forward proposals for those parts of the market 
which are not covered by Article 296 and thus come under Community rules. 

The Commission suggested two possible Community initiatives: 

•  An  interpretative  communication,  clarifying  the  existing  law  and  in  particular  the 

principles governing the use of the derogation in Article 296.  

•  A directive providing new, more flexible rules for the procurement of arms, munitions and 
war material not concerning essential security interests. These new rules should take into 
account all the specificities of such defence contracts. 

The  two  solutions  were  presented  as  not  being  mutually  exclusive.  Moreover,  the 
Commission has made it clear that, in every possible scenario, Member States would always 
have  the  right  to  invoke  Article  296,  provided  that  the  conditions  established  in  the  Treaty 
(and confirmed by the case law of the ECJ) are strictly met.  

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See Johnston, case 222/84; Commission v. Spain, case C-414/97 
Source : TED data base 

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At  the  same  time,  the  two  options  would  only  concern  defence  procurement  by  national 
authorities  inside  the  European  internal  market.  Arms  trade  with  third  countries  would 
continue to be governed by WTO rules, and in particular by Article XXIII of the Government 
Procurement  Agreement  (GPA),  which  allows  Members  to  derogate  from  the  Agreement 
itself, when essential security interests are at stake.  

II. 

THE RESULTS OF THE CONSULTATION 

1. 

Participation 

During  the  six-months  consultation  period,  a  series  of  bilateral  meetings,  seminars  and 
working group meetings were held which allowed the Commission to explain its initiative and 
to gain a clearer idea of stakeholders’ interests and concerns. At the end of the consultation, 
the  Commission  had  received  40  contributions  from  16  Member  States,  Institutions  and 
industry8.  Given  the  sensitivity  of  the  issue  and  the  relatively  small  number  of  actors 
involved, the Commission considers this to be a good level of participation.  

2. 

Opinions 

The  contributions  all  welcomed  the  Green  Paper  and  supported  the  objective  of  the 
Commission  to  contribute  to  overcoming  market  fragmentation  and  to  increasing  intra-
European competition via an appropriate set of rules for defence procurement. 

The  vast  majority  of  stakeholders  shared  the  Commission’s  assessment  of  the  Green  Paper. 
They  acknowledged  the  widespread  misinterpretation  of  Article  296  and  considered  the 
existing PP Directive often ill-suited for defence procurement, despite the recent adaptations. 
The main obstacles mentioned were the following: 

•  open  tendering  procedures  based  on  publication  in  the  Official  Journal  of  the  European 

Union are not compatible with confidentiality requirements; 

•  the use of negotiated procedure - which is the only appropriate procedure - is too restricted 

and not properly defined; 

•  the selection criteria are based solely on technical, economical and financial aspects, and 
key  conditions  for  selecting  tenderers  in  the  defence  sector  -  such  as  security  of  supply, 
confidentiality and urgency - are missing; 

•  the rules on technical specifications, time limits and follow-up contracts are inappropriate. 

Almost all stakeholders supported a Community initiative in the field of defence procurement 
and ruled out the “no action” option. As for the instruments presented as possible solutions, 
stakeholders expressed a variety of opinions: 

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All 
http://www.europa.eu.int/comm/internal_market/publicprocurement/dpp_en.htm 

contributions 

published 

received 

their 

are 

in 

original 

language, 

see 

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2.1 

Interpretative Communication 

(1) 

A  majority  considered  an  Interpretative  Communication  to  be  useful.  The 
arguments  put  forward  in  favour  of  an  interpretative  communication  are  as 
follows: 

•  As a non-legislative measure, it could be prepared quickly; 

•  By spelling out in detail the principles defined by the Court for the use of Article 
296,  it  could  reduce  the  risk  of  legal  misinterpretation  and  thus  ensure  better 
application of existing law by Member States (and more regular use of tendering 
procedures); 

•  Absent  any  further  legislative  action,  the  Commission  would  have  a  clearer  and 

stronger legal basis for applying procurement rules. 

(2) 

Only  a  minority  of  stakeholders  were  sceptical  about  or  opposed  to  a 
communication. The arguments against a communication are the following:  

•  As  it  would  do  nothing  to  change  the  existing  legal  framework,  it  would  not 

contribute to a more homogeneous regulatory framework.  

•  The  principles  defined  by  the  Treaty  and  the  relevant  case  law  are  sufficiently 
clear  and  should  be  well-known  to  all  stakeholders;  additional  clarification  is 
therefore unnecessary.  

•  A communication would clarify only how Article 296 is to be used, but it would 
not be able to specify for which contracts, since it could neither clarify the concept 
of  essential  security  interests  nor  elaborate  on  the  list  of  1958  (both  of  these 
actions  fall  under  the  Member  States’  prerogatives).  The  uncertainty  about  the 
scope of Article 296 would thus remain. 

•  The  decision  on  whether  or  not  defence  contracts  concern  essential  security 
interests  is  a  political  rather  than  a  legal  one.  A  purely  legalistic  and  rigid 
approach to a problem of political definition might create even greater confusion 
and increase the number of legal disputes on the borderline of Article 296. 

•  An Interpretative Communication would not dispel Member States’ reluctance to 
use  the  existing  PP  Directive  for  defence  procurement.  Its  impact  in  terms  of 
transparency  and  competition  would  therefore  be  limited  mainly  to  non-war 
material.  This  might  generate  some  cost  savings  at  the  margins  of  defence 
markets, but would miss the main target of the initiative (i.e. to enhance the cost-
effectiveness of defence markets and the competitiveness of the EDITB). 

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2.2 

Defence Directive 

The general picture with regard to a defence directive is more complex: 

(1) 

A  majority  of  stakeholders  found  that  a  defence  directive  would  be  useful.  Its 
main advantages would be the following: 

•  By coordinating national rules in certain parts of the defence markets, a directive 

would contribute to a more homogeneous regulatory framework in the EU; 

•  As  it  is  legally  binding,  a  directive  would  have  the  capacity  to  enhance 
transparency,  non-discrimination  and  equal  treatment  in  certain  parts  of  the 
defence market.  

•  It  could  offer  new,  more  flexible  and  more  suitable  rules  for  procurement  of 
defence contracts, which are not covered by Article 296 and for which the existing 
Directive may be too rigid and inappropriate. 

•  It could take into account the specific features of defence contracts which are not 

addressed or not adequately dealt with by the current PP Directive, such as: 

- 

- 

- 

- 

- 

- 

An appropriate centralised system of publication; 

General use of the negotiated procedure (which would allow contracting 
authorities, after a call for tenders, to consult and negotiate contract terms 
with the selected companies); 

Scope for contracting authorities to use the negotiated procedure without 
prior  publication  of  a  tender  notice  in  certain  defined  cases,  such  as 
urgency for military purposes; 

New specific selection criteria to be applied in assessing tenders, such as 
confidentiality and security of supply; 

Clauses  to  ensure  adequate  competition  throughout  the  supply  chain,  in 
particular to improve market access for SMEs; 

Clauses to harmonise offset practices. 

•  A Directive would not remove the difficulty of defining the borderline of Article 
296, but it  could be flexible  enough to become  a  credible  alternative to national 
procedures. In this case, the Directive could defuse the issue of choosing between 
Community rules and Article 296.  

(2) 

Among those who find the Directive useful, however, there are varying opinions 
as regards timing and conditions: 

•  some stakeholders suggested that the work should be started; 

•  others  favoured  waiting  to  see  whether  or  not  the  clarification  of  current 

legislation is sufficient; 

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•  some  argued  that  political  and  economic  conditions  in  other  areas  (for  example, 
the  structure  of  the  industrial  base,  or  the  mentality  of  buyers)  must  be  met  in 
order to create a level playing field for non-national suppliers before starting work 
on a directive; 

•  others  argued that work  on the directive could serve as a catalyst for reforms in 

these related areas.  

(3) 

Only  a  few  stakeholders  were  explicitly  against  a  directive,  and  put  forward 
widely differing arguments:  

•  As a legislative measure, it is unlikely to be achieved quickly; 

•  The  existing  Directive  is  sufficiently  flexible  and  there  is  therefore  no  necessity 

for a new legislative instrument that would add extra regulation; 

•  It would have only a limited impact, either because it would take too long to be 
developed and implemented, or because it would not apply to high-value contracts 
(which  usually  concern  essential  security  interests  and  would  therefore  remain 
covered by the Article 296 derogation); 

•  It  would  create  three  separate  procurement  processes  with  new  boundaries 
between the various market segments. This could involve a limitation of the right 
to use Article 296 and make it difficult to demarcate the respective scope of the 
civil and the defence Directives. 

To sum up, even if it is very difficult to draw a general conclusion or a single general trend, it 
does appear that a majority of stakeholders are in favour of an interpretative communication, 
and not against a directive. There is some disagreement about the timing of the latter. 

Preferences  for  an  interpretative  communication  or  a  directive,  also  as  far  as  timing  is 
concerned, do not follow the traditional dividing lines between big and small, producing and 
non-producing  Member  States.  The  same  is  true  for  industry,  with  differences  being  seen 
between  European  and  national  associations  and  between  defence  industry  associations  and 
non-defence  industry  association.  The  European  Parliament  expressed  clear  support  for  a 
comprehensive  approach  combining  an  interpretative  communication  and  a  new  directive 
adapted 
the  development  of  an 
intergovernmental code of conduct - see below). 

the  specificities  of  defence  (combined  with 

to 

All  stakeholders  asked  the  Commission  to  be  closely  associated  with  and  to  participate 
actively in the development and implementation of the solutions they support.  

3. 

Broadening of the debate 

During  the  consultation  period,  several  stakeholders  put  forward  options  beyond  those 
mentioned in the Green Paper. 

•  Many saw a need for greater transparency and competition, including in the area covered 
by Article 296. Partly as a response to this, Ministries of Defence mandated the European 
Defence  Agency  (EDA)  to  explore  the  possibilities  of  drawing  up  an  intergovernmental 
Code of Conduct to foster intra-European competition in this area of the market too. Such a 

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Code would be a political but not a legally binding instrument, which would complement 
Community  instruments  and  pursue  the  same  objective  in  a  different  segment  of  the 
defence market. It could also include a notification system on the use of Article 296. 

•  Others considered an intergovernmental instrument as an interim solution/intermediate step 
on the way to a Community directive. Although the two instruments would cover different 
market segments, it would be advisable, from this point of view, to foster the convergence 
of national procurement policies before coordinating national procurement rules.  

•  Some,  however,  believe  that  an  intergovernmental  instrument  of  this  kind  can  be  an 
alternative  to  Community  initiatives.  From  this  point  of  view,  a  directive  would  only  be 
acceptable if the Code proved ineffective.  

In  addition,  almost  all  stakeholders  underlined  that  procurement  was  just  one  aspect  of  an 
EDEM construction. They highlighted the necessity for any Community initiatives in the field 
of procurement law to be accompanied by actions in other areas; this was seen as a necessary 
precondition  for  an  efficient  internal  defence  market  and  for  the  creation  of  a  level  playing 
field for industry. In this context, stakeholders mentioned arrangements for security of supply, 
transfers and transits, harmonisation of export policies, state aid, offset practice and the full 
privatisation of all European defence firms. 

Stakeholders also expressed their concerns about the conditions of access to the EU market, 
particularly in view of the unbalanced situation with certain third countries. They expected all 
measures taken at EU level to favour reciprocal access, in particular with the US, and stressed 
the need to strengthen the competitiveness of EU industries on world markets.  

III.  COMMISSION ASSESSMENT AND FUTURE INITIATIVES 

The  whole  consultation  process  shows  that  the  current  legislative  framework  on  defence 
procurement  is  not  functioning  properly,  in  practice,  for  the  different  reasons  listed  above. 
The appropriate initiatives therefore have to be taken, in order to improve a situation which is 
almost unanimously regarded as unsatisfactory. The Commission is ready to play its role in 
pursuit of this objective. 

(1) 

On  one  hand,  the  dividing  line  between  defence  acquisitions  concerning  essential 
security  interests  according  to  Article  296  and  defence  acquisitions  which  do  not 
concern  essential  security  interests  is  not  clear,  or  at  least  is  not  perceived  in  the 
same way by all Member States. As a consequence, the application of the derogation 
remains problematic. 

The Commission will therefore adopt in 2006 an “Interpretative Communication on 
the application of Article 296 of the Treaty in the field of defence procurement.” This 
Communication will recall the principles governing the use of the derogation, in the 
light of the case law of the Court of Justice, and will clarify the criteria on the basis 
of  which  Member  States  have  to  decide  when  the  conditions  for  the  application  of 
the derogation are met and when they are not. 

While  providing  additional  legal  certainty  and  guidance  for  Member  States,  an 
Interpretative  Communication  will  not  alter  the  current  legal  framework.  It  will 
simply clarify the existing one, with the objective of making its implementation more 
uniform.  

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In line with the principle of better regulation, the Interpretative Communication will 
be accompanied by a proportionate impact assessment, aimed at verifying whether it 
is actually likely to bring benefits.  

As  the  Interpretative  Communication  will  also  concern  issues  related  to  free 
movement of goods, it could have further consequences e.g. on intra-EU transfers for 
defence  goods.  This  will  be  duly  taken  into  account  in  the  drafting  of  such 
Communication. 

(2) 

On the other hand, a simple clarification may be insufficient. The consultation also 
confirmed that the current PP Directive, even in its revised version, may be ill-suited 
to many defence contracts, since it does not take into account some special features 
of those contracts. 

therefore  considers 

The  Commission 
that  a  directive  coordinating  national 
procedures for the procurement of defence goods (arms, munitions and war material) 
and services, would be the appropriate instrument to improve the situation described. 
This directive could take into account all the specific needs of defence procurement, 
and offer new, more flexible rules for defence procurement, to be followed in cases 
where the derogation in Article 296 does not apply. 

In  accordance  with  the  principle  of  better  regulation,  such  a  directive  will  also  be 
subject to the results of the relevant impact assessments, which will be completed in 
2006, prior to the presentation of a possible proposal. 

The Commission will also follow with great interest the development of the Code of Conduct 
under preparation by the EDA. This code, voluntary and non binding would aim at increasing 
transparency and competition also in a different segment of the market, since it would apply 
in  cases  where  the  conditions  for  the  application  of  Articles  296  are  met.  This  kind  of 
intergovernmental  initiative  would  usefully  complement  the  initiatives  taken  at  Community 
level. 

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