COMMISSION STAFF WORKING DOCUMENT Ex-ante Evaluation Accompanying the document Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL establishing the European Defence Industrial Development Programme aiming at supporting the competitiveness and innovative capacity of the EU defence industry
Date: 2017-06-07
Institutions: Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs, European Commission
Subjects: EU aid, EU programme, competitiveness, defence policy, development plan, financial aid, industrial development, innovation, inter-company cooperation, research and development

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 7.6.2017  SWD(2017) 228 final   COMMISSION STAFF WORKING DOCUMENT Ex-ante Evaluation Accompanying the document Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL  establishing the European Defence Industrial Development Programme aiming at supporting the competitiveness and innovative capacity of the EU defence industry  {COM(2017) 294 final}  
 
 
Table of Contents 

1.  CONTEXT .................................................................................................................. 5 

2.  PROBLEM ANALYSIS AND NEEDS ASSESSMENT ........................................... 6 

2.1.  Problem drivers ................................................................................................. 9 

2.1.1. 

Increasing costs of defence equipment and high development 
costs ..................................................................................................... 9 

2.1.2.  Limited  cooperation  between  Member  States  in  defence 

equipment investments ...................................................................... 10 

2.1.3.  Few  programmes  linked  to  EU  priorities  and  difficulty  to 

agree on common technical specifications ........................................ 12 

2.2.  Problems .......................................................................................................... 13 

2.2.1.  Low investments in innovative defence programmes ....................... 13 

2.2.2.  Fragmentation  of 

the  defence 

industry  and 

limited 

cooperation of undertakings .............................................................. 15 

2.3.  Consequences .................................................................................................. 17 

3.  WHY SHOULD THE EU ACT? .............................................................................. 17 

4.  OBJECTIVES ........................................................................................................... 18 

4.1.  General objective ............................................................................................. 18 

4.2.  Specific objectives ........................................................................................... 18 

4.3.  Operational objectives ..................................................................................... 18 

5.  THE NEED FOR A NEW POLICY ......................................................................... 19 

5.1.  Status quo - baseline “do nothing” scenario .................................................... 19 

5.2.  Moving  forward  with  the  European  Defence  Industrial  Development 

Program (EDIDP) ............................................................................................ 20 

5.2.1.  Description of the proposed instrument ............................................ 21 

6.  THE 

IMPACTS  OF  THE  EUROPEAN  DEFENCE 

INDUSTRIAL 

DEVELOPMENT PROGRAMME ........................................................................... 22 

6.1. 

Impact on the competitiveness of the industry ................................................ 23 

6.2.  Wider economic impacts ................................................................................. 24 

6.3. 

Impacts on the SMEs ....................................................................................... 25 

6.4.  Social impacts .................................................................................................. 26 

6.5.  Wider security impacts .................................................................................... 26 

6.6.  Environmental impacts .................................................................................... 27 

6.7.  Other impacts ................................................................................................... 27 
2 

 
 
 
 
6.8.  Cost-effectiveness ............................................................................................ 27 

7.  FUTURE MONITORING AND EVALUATION .................................................... 28 

ANNEX 1: PROCEDURAL INFORMATION ................................................................ 30 

ANNEX 2: REFERENCES ............................................................................................... 31 

3 

 
 
 
 
Glossary 

ASD  

CEPS 

Aerospace and Defence Industry Association 

Centre for European Policy Studies 

DG GROW  

the  Directorate-General 
Entrepreneurship and SMEs 

for 

Internal  Market, 

Industry, 

EDIDP 

EDA 

EDAP  

EDF 

European Defence Industrial Development Programme 

European Defence Agency 

European Defence Action Plan 

European Defence Fund 

EDTIB 

European Defence Technological and Industrial Base 

EFSI 

ESIF  

EU 

GDP 

ISG 

European Fund for Strategic Investments 

European Structural and Investment Funds 

European Union 

Gross Domestic Product 

Inter-Service Steering Group 

NATO 

North Atlantic Treaty Organization 

PA 

R&D  

R&T  

SMEs 

SWD 

TFEU 

US  

Preparatory Action 

Research and Development  

Research and Technology 

Small and Medium-sized Enterprises 

Staff Working Document 

Treaty on the Functioning of the European Union 

United States 

4 

 
 
 
 
1.  CONTEXT 

On  30  November  2016,  the  Commission  adopted  the  European  Defence  Action  Plan 
(hereinafter: EDAP)1 as part of a wider defence package including the implementation of 
the defence and  security aspects  of the Global Strategy  on Foreign and Security Policy 
and the Joint EU / North Atlantic Treaty Organization (hereinafter: NATO) Declaration 
of  July  2016.  The  EDAP  included  the  proposal  to  establish  a  European  Defence  Fund 
(hereinafter: EDF) and other actions to support Member States' more efficient spending 
in  joint  defence  capabilities,  strengthen  European  citizens'  security  and  foster  a 
competitive and innovative defence (traditional and cyber) industry in Europe.  

The EDF was first mentioned by President Juncker in his 2016 State of the Union speech. 
It was presented as an initiative that will support investment in the joint research and the 
joint  development  of  defence  equipment  and  technologies  and  will  rely  on  two 
complementary “windows": 

  a  research  window,  to  fund  collaborative  defence  research  projects  at  the  EU 
level.  The  research  window,  was  launched  in  2017  by  the  Preparatory  Action 
(hereinafter:  PA)  on  Defence  Research  and  will  pave  the  way  for  a  dedicated 
European  Defence  Research  Programme  under  the  next  multiannual  financial 
framework.  

  a  capability  window  to  support  the  development  of  defence  capabilities 
commonly agreed by Member States. This would be financed through the pooling 
of national contributions and, where possible, supported by the EU budget. 

As regards the research window, the Commission has already launched the PA in support 
of defence research.  

On  15  December  2016,  the  European  Council  invited  the  Commission  "to  make 
proposals  in  the  first  semester  of  2017  for  the  establishment  of  a  European  Defence 
Fund, including a window on the joint development of capabilities commonly agreed by 
the Member States"2.  

This  Staff  Working  Document  (hereinafter:  SWD)  accompanies  the  Commission 
proposal  for  a  European  Defence  Industrial  Development  Programme  (hereinafter: 
EDIDP)  to  support  competitiveness  and  innovation  of  the  EU  defence  industry  in  the 
development  phase  of  collaborative  defence  projects  over  the  period  2019-2020  and 
contains ex-ante evaluation of its impact. The EDIDP represents a first step towards the 
establishment of the capability window of the EDF. The SWD analyses the impacts of a 
proposal  for  a  Union  budget  contribution  to  support  the  competitiveness  of  the  EU 
defence industry by covering a part of the development costs and providing an incentive 
to launch and execute European collaborative defence development projects. The current 
ex-ante  evaluation  addresses  the  requirements  of  Article  30(4)  of  Regulation  No  966/2012 
(Financial Regulation) on the implementation of the budget.  

1  Communication  from  the  Commission  to the  European Parliament,  the  European  Council,  the  Council, 
the  European  Economic  and  Social  Committee  and  the  Committee  of  the  Regions  "European  Defence 
Action  Plan",  COM(2016)  950  final..  The  present  document  draws  on  the  EDAP,  without  providing 
references to all quotations used.   
2 European Council, 2016, point 12. 

5 

 
                                                 
2.  PROBLEM ANALYSIS AND NEEDS ASSESSMENT 

The European defence industry is both of strategic importance for Europe's security and a 
major  contributor  to  the  European  economy.  According  to  Aerospace  and  Defence 
Industry Association of Europe (hereinafter: ASD) data, the total turnover of the defence 
industry in 2015 was estimated to be around EUR 102 billion (Table 1), while the direct 
workforce level was 430,000 employees3. 

Table 1: Turnover of the European defence industry, by year [EUR billion] 

Year 
2010 
2011 
2012 
2013 
2014 
2015 

Turnover 

94 
92 
95 
98 
97 
102 

Source: Aerospace and Defence Industries Association of Europe, 2016. 

The  defence  industry  is  also  characterised  by  a  high  intensity  in  Research  and 
Development  (hereinafter:  R&D)  and  competition  based  on  technology  development. 
This  is  another  reason  for  the  strategic  importance  of  the  sector  as  it  is  frequently 
perceived as a driver of innovation whose benefits may also extend to other sectors of the 
economy.  

Another  specificity  of  the  defence  industry  derives  from  the  fact  that  the  demand 
addressed  to  the  industry  comes  almost  exclusively  from  States  and  in  particular  from 
their defence national budgets.  

The  defence  industry  is  in  practice  dependent  on  the  launch  of  capability  development 
programmes  by  governments  and  more  generally  on  the  level  of  public  spending  and 
investment  in  defence.  Investment  in  defence  research  and  development  is  of  particular 
importance  as  it  determines  the  quality  of  the  products  generated  by  the  industry,  its 
innovative power and ultimately its global competitiveness. 

The  comparatively  low  defence  spending  in  Europe  combined  with  uncoordinated 
national policies has a direct impact on the competitiveness of the EU defence industry. 
While  collectively  Europe  is  still  the  world’s  second  largest  defence  spender,  the 
dynamics over the past decade shows that  its comparative position is  quickly  receding. 
According  to  data  collected  by  the  European  Defence  Agency  (hereinafter:  EDA), 
European  defence  spending  has  been  systematically  declining,  falling  by  almost  11% 
between 2005 and 20144. Today, only 4 Member States reach the NATO spending target 
of  2%  of  Gross  Domestic  Product  (hereinafter:  GDP):  Estonia,  Greece,  Poland  and  the 
United  Kingdom5.  Over  the  same  period,  the  defence  spending  of  the  United  States 
(hereinafter:  the  US)  marked  a  significant  increase  before  returning  back  to  levels 
comparable  to  those  of  2005.  Many  global  competitors  have  however  upgraded  their 
defence  sectors  on  an  unprecedented  scale:  Russian  defence  spending  almost  doubled 
over the same period, while China achieved an increase of 150%6.  

3 Aerospace and Defence Industries Association of Europe, 2016. 
4 European Defence Agency, 2016. 
5 North Atlantic Treaty Organization, 2017. Austria, Finland, Ireland, Sweden and Malta are not members 
of NATO and are therefore not concerned by the NATO spending target. 
6 Stockholm International Peace Research Institute, 2017. 
6 

 
                                                 
In  addition,  personnel  expenses,  by  opposition  to  investment  expenses,  are  by  far  the 
dominant  category  with  a  share  that  systematically  exceeds  50%7.  By  comparison, 
investment expenses, including R&D, account for approximately 20% in the EU against 
30% in the US8.  

The key problems and their drivers identified in the context of the current evaluation are 
presented on the graph overleaf (Figure 1) and described in more detail in the following 
sections. 

7  Personnel  expenses  account  for  approximately  one  third  of  total  defence  expenditures  in  the  US 
(European Defence Agency, 2013). 
8 European Defence Agency, 2013. 

7 

 
 
                                                 
Figure 1: Problem tree 

8 

 
 
 
2.1. 

Problem drivers 

In  line  with  Figure  1,  the  three identified  problem  drivers are  discussed  below  in more 
detail. 

2.1.1.  Increasing costs of defence equipment and high development costs 

The defence sector is characterised by increasing costs of defence equipment and by high 
development costs that limit the launch of new defence programmes and directly impact 
on the competitiveness and innovation capacity of the EU industry.  

The  costs  of  defence  goods  increase  at  a  rate  that  exceeds  by  far  the  average  inflation 
rates for civil products. While estimations of unit costs increases may vary for different 
categories  of  defence  equipment,  figures  as  high  as  5%  or  even  10%9  per  year  in  real 
terms  have  been  frequently  put  forward10.  Cost  increases  are  the  consequence  of 
technological  competition  in  a  field  where  relative  performance  is  paramount  and 
competition  frequently  takes  place  at  the  technology  frontier.  Innovating  at  the 
technology frontier is immensely expensive and increasing development costs lead to less 
frequent projects making the necessary leap forward even greater and costs even higher11.    

A consequence of this phenomenon, combined with flat or declining defence spending, is 
the falling number of units that the defence equipment budget can buy, a reduction in the 
length of the series produced and a lower frequency of new development projects.  

Another  key  element  to  consider  is  the  importance  of  R&D  expenses  in  relation  to  the 
recurring  costs.  The  share  of  development  costs  in  acquisition  costs  may  significantly 
vary from one project to another, depending on the type of equipment developed, ranging 
from  5%  and  up  to  90%.  25%  is  considered  as  a  good  average  indicator12.  A  study 
published by the European Parliament also notes that the ratio of R&D costs to recurring 
costs of defence programmes is several times higher than the corresponding ratio for civil 
programmes13.  

In  order  to  demonstrate  the  order  of  magnitude  it  may  be  useful  to  compare  the 
development costs of a large defence project to the R&D expenses of EU Member States. 
For  instance,  the  development  costs  of  the  Eurofighter  Typhoon  to  the  four  partner 
nations are estimated at more than EUR 20 billion (prices of 2012)14. Total defence R&D 
expenses of the 27 Member States participating in the EDA were slightly below EUR 9 
billion in 2014. If the UK, France and Germany are however taken out, the remaining 24 
Member States only spent a total of approximately EUR 600 million. The development 
costs  of  the  Eurofighter  Typhoon  are  thus  33  times  higher  than  the  combined  yearly 
defence R&D budgets of 24 EDA participating Member States and more than 333 times 
higher  than  the  defence  R&D  expenses  of  a  medium  size  Member  State  such  as  the 

9 It is worth noting that a 10% annual increase implies the doubling of weapons costs every 7.25 years. 
10  Kirkpatrick,  1995  and  2004;  Pugh  1986,  1993  and  2009;  Hove  &  Lillekvelland,  2016;  and  Nordlund, 
2016. 
11 See Hove & Lillekvelland, 2016. 
12 Mauro, 2017. Pugh (2009) also provides estimations of the ratio of development costs to unit production 
costs  and  shows  a  variation  across  different  class  of  land  and  air  systems  with  values  that  can  range 
between 40 for large fixed-wing aircraft and 25,000 for anti-tank weapons. 
13 European Parliament, 2016. 
14 Europe Economics, 2013. Official information on the development costs, approximately GBP 6.7 billion, 
of the Eurofighter Typhoon to the UK budget is provided by the UK National Audit Office (National Audit 
Office, 2001).  

9 

 
 
                                                 
Netherlands (which spent approximately EUR 60 million in 2014). Keeping in mind the 
costs increases, the difference in magnitude will further increase for future programs.     

In view of the escalation of costs, of the magnitude of non-recurring R&D expenses and 
of the small series that can be procured nationally, the development of a new generation 
of many major defence systems is today beyond the reach of a single EU Member State.  

2.1.2.  Limited  cooperation  between  Member  States  in  defence  equipment 

investments 

Despite the fact that single EU Member States may not be in a position to develop new 
major  defence  systems,  cross-border  collaboration  in  the  development  of  defence 
equipment  remains  limited  thus  further  depriving  the  EU  defence  industry  of  the 
opportunities that the launch of such programmes would constitute.  

The level of cooperation in the development of defence products and technologies is not 
up to the collective benchmarks for investments set up in the framework of the EDA. In 
November 2007, the EDA’s Ministerial Steering Board approved collective benchmarks 
for  investments,  including  a  benchmark  for  European  collaborative  defence  equipment 
procurement,  specified  as  a  percentage  of  defence  equipment  procurement  and  set  at 
35%.   

According to EDA data (Figure 2), between 2006 and 2014 the European collaborative 
defence  equipment  procurement  oscillated  between  15%  and  24%  of  the  total  defence 
equipment procurement. In view of the observed fluctuations it is difficult to distinguish 
a trend. It can however be easily noted that the reported figures are far from the agreed 
benchmark  and  the  best  performance  attained  (2011)  is  still  more  than  10  percentage 
points short of it. It is also worth noting that it is only a small fraction of the EU Member 
State  that  actually  accounts  for  the  total  collaborative  procurement,  the  large  majority 
declaring no such procurement.  The data on collaborative procurement is also indicative 
of an important deficit of collaborative development in the EU15.  

Figure 2: European collaborative defence equipment procurement as a percentage 
of defence equipment procurement [%] 

15 For more details see also section 5.2.1. 

10 

 
 
                                                 
Source: European Defence Agency, 2016, p. 3316 

No significant increase in collaboration at the EU level can be distinguished even during 
years  characterised  by  a  very  difficult  economic  context  and  stringent  budgetary 
constraints.  Insufficient  levels  of  collaboration  are  extremely  worrying  from  a  longer 
term  perspective.  Already  ten  years  ago  a  report  published  by  the  European  Union 
Institute for Security Studies concluded that "static defence budgets and low equipment 
spending means that a competitive defence industry is not sustainable on a national basis 
anymore"17.  

Past experience however also points to issues that can increase the costs and reduce the 
net  benefits  of  collaborative  projects  in  comparison  with  an  equivalent  one-nation 
project.  This  also  is  a  factor  in  the current  hesitation  of  Member  States  to  initiate  such 
projects.  Amongst  such  problems  one  can  mention  issues  linked  to  a  lack  of  common 
defence planning and of synchronisation of capability procurement policies and calendars 
between  Member  States.  When  the  timing  on  the  demand  side  significantly  diverges, 
collaboration  is  indeed  rendered  impossible;  in  the  1980s  for  instance  France  and 
Germany considered the joint development of a new tank, but German plans required the 
tank to be made available quickly while France was planning for a decade later18.  

Problems with the synchronisation of budgetary procedures also have a negative impact 
on the smooth work on collaborative projects and sometimes participating countries have 
even been obliged to pay temporarily on behalf of other participating States facing issues 
with  their  budgetary  approval  procedures19.  The  allocation  of  work  shares  in 
collaborative projects is also generally defined on the basis of the financial contributions 
by  each  participating  country  rather  than  on  the  basis  of  economic  efficiency  and 
competitiveness. It is thus often considered that collaborative projects are more difficult 
to manage, that they do not overcome completely industrial duplications and are costlier 
and affected by larger delays than equivalent national projects.  

It  is  however  worth  mentioning  that  it  is  difficult  to  empirically  establish  that 
collaborative  projects are costlier and take more time than real national projects20. And 
even  if  such  was  the  case,  in  many  fields  collaboration  is  today  the  only  feasible  way 
forward considering the development costs of new generations of major defence systems. 
It  is  important  to  note  that,  even  if  collaborative  projects  would  be  costlier  than 
equivalent  theoretical  national  projects,  the  development  costs  are  shared  amongst  the 
participants  and  the  financial  burden  that  falls  on  the  individual  participating  Member 
States  is  still  lower  than  if  they  had  to  undertake  the  development  in  isolation.  This 
enables the realisation of large projects that would not be affordable for a single State.       

Limited  collaboration  on  the  demand  side,  i.e.  between  Member  States,  also  has 
consequences on the industrial side of the defence sector as it is an important condition 

16  2012-2014  figures  on  collaboration  are  partial,  as  several  Member  States  were  not  in  a  position  to 
provide the data to the EDA. 
17 European Union Institute for Security Studies, 2007. 
18 European Union Institute for Security Studies, 2007. 
19 European Union Institute for Security Studies, 2007. 
20  Hartley  2008  shows  that  the  Eurofighter  Typhoon’s  cost  and  time  escalation  is  not  abnormal  in 
comparison  with  other  contemporary  national  defence  projects.  Hartley  also  notes  that  industrial 
duplications in the project were limited to the final assembly line which represented only 5% of production 
costs. Heuninckx 2008 also confirms that once a collaborative defence procurement has been launched, the 
cost overruns and delays of collaborative projects and similar national projects appear comparable. 

11 

 
                                                 
for  enabling  reinforced  collaboration  on  the  supply  side,  i.e.  between  defence 
undertakings located in different Member States.   

2.1.3.  Few  programmes  linked  to  EU  priorities  and  difficulty  to  agree  on 

common technical specifications 

The  difficulty  in  defining  common  technical  specifications  is  also  amongst  the  major 
issues  affecting  international  collaboration  in  defence  development  projects.  The  latter 
are initiated by Member States, which establish the technical specifications, to which the 
system  developed  should  respond.  In  case  of  collaborative  projects,  participating 
Member  States  often  have  diverging  technical  specifications.  Failure  to  harmonise 
increases  the  system’s  complexity  and  obliges  the  industry  to  find  a  way  to  satisfy 
diverging,  and  sometimes  even  contradictory,  needs  expressed  by  the  different 
participating countries. In the Tiger helicopter project two substantially different versions 
were developed to respond to respectively French and German specifications21. Another 
helicopter, the NH-90, had to be developed in 23 versions22.  

Such  a  situation  inflates  costs  and  causes  delays.  It  also  reduces  the  benefits  of 
collaboration  from  the  industrial  point  of  view,  as  low  commonality  has  also  negative 
effects  on  economies  of  scale.  In  some  cases,  the  impossibility  to  agree  on  common 
specifications  has  reduced  significantly  the  scope  of  collaboration,  or  even  made  it 
impractical.  For  example,  the  decision  of  France  to  pursue  a  national  combat  aircraft 
project was to a large degree due to the impossibility to agree to common specifications 
that  would  have  allowed  the  country  to  continue  collaboration  under  the  Eurofighter 
project23. Standardization and interoperability are thus reduced. 

Difficulty in agreeing on common technical specifications often results from the desire to 
defend and promote the interest of the national defence industries. It can however be also 
the  result  of  more  fundamental  differences  stemming  from  diverging  doctrines, 
assessments  of  needs  and  operational  requirements.  When  capability  priorities  are 
commonly  developed  and  agreed  within  the  EU,  notably  through  the  Capability 
Development  Plan,  a  higher  degree  of  convergence  regarding  the  above-mentioned 
elements  should  be  realised.  This  should  make  the  definition  of  common  technical 
specifications  easier  and  should  thus  improve  the  efficiency  of  collaborative  projects 
from  an  industrial  point  of  view.  However,  the  impact  of  such  joint  definition  of 
capability priorities has not yet been sufficiently prioritised by Member States.  

In  the  same  time,  past  experience,  in  particular  from  common  operations  like  Libya  in 
2011  and  Chad  in  2008,  clearly  indicates  the  presence  of  shortages  that  hamper  the 
ability  of  Member  States  to  act  effectively  together.  Critical  shortages  of  key  enablers, 
such  as  air-to-air  refuelling  and  strategic  lift  have  become  apparent24.  Readiness  levels 
for  fighter  jets,  attack  and  transport  helicopters  are  reported  to  stand  at  below  50%  for 
several large Member States25.  

21 European Union Institute for Security Studies, 2007. 
22 Mauro, 2017. 
23 For this and other examples, see European Union Institute for Security Studies, 2007. 
24 European Political Strategy Centre, 2015. 
25 De France, 2015; European Union Institute for Security Studies, 2007. 

12 

 
 
                                                 
2.2. 

Problems  

The observed increase in costs of defence equipment and high development costs result 
in  low  investments  in  innovative  development  projects  which  constitutes  a  problem 
discussed  in  more  depth  in  section  2.2.1  below.  Additionally,  the  abovementioned 
problem drivers result in duplications and sub-optimal cost-efficiency of investments in 
defence  equipment,  as  potential  economies  of  scale  are  foregone  in  an  industry  where 
scale  is  a  major  determinant  of  competitiveness.  The  inefficiencies  due  to  untapped 
economies of scale further exacerbate the above-mentioned problem of low investments. 

Limited cooperation among governments as well as the fact that implemented programs 
are rarely linked to common technical specifications also directly affects suppliers - from 
the industry's point of view, there is little incentive to cooperate across borders, as clients 
are still served predominantly on a country-by-country basis and on the basis of national 
technical requirements. This results in a lack of coherence in defence investments across 
the  EU  and  a  dispersed  or  fragmented  European  Defence  Technological  and  Industrial 
Base  (hereinafter:  EDTIB).  The  two  above-mentioned  problems  are  discussed  in  more 
detail in the subsequent sections. 

2.2.1.  Low investments in innovative defence programmes 

Increasing costs of defence equipment, high development costs and insufficient levels of 
collaboration - while some projects are beyond the means of individual Member States - 
lead to investments in innovative defence programmes in the EU that are comparatively 
low and insufficient to sustain the competitiveness of the European industry.  

The low level of investment is evidenced by Figure 3 which demonstrates the difference 
in  magnitude  of  equipment  and  R&D  spending  between  the  EU  and  the  US.  Defence 
equipment  expenses  in  the  US  exceed  three  times  those  of  the  EU  Member  States. 
Defence R&D spending in the EU in 2011 was about 15% that of the US. Not only is the 
European defence R&D spending comparatively low, but it has also been declining over 
the past decade with a level in 2014 that is approximately 81% of the amounts spent in 
200626.  

26 European Defence Agency, 2016. 

13 

 
 
 
 
 
 
 
 
 
 
                                                 
Figure 3: Defence investment breakdown in absolute values [EUR billion] 

Source: European Defence Agency, 2013, p.10. 

In addition to the comparatively low levels of investment in Europe evidenced in Figure 
3, while the EU is spending almost three times less on equipment procurement and seven 
times  less  than  the  US  on  defence  R&D,  the  money  is  split  between  a  much  larger 
number of defence programmes. Research performed by the Centre for European Policy 
Studies  (hereinafter:  CEPS)27  in  2013  shows  that  the  number  of  defence  platforms  and 
systems  in  production  in  Europe  is  36  against  only  11  in  the  US.  As  regards  the  land 
segment,  the  ratio  is  17  to  2.  As  the  CEPS  note  mentions,  such  unnecessary 
fragmentation  implies  a  failure  to  capture  economies  of  scale  and  learning,  important 
opportunity  costs  through  reduced  money  available  to  develop  capabilities  in  other 
sectors  and  as  a  probable  final  result  "European  countries  become  less  technologically 
advanced;  more  expensive  platforms  and  systems  obtain  a  narrower  range  of  military 
capabilities in a less productive and innovative industry"28.  

Despite indications of a reversing trend regarding European  defence R&D expenditures 
over  the  last  few  years,  the  persisting  lack  of  investment  has  had  an  impact  on  the 
European defence industry, from prime contractors to suppliers. There has been a general 
lack of opportunities in terms of new major defence industrial projects, including a lack 
of European collaborative programmes29. 

Such  a  lack  of  opportunities  for  companies  is  a  major  impediment  for  maintaining  the 
innovativeness  of  the  EU  industry.  In  view  of  the  fact  that  demand  and  therefore 
investment is entierly driven by Member States, the industry would normally not embark 
on  substantial  spontaneous  self-funded  defence  Research  and  Technology  (hereinafter: 
R&T)  or  development  projects.  It  is  very  unlikely  that  investments  operated  by  the 
industry would compensate for insufficient investments by the Member States.  

27 Briani, 2013.  
28 Briani, 2013, p.2. 
29 European Union Institute for Security Studies and Communication (2016)950 from the Commission. 

14 

 
 
                                                 
In the same time, as noted in the Report of the Group of Personalities on the Preparatory 
Action for CSDP-related research,  "R&T activities are the first necessary step to prepare 
for  future  capability  developments  allowing  for  the  maturing  of  technologies  and  the 
reduction of risks. The defence R&T investment made today will underpin the freedom of 
action available tomorrow, the preservation of operational and technological advantage, 
the reinforcement of industrial competitiveness and employment opportunities"30. 

And while EU support for defence R&T is already available through the PA on Defence 
Research,  defence  development  projects  through  which  technology  needs  to  transition 
towards final products and capabilities also encounter important barriers. Such projects, 
crucial  for  the  competitiveness  of  the  EU  defence  industry,  may  not  proceed  forward, 
even if the initial stages of R&T have already been funded: bridging the "valley of death" 
between R&T and development and innovation is a lenghty process that entails important 
technical and financial risks that individual Member States may not be willing or capable 
of assuming on their own. The development and testing of prototypes is a phase in the 
development process that is particularly difficult because of the high costs involved and 
the  important  risks  of  failure  still  present.  In  a  context  characterised  by  important 
budgetary constraints it cannot be excluded that promising technologies may not proceed 
into the development stage thus reducing the quality of the capabilities available and the 
competitiveness of the European defence industry. 

2.2.2.  Fragmentation  of  the  defence  industry  and  limited  cooperation  of 

undertakings  

Limited  collaboration  of  Member  States  in  defence  implies  important  duplications  and 
results in a defence industry that remains highly fragmented along national borders. The 
lack of integration on the demand side of the market indeed fails to generate incentives 
for  trans-border  collaboration  between  undertakings  and  for  further  integration  of  the 
industry.  

The  dependence  on  national  markets  still  remains  important  in  particular  for  those 
companies  that  exhibit  a  high  proportion  of  defence-related  activities.  Looking  at  32 
major  European  companies  active  in  the  defence  industry  Masson  (2015)  notes  that  5 
firms  show  a  share  of  domestic  sales  in  their  turnover  that  is  above  50%  and  for  a 
majority of 20 firms the proportion varies in the interval 20%-50%. 

As mentioned earlier there are 36 production lines for defence systems or platforms open 
in  Europe  against  11  in  the  US.  Resulting  duplications  prevent  the  industry  from 
achieving optimal size of production as comparatively small national markets are served 
in  isolation.  Another  illustration  of  the  fragmentation  and  the  resulting  impact  on  the 
competitiveness of the industry can be found in relation to combat aircraft. Three types of 
combat  aircraft  are  currently  in  production  in  Europe:  the  Eurofighter  Typhoon,  the 
Rafale and the Gripen. A 2013 study on the Costs of non-Europe in the defence field31 
provides  a  comparison  between  the  R&D  costs  and  the  expected  sales  of  the  three 
European aircrafts and the US JSF programme (Table 2).   

30  European  Union  Institute  for  Security  Studies  and  Communication  (2016)950  from  the  Commission, 
p.43. 
31 Briani, 2013.  

15 

 
 
 
                                                 
Table 2: Comparison between the European aircraft projects and the US JSF 

Aircraft 

Eurofighter 

Gripen 

Rafale 

JSF 

Source: Briani, 2013, p.16. 

R&D costs (EUR billion)  Units envisaged/produced 

19.48 

1.48 

8.61 

19.34 

707 

204 

294 

3003 

The  study  concludes  that  the  total  R&D  costs  of  the  three  European  projects  together 
largely exceed those of the JSF while the total expected output is almost 1800 units lower 
and  divided  between  3  different  aircrafts  which  significantly  reduces  the  economies  of 
scale and learning that can be captured.       

It can be noted that even large trans-border consolidations have not necessarily led to a 
genuine and deep consolidation of industrial assets at the European level but have often 
led  to  the  creation  of  “multi-domestic”  companies32.  The  concluding  remarks  of  the 
European Parliament’s study on the overall condition of the European defence industry 
are that “all sectors show excess capacities in production. This is expressed in many but 
small producers which are specialized in similar areas but do not compete against each 
other  for  the  first  production  lot  due  to  markets  with  high  barrier  for  non-domestic 
suppliers.”33 

The fragmentation of the European defence industry is not only limited to the weakness 
of horizontal collaboration at the level of system integrators. It also affects trans-border 
access to the supply chains having in  particular negative  effects  on small and medium-
sized enterprises' (hereinafter: SMEs) capacity to take full benefits of their participation 
in  the  defence  market.  As  noted  in  a  Resolution  of  the  European  Parliament:  “the 
fragmentation  of  the  European  defence  market  is  an  obstacle  to  the  ability  of  SMEs  to 
market  their  products”34.  The  supply  chains  of  the  large  system  integrators  have  been 
predominantly set up on a national basis and the access of new entrants located in other 
Member States may remain limited35.   

SMEs play an important role in the defence industry and it is estimated that they account 
for  between  11  and  17  per  cent  share  of  the  estimated  defence  equipment  sales  in  the 
EU36. They also assume an increasing responsibility through the extension of the use of 
risk-sharing partnerships by the large system integrators where the costs of development 
are distributed between system integrator and partners in its supply chain.  

Defence-related  SME  also  face  important  challenges  related  to  information  problems 
(e.g. difficulties in obtaining information on future capability requirements and business 

32 Bellais & Droff, 2013. 
33 European Parliament, 2013, p.47. 
34 European Parliament Resolution 2013/2125(INI), point 31. 
35 See for instance Ianakiev & Mladenov, 2008.  
36 Europe Economics, 2009. 

16 

 
       
                                                 
opportunities  but  also  a  lack  of  visibility  to  large  companies,  in  particular  in  a  cross-
border  context,  which  results  in  a  preference  for  existing  suppliers  or  suppliers  closely 
located  to  the  contractor),  access  to  finance  or  administrative  burden  and  costs  (e.g. 
related to IPR protection)37.  

2.3.  Consequences 

To  conclude,  the  EU  defence  industry  suffers  from  a  low  level  of  investments  in  the 
development of innovative defence products and technologies and is characterised by a 
limited  cooperation  of  undertakings  in  a  largely  fragmented  industry  still  organised 
predominantly on a national basis. Such a situation is not sustainable for the future. It is 
thus crucial to incentivise enhanced collaboration and specialisation, that will also allow 
to better capture scale effects by reducing duplications.  

A specific  stage  at which action  could  be  particularly useful is  the launch of important 
collaborative  defence  development  projects  that  can  play  the  role  of  a  focal  point  for 
trans-border  collaboration  of  firms.  As  mentioned  before,  because  of  the  important 
technology risks remaining even after the R&T phase and the substantial costs involved 
in the development phase, in particular as regards prototyping, many projects would not 
be able to bridge the “valley of death”.  

All of this creates substantial risks for the competitiveness of the European defence 
industry  and  its  standing  vis-a-vis  its  global  competitors38.  Less  innovative  technical 
solutions and a possible competitiveness gap will also mean a challenge to the strategic 
autonomy  of  the  EU  and  ultimately  a  weaker  political  stance  of  the  EU  in  the  field  of 
defence.  

3.  WHY SHOULD THE EU ACT? 

The EU competence to take action on industrial development matters comes from Article 
173 of the Treaty on the Functioning of the European Union (hereinafter: TFEU). 

As discussed in the section on problem definition above, lack of coherent EU support for 
defence development and the prevalence of non-coordinated national policies of Member 
States  in  this  area  have  proven  to  be  insufficient  in  addressing  the  sector’s  needs.  The 
lack of coordination and coherence between Member States has been not only the source 
of  competitive  disadvantage  of  the  EDTIB  vis-a-vis  its  international  counterparts,  but 
also  remains  a  major  source  of  costs  for  the  public  purse  and  constitutes  a  significant 
impediment for the implementation of the Common Security and Defence Policy.  

Finally,  it  has  been  widely  recognised  that  given  the  technological  advancements  in 
defence  observed  in  the  recent  decades,  which  result  in  a  significant  cost  increase,  the 

37  Commission  Staff  Working  Document  SWD(2013)279.  The  important  difficulties  that  SMEs  face  in 
developing their activities in the defence sector are also recognised by the EDA: "SMEs have identified a 
number  of  difficulties  in  participating  in  the  defence  market  including  access  to  information,  defence 
procurement, supply chain and finance. They claim to face barriers in promoting their innovative solutions 
to  Government  authorities  and  large  companies.  As  defence  supply  chains  have  a  substantial  national 
focus, there are additional challenges for SMEs that wish to enter defence supply chains in other European 
countries." (European Defence Agency, 2015, p. 3). 
38 The 2016 edition of the World Military Expenditures and Arms Transfers (WMEAT) Report published 
by the US Department of State and covering the period 2004-2014 notes that " The U.S. share of the world 
arms market appears to have grown, while the E.U. share appears to have diminished, with no clear trend 
in the Russian and Chinese shares." 

17 

 
                                                 
effective  implementation  of  defence  R&D  activities  frequently  remains  beyond  the 
means  of  a  single  country:  “No  single  country  is  able  to  stand  up  to  these  challenges 
alone. ‘More Europe’ in defence and security is clearly needed”39. 

A proposal for an  instrument at the  EU level  seems to  be the  most  viable solution that 
could potentially address the inefficiencies of the current “state-driven” approach. Such 
an  instrument  should  incentivise  but  not  replace  the  efforts  of  Member  States,  whose 
importance remains crucial for the launch of defence development projects.  

4.  OBJECTIVES 

Working  towards  a  strong,  competitive  and  innovative  EU  defence  industry  requires 
measures  that  will  address  problems  and  challenges  that  the  latter  faces.  In  order  to 
achieve it, a set of objectives, as specified below, could be defined. 

4.1.  General objective 

The general objective of the EDIDP would be to foster an innovative and competitive 
European defence industry able to meet Europe's current and future security needs and 
improve its standing vis-a-vis its international competitors. 

The Treaty basis for this general objective is Article 173 TFEU, which takes into account 
the policies of innovation, research and technological development.  

4.2. 

Specific objectives 

With  a  view  to  addressing  the  identified  problems  and  achieving  the  above  general 
objective, the following specific objectives have been defined:  

•  Objective 1 –  to  foster  better exploitation  of the results of defence research and 

contribute to closing the gaps between research and development. 

•  Objective  2  –  to  support  and  leverage  the  cooperation  between  undertakings, 
including  SMEs,  in  the  development  of  technologies  or  products  in  line  with 
defence capability priorities commonly agreed by Member States within the EU. 

4.3.  Operational objectives 

The  above  specific  objectives  can  be  further  split  into  the  following  operational  policy 
actions: (i) participate in the development costs of defence products and technologies to 
unlock the implementation of innovative collaborative projects beyond the research and 
technology  phase,  and  (ii)  facilitate  collaboration  between  several  Member  States  and 
between  undertakings  to  avoid  duplications,  while  (iii)  contributing  to  the  EU  security 
interest  taking  into  account  capability  priorities  commonly  agreed  by  Member  States 
within the EU and inducing the implementation of common technical specifications. 

Altogether, the three tiers of objectives have been summarised in Figure 4 (below). 

39 European Political Strategy Centre, 2015, p.2.  

18 

 
 
 
                                                 
Figure 4: Three-tier structure of objectives for the intervention 

5.  THE NEED FOR A NEW POLICY   

In order to achieve the objective and expected results presented in Section 4, a proposal 
to  establish  the  EDIDP  has  been  examined  and  compared  to  the  maintenance  of  the 
current situation (status quo) which constitutes the baseline scenario.  

5.1. 

Status quo - baseline “do nothing” scenario 

Under the status quo (baseline scenario) no specific funding measures at the Union level 
would  be  established  to  support  collaborative  defence  development  projects  under  the 
current programming period, despite the existence of specific difficulties encountered by 
the  defence  industry  in  the  development  phase.  As  explained  in  section  2,  such 
difficulties  are  notably  due  to  the  high  costs  and  technological  risks  linked  to  the 
development  of  prototypes,  which  is  amongst  the  most  risky  phases  of  defence 
development projects. In the absence of a specific EU-level action, collaborative projects 
would  most  probably  not  proceed  beyond  the  initial  research  phase  or  be  at  least 
significantly delayed.  

Under the status quo, the support for collaborative projects from the EU’s own resources 
would be limited to the R&T phase of the projects. It will be provided through the PA on 
Defence Research launched in April 2017. The PA is based on an estimated total budget 
of EUR 90 million for the period 2017-2019 and will focus on a limited number of key 
research  projects.  It  will  prepare  the  introduction  of  a  European  defence  research 
programme within the next multiannual financial framework.  

In  view  of  the  introduction  of  the  PA,  not  targeting  the  post  research  and  technology 
phase  risks  to  hamper  the  further  development  of  the  results  of  defence  research  thus 
putting a halt to the development of the defence products and technologies needed. This 
may also send a negative signal to stakeholders demonstrating a lower engagement of the 
Union  in  supporting  later  stages  of  development  of  defence  projects  compared  to  the 
initial research phase. An opportunity to implement a pilot approach and prepare the way 
for the introduction of a more ambitious EDIDP as part of the capability window of the 
EDF  under  the  next  programming  period  would  also  be  forsaken.  Possible  learning 
opportunities would be lost. 

19 

 
 
 
In addition to the PA, actions funded under the Horizon 2020 and COSME programmes 
may  also  lead  to  results  which  can  have  dual  use,  and  the  EU  guarantee  under  the 
European Fund for Strategic Investments (hereinafter: EFSI) can also be used for certain 
operations where  dual-use  technologies are concerned. In addition, European Structural 
and Investment Funds (hereinafter: ESIF) can also be used to reinforce certain aspects of 
the EU defence sector.  

It is also foreseen that additional initiatives would be developed at the EU level aimed at 
better  incentivising  collaborative  development  and  procurement.  Notably,  a  financial 
toolbox would be developed, providing Member States with ready to use financial tools 
that  can  be  voluntarily  applied  to  address  the  most  common  challenges  impeding  joint 
development and procurement of defence capabilities.  

The Commission would also propose measures that will specifically target the difficulties 
encountered by SMEs in the defence industry by adopting recommendations to Member 
States aimed at implementing measures to improve SMEs’ participation to procurement 
contracts and access to finance for SMEs active in the defence sector.  

In  view  of  the  above,  it  can  be  concluded  that  under  the  status  quo  the  Union  budget 
would not incur additional direct costs but the policy objectives would not  be achieved 
either.  In  the  absence  of  a  targeted  Union  action  the  main  problems  identified  would 
persist,  collaboration  and  investments  in  defence  development  projects  would  remain 
comparatively  limited  and  the  competitiveness  and  innovativeness  of  the  European 
defence industry would not be significantly improved in this regard. The economic and 
social  impacts  that  can  be  expected  from  a  reinforced  level  of  cooperation  in  defence 
development projects will also be foregone.   

5.2.  Moving  forward  with  the  European  Defence  Industrial  Development 

Program (EDIDP) 

On  the  basis  of  Article  173  TFEU,  the  EDIDP  for  Union  action  in  the  field  of 
competitiveness  and  innovation  of  the  EU  defence  industry  would  be  set  up  as  from  1 
January 2019 and would run until 31 December 2020.  

The  EDIDP  would  complement  research  and  technological  development  carried  out  in 
accordance with Article 182 of the Treaty. It would be expected to promote all forms of 
innovation and contribute in enabling the realisation of collaborative defence capability 
development projects that may face difficulties at the crucial moment where technology 
needs to transit from the research and technology to the development phase. To achieve 
its objective and ensure complementarity with the PA on Defence Research the EDIDP 
will  target  its  support  to  actions  that  come  after  the  R&T  phase  but  will  not  support 
production.  It  will  leverage  support  and  provide  complementary  funding  in  order  to 
incentivise cooperation and innovation. 

More  precisely,  the  EDIDP  would  support  the  design,  prototyping,  testing  and 
qualification  of  defence  products,  tangible  or  intangible  components  and  technologies. 
Funding could also be provided for the certification of a defence product or technology, 
as  well  as  for  the  development  of  the  technical  specifications  on  which  the  design  is 
based, for studies, feasibility assessments and other accompanying measures. Support can 
be provided for actions in the development phase covering both new and the upgrade of 
existing products and technologies.  

20 

 
5.2.1.  Description of the proposed instrument  

The EDIDP would provide financial support to undertakings40 established in EU Member 
States  owned  in  majority  and  effectively  controlled  by  Member  States  or  nationals  of 
Member States and which take part in collaborative defence development projects. The 
activities  linked  to  actions  funded  under  the  Programme  should  not  be  located  on  the 
territory  of  non-Member  States  during  the  entire  duration  of  the  action.  The  project 
should  involve  cooperation  between  at  least  3  undertakings  established  in  at  least  2 
different Member States. It must be based on common technical specifications defined by 
the participating Member States.  

As the PA on Defence Research, the EDIDP is a first step and should thus pave the way 
for  the  implementation  of  a  reinforced  development  programme  under  the  next 
multiannual financial framework.  

The  proposed  intervention  strategies  would  be  through  financial  assistance.  In  view  of 
the  nature  of  the  identified  problems  other  soft  measures  such  as  information  sharing 
and/or  networking  activities  would  not  be  sufficient.  The  financial  assistance  provided 
under  the  EDIDP  can  take  the  form  of  grants,  financial  instruments  and  public 
procurement. The proposed overall budget of the EDIDP would be EUR 500 million.  

A scoping study41 commissioned by the Commission recommended that the budget of the 
EDIDP  should  be  of  EUR  150  million  in  2019  and  EUR  250  million  in  2020.  On  the 
basis  of  the  latest  EDA  data  available,  and  with  reference  to  the  EDA  benchmark  of  a 
35%  European  collaborative  procurement  as  percentage  of  total  defence  equipment 
procurement,  the  study  estimates  that  a  “collaboration  deficit”  of  EUR  3.3  billion  is 
currently  present.  Taking  into  account  that  the  average  ratio  of  R&D  to  equipment 
expenses  in  the  EDA  participating  states  was  22%  and  relying  on  assumptions  on  the 
possible additional costs that collaborative projects may imply, the study concludes that 
the  Commission  should  spend  more  than  EUR  700  million  per  year  to  incentivise  the 
necessary level of collaboration42. Considering however that a limited number of projects 
would be ready for funding in the first years, the lower budget figures quoted above are 
recommended  for  the  2019-2020  period.  For  the  future  (post-2020),  the  study  foresees 
that increasing amounts of engagement by the Commission may be necessary if Member 
States  work  towards  respecting  also  the  benchmark  of  investment  and  R&T  expenses 
reaching 20% of total defence expenditure as well as the NATO spending target of 2% of 
GDP.       

The proposed funding rate would not exceed 20% of the total cost of the relevant action 
when  it  relates  to  prototyping.  In  the  case  of  technical  specifications,  design,  testing, 
qualification or certification and supporting measures, the assistance may cover up to the 
total cost of the action.  

Member  States  would  need  to  contribute  to  the  remaining  costs,  in  particular  through 
pooling  of  national  contributions.  The  EU  budget  would  thus  be  used  to  leverage  the 
right amount of Member States’ contributions to initiate the cooperation and would act as 

40  Support  under  the  EDIDP  will  be  provided  directly  to  the  undertakings  participating  in  the  project. 
Funding provided under the EDIDP thus represents Union resources that are awarded directly by the Union 
without discretion on the part of the national authorities. As such, they do not qualify as State resources in 
the meaning of Article 107(1) TFEU and therefore do not constitute State aid. 
41 Mauro, 2017. 
42  The  United  Kingdom  is  excluded  from  the  calculations  performed  so  as  to  provide  a  post-Brexit 
analytical framework.  

21 

 
                                                 
enabler for cooperation, unblocking potential collaborative development programmes in 
one of the riskiest phases, i.e. the development phase. Beneficiaries developing actions in 
the  context  of  Permanent  Structured  Cooperation  would  be  eligible  for  an  increased 
funding rate in view of the reinforced collaboration in the framework of the EU that such 
actions entail.  

The Commission will be responsible for the execution and the management structure of 
the EDIDP. It may however entrust part of the implementation to another entity. In view 
of its expertise, the Commission may entrust the EDA with such a role.    

The  proposals  submitted  in  view  of  obtaining  support  under  the  EDIDP  would  be 
evaluated on the basis of the following cumulative award criteria:  

  Excellence 

  The  contribution  to  the  innovation  and  technological  development  of  defence 
industries and thus to fostering the industrial autonomy of the EU in the field of 
defence technologies; 

  The  contribution  to  the  security  and  defence  interests  of  the  EU  by  enhancing 
defence technologies which contribute to implement defence capability priorities 
commonly agreed by Member States within the EU;  

  viability notably via a demonstration by the beneficiaries that the remaining costs 
of  the  eligible  action  are  covered  by  other  means  of  financing  such  as  Member 
States’ contributions. 

 

for prototyping, testing, qualification and certification actions, the contribution to 
the competitiveness of the European defence industry through the demonstration 
by the beneficiaries, that Member States have committed to jointly  produce and 
procure  the  final  product  or  technology  in  a  coordinated  way,  including  joint 
procurement where applicable43. 

6.  THE 

IMPACTS  OF  THE  EUROPEAN  DEFENCE 

INDUSTRIAL 

DEVELOPMENT PROGRAMME  

The  proposed  EDIDP  would  support  a  collaborative  approach  to  defence  development 
projects  and  foster  the  exploitation  and  transition  of  defence  research  towards  the 
development  of  products  and  technologies  consistent  with  defence  capability  priorities 
commonly  agreed  by  Member  States  within  the  EU.  This  is  expected  to  foster  the 
competitiveness and innovativeness of the European defence industry.    

It is however important to note that all below mentioned expected impacts of the EDIDP 
should be interpreted in the light of its pilot nature and of its limited scale and duration.  

The EDIDP, by supporting common technical requirements, would contribute in ensuring 
standardisation  and  interoperability,  would  reduce  duplications  and  hence  enhance  the 
competitiveness of the defence industry. 

43  Should  Member  States  make  such  commitments  to  further  develop  and  to  procure  a  product  or 
technology,  they  must  ensure  compliance  with  EU  public  procurement  legislation,  in  particular  with  the 
rules  of  Directive  2009/81/EC.  In  this  context,  Member  States  may  rely  on  the  exclusion  under  Article 
13(c) of this Directive, provided that the conditions for its application are fulfilled. 

22 

 
                                                 
The  EDIDP  would  fund  the  initial  phases  of  development  in  order  to  encourage 
innovation generated by the EU defence industry at a stage that is difficult to overcome 
by the industry without additional incentives. 

6.1. 

Impact on the competitiveness of the industry 

The EDIDP is implemented under Article 173 TFEU and its main objective is to foster 
an  innovative  and  competitive  European  defence  industry.  The  programme  will 
contribute in achieving this objective, in particular through the following channels: 

  Enhanced collaboration in defence development projects in Europe 

The EDIDP should contribute to reinforcing collaborative projects in the EU by allowing 
additional projects to be implemented, and by establishing a framework that incentivises 
more efficient collaboration architectures.   

Regarding  the  first  element,  the  EDIDP’s  financial  contribution  is  expected  to  unlock 
development  projects  which  may  not  be  able  to  proceed  forward  in  view  of  their 
financing needs and of the technological risks involved.  

As  illustrated  in  Figure  5,  the  effectiveness  of  financial  incentives  for  collaboration 
would  be  expected  to  increase  with  the  cost  of  the  project  and  with  the  ratio  of 
development  costs  to  acquisition  costs44.  On  one  hand,  the  higher  the  costs,  the  more 
difficult it is for a single Member State to undertake the project. On the other hand, the 
benefits  of  collaboration  depend  on  the  ratio  of  development  costs  to  acquisition  costs 
because  the  part  of  costs  that  is  shared  between  participants  corresponds  to  the 
development  costs,  while  each  client  has  to  support  the  acquisition  costs  of  its  own 
purchase.  As  previously  mentioned,  a  collaborative  project  would  be  financially 
interesting  for  the  participating  Member  States  even  when  its  total  costs  would  exceed 
those of an equivalent national project because the fixed costs are divided between all the 
participants thus alleviating the financial burden falling on each one of them.    

Figure 5: Economic drivers for Collaboration 

Source: Mauro, 2017. 

44 Mauro, 2017. 

23 

 
 
                                                 
As regards achieving better collaboration, the EDIDP takes stock of lessons learned from 
past  experience  and  incentivises  the  elaboration  of  common  technical  requirements  in 
order to maximise the efficiency of the development projects.  

 

Improving defence industry efficiency and capturing size effects 

As  mentioned  earlier,  the  defence  industry  is  characterised  by  important  economies  of 
scale and learning that the current dispersion of programmes in Europe does not allow to 
capture to a sufficient degree. Enhanced cooperation, by reducing wasteful duplications, 
will enable increasing the scale of production thus improving the competitiveness of the 
EU defence industry. This should have a positive effect on export performance. It is also 
expected  to  benefit  the  Member  States  in  their  role  of  buyers,  as  higher  scale  implies 
comparatively lower unit costs of equipment. The expected positive impact on the cost-
effectiveness  of  the  industry  could be  significant  –  according  to  different  studies,  costs 
reductions  of  10-20%  can  be  achieved  when  production  is  doubled  or  increased  from 
minimum efficient scale to the ideal level45. Better capture of scale and learning effects 
can  thus  provide  a  major  contribution  in  improving  the  competitiveness  of  the  EU 
defence industry. 

Investment in defence can also re-direct resources within the manufacturing sector from 
activities with average productivity to activities where productivity is substantially above 
average46. 

 

Improved defence technology development 

The implementation of EDIDP is also expected to enhance the quality and the variety of 
technologies  being  developed  in  Europe  by  reducing  the  current  duplications  where 
Member  States  are  funding  comparable  projects  in  parallel  instead  of  exploiting 
complementarities and opportunities for specialisation. A better use of scarce budgetary 
resources should allow the EDTIB to also develop technologies and experience in fields 
that currently suffer from insufficient investment. This would improve the standing of the 
EU defence industry by allowing it to effectively compete with international competitors 
through  enhanced  product  quality  and  by  increasing  the  scope  of  the  products  and 
technologies that it can offer. 

Important spin-offs, which will also benefit civil activities, can be expected as explained 
below.  

6.2.  Wider economic impacts  

The  EDIDP  is  expected  to  bring  wider  positive  economic  effects  for  the  European 
economy. Investments in the defence sector have significant positive multiplier effects on 
GDP,  tax  and  employment,  comparable  to  those  of  other  key  categories  of  public 
spending (transport, education, health)47. However, defence has an impact on R&D that 
is, according to some studies, 12 to 20 times greater than the impact of other categories 

45 McKinsey, 2013, estimates that each doubling of volume results in an efficiency increase of approx. 20% 
that would lead to total potential saving of 17% of the total weapon system procurement costs under the 
assumption  of  a  40%  labour  costs  share.  National  Audit  Office,  2001,  considers  that  equipment  unit 
production costs could fall by up to 10% as output doubles. Hartley, 2006, estimates the median unit cost 
saving by increasing scale from the minimum to the ideal level at 10-20%. 
46 Europe Economics, 2013. 
47 Europe Economics, 2013. 

24 

 
                                                 
of  public  spending  mentioned  before  and  can  thus  contribute  significantly  to  future 
economic growth in the EU and to the competitiveness of the EU industry in general48.    

Beyond the macroeconomic effects on R&D, defence R&D is at the origin of important 
spin-offs  that  benefit  both  the  defence  and  the  civil  sector.  A  study  on  the  economic 
benefits of the Eurofighter Typhoon programme values its technological externalities at 
USD  7.2  billion  (minimum)49.  The  study  also  shows  that  important  benefits  were  also 
derived in  terms  of organisational and  process innovation through the introduction of a 
range  of  modern  business  practices  throughout  the  supply  chain.  As  previously 
mentioned, investments in defence development may also improve the productivity of the 
economy by transferring resources to highly productive activities. 

6.3. 

Impacts on the SMEs 

SMEs  play  a  crucial  role  in  the  European  economy  as  well  as  in  the  defence  industry. 
They  provide  important  employment  opportunities  and  are  a  factor  of  innovation  and 
thus  competitiveness.  It  is  therefore  important  to  carefully  examine  the  effects  of  the 
proposed introduction of the EDIDP on SMEs. 

First, from a general perspective, the EDIDP will have positive effects on SMEs which 
are involved in defence development programmes through the supply chains of the main 
system  integrators.  Most  of  the  beneficial  effects  mentioned  above  will  also  be 
transmitted to suppliers down the supply chain, including to SMEs. It is worth noting that 
the  number  of  companies  involved  in  the  development  and  production  of  an  important 
defence system can be quite high: the Leopard II tank for instance combines the efforts of 
some 1,500 companies, many of which SMEs50. Benefits to suppliers also take the form 
of technology transfers51. 

Second,  the  introduction  of  the  EDIDP  is  expected  to  have  positive  effects  as  regards 
cross-border  access  to  the  supply  chains.  Barriers  to  cross  border  access  to  the  supply 
chains  affect  particularly  SMEs,  but  are  also  an  important  impediment  for  larger  firms 
that want to establish relations with companies and system integrators located in another 
Member State. 

European collaborative defence development projects have the potential of favouring the 
establishment of cross-border industrial relations including at the level of the lower tiers 
in the supply chains. Learning to work together and building confidence are major factors 
favouring internationalisation of the supply chains and the EDIDP will be conducive to 
the establishment of such relations. It is foreseen that the Work programme of the EDIDP 
would  specifically  ensure  that  a  proportion  of  the  overall  budget  will  benefit  actions 
enabling cross-border participation of SMEs.  

It is worth noting that the establishment of first cross-border relations between a supplier 
and  higher  tier  industrial  clients  face  the  highest  difficulties  in  terms  of  informational 
barriers  and  supplier  switching  costs,  including  elements  pertaining  to  trust,  risk-

48 Europe Economics, 2013. 
49 Hartley, 2008. Technological benefits included carbon fibre technology; super plastic forming and fusion 
bonding;  modular  avionics;  the  flight  control  system;  and  aero-engine  technology.  Technology  spin-offs 
were  also  identified  from  the  Typhoon  Programme  to  civil  aircraft,  to  motor  car  industries  (including 
Formula 1 racing cars in Italy and the UK) and to supply chains. 
50 Duran et al., 2012. 
51 Hartley, 2008. 

25 

 
                                                 
management or security of supply52. Once such relations are established and have let to 
the discovery of new efficient and reliable suppliers, collaboration would be expected to 
extend  beyond  the  scope  of  the  projects  supported  under  the  EDIDP.  Skills  and 
technology acquired by Spanish firms in the framework of the development of the EJ200 
engine for the Eurofighter, have for instance allowed the Spanish industry to successfully 
enter some segments of the aerospace industry53.    

Finally, the progressive blurring of the border between the defence and the civil sectors 
also allows SMEs that are not traditionally active in the defence sector to participate. The 
share  of  electronics  and  software  in  defence  projects  is  increasing  and  this  offers 
opportunities  for  innovative  SMEs  to  participate  and  draw  significant  benefits  from 
defence development programmes. Innovative cyber security technologies necessary for 
defence purposes (e.g. protection of defence networks, operations, cyberspace) will also 
be  increasingly  exploited  and  will  play  an  increasing  role  in  defence  development 
programs.  

6.4. 

Social impacts 

Enhanced investment in defence development projects is also expected to bring benefits 
as regards, jobs, skills and remuneration.    

It is estimated that the Eurofighter project supported some 100,000 personnel directly or 
indirectly  in  over  400  companies  throughout  Europe54.  More  generally,  a  study  on  the 
impact of investments in the UK defence industry notes that for each job created within 
the  defence  industry,  1.6  jobs  are  created  elsewhere  in  the  economy55.  Another  study 
estimates that each EUR 1 million invested in the defence sector of the EU can generate 
28.7 jobs56. In view of such estimates and of the budget of the EDIDP and the co-funding 
that  would  be  provided  by  participating  Member  States  the  expected  positive 
employment effects can be expected to be substantial. 

Defence  development  projects  traditionally  require  highly  skilled  personnel.  On  the 
Eurofighter Typhoon R&D work, the employment of EADS (Germany) comprised 60% 
engineers, 25% blue collar, 5% commercial and legal workers and the rest as support57. 
The labour skills on the development and production of the Typhoon also proved to be 
highly  transferable  towards  a  wide  range  of  both  defence  and  civil  activities  (e.g. 
automobile, electronics, civil aviation including the Airbus A-380)58.  

In addition, salaries on the projects' development work were 60% higher than the average 
gross earnings in all EU industries59.    

6.5.  Wider security impacts 

A  first  effect  regards  the  quality  of  the  defence  products  and  technologies  that  will  be 
made available to the Member States. A correlation indeed exists between past levels of 
defence R&D spending and the quality of the defence equipment in the inventories of the 

52 Ianakiev & Mladenov, 2008; Ianakiev, 2014. 
53 Hartley, 2008. 
54 Hartley, 2008, p. 9. 
55 Oxford economics, 2011.  
56 Europe Economics, 2013. 
57 Hartley, 2008. 
58 Hartley, 2008. 
59 Hartley, 2008. 

26 

 
                                                 
corresponding country60. The European defence industry will also preserve and enhance 
its technological ability to develop new generations of critical defence technologies and 
products and to compete on global markets.  

The  expected  security  benefits  are  however  not  restricted  to  improvement  of  quality  in 
the medium-long term: standardisation and interoperability of equipment are amongst the 
main benefits that can be expected from collaborative capability development. They will 
in  turn  open  opportunities  for  collaboration  in  support  and  maintenance,  repair  and 
overhaul  activities,  enabling  further  significant  savings61,  and  in  joint  operations, 
ultimately contributing to the reinforcement of the security of the EU and of its Member 
States.  

In view of the increasing role of cyber defence technologies and their penetration in the 
defence  sector,  the  implementation  of  the  EDIDP  is  also  expected  to  contribute  in 
enhancing cyber defence. 

6.6.  Environmental impacts 

No significant environmental effects of the present initiative have been identified.  

6.7.  Other impacts 

As  far  as  practical  implementation  risks  are  concerned,  they  may  stem  from  the  short 
duration  of  the  EDIDP  which  may  lead  to  difficulties  in  utilising  the  entire  budget 
available  in  case  no  sufficient  quality  applications  are  received.  In  a  current  context 
characterised by low investments in defence development projects the probability of such 
a risk materialising appears limited. In the preparation of the EDIDP the Commission has 
also  run  consultations  with  both  industry  and  Member  States  which  should  contribute 
positively to an early awareness of stakeholders about the EDIDP that should allow them 
to be prepared at the moment when the project selection procedure would be open.   

Risks of duplication and overlap with support provided through other programmes of the 
Union also remain low in view of the limited intervention of such programmes directed 
specifically  towards  the  defence  industry62.  The  PA  on  Defence  Research  is  however 
targeting  the  defence  sector  and  it  is  important  that  duplications  are  avoided.  The 
proposed  EDIDP  Regulation  provides  that  only  actions  in  the  development  phase  of 
collaborative defence projects would be eligible thus avoiding possible overlaps with the 
PA. The two initiatives would be therefore complementary.     

6.8.  Cost-effectiveness 

The setting up of the EDIDP would imply direct costs to the Union budget of EUR 500 
million over the 2019-2020 period, but the Union would not fund the entire projects - it 
would provide a limited contribution with the aim of enabling the projects to proceed by 
also leveraging spending originating from the Member States.  

60 Middleton et al., 2006. 
61  McKinsey  (2013)  estimates  the  potential  savings  of  sharing  maintenance  depots  and  personal  for  the 
top12 platforms in Europe to roughly EUR 500-600 million per year.  
62 As mentioned earlier, actions funded under Union programs such as Horizon 2020 or COSME can lead 
to  results  that  have  dual  use.  These  programs  do  not  support  actions  specifically  targeted  at  the  defence 
sector. In addition, when drafting the multiannual Work Programme the Commission will also ensure that 
no overlaps with other Union instruments occur.    

27 

 
 
                                                 
The direct costs to the Union budget would be also comparatively limited with regard to 
the total costs of the supported defence development projects. If the EDIDP funds 20% of 
the  eligible  costs  of  a  project  (taking  into  account  the  maximum  funding  rate  for 
prototyping),  the  remaining  80%  would  be  provided  by  the  Member  States.  In  view  of 
the  budget  of  EUR  500  million  the  total  corresponding  contribution  that  would  be 
provided  by  the  Member  States  could  reach  up  to  EUR  2.5  billion.  This  represents  a 
significant  figure  when  taking  into  account  that  the  total  defence  R&D  expenditures  in 
the EU were slightly below EUR 9 billion in 201463.   

The proposal would require the use of appropriations of an administrative nature under 
the  multiannual  financial  framework,  in  particular  human  resources  expenditures  and 
other  administrative  expenditure.  In  this  respect,  the  resource  implications  can  slightly 
differ depending on the choice of direct or indirect management mode. The two modes of 
management imply differences in both the number of full-time equivalents (FTEs) at the 
Commission level (and their related costs) and the other administrative costs. 

The direct management mode requires a significant number of officials (AD and AST) to 
fully  manage  the  program  at  technical,  programmatic,  financial  and  legal  level.  The 
indirect management foresees some of these tasks to be performed by the implementing 
body and therefore allows the Commission to focus on the follow-up and monitoring of 
the  project.  The  reporting  mechanisms  set-up  with  the  implementing  body  allow  for  a 
lower number of officials at the Commission level compared to the direct management. 

Administrative  costs  are  also  slightly  higher  with  the  direct  management  mode.  In 
particular,  ad  hoc  Information  systems  need  be  established  and  more  missions  are 
necessary (on the spot audit, follow-up meetings etc). 

However  the  administrative  costs  and  human  resources  costs  will  remain  limited  in 
comparison to the total funding amounts that would be invested in collaborative defence 
development projects. The EDIDP would therefore achieve a positive cost-efficiency, as 
the  expected  benefits  for  the  industry  and  broader  policy  impacts  should  outweigh  the 
costs incurred.   

7.  FUTURE MONITORING AND EVALUATION 

The proposed monitoring and evaluation activities should above all be based on the data 
which  are  already  collected  and  published  by  various  organisations  active  in  the 
European defence sector. Generally, the key data used in this this SWD should continue 
to be collected and serve as a benchmark for the future ex-post evaluation. In particular, 
this would concern the following data sources: 

  EDA  data  submitted  by  affiliated  Member  States  on  an  annual  basis  (e.g.  the 
volume and share of EU and non-EU collaborative procurement, the volume and 
share  of  EU  and  non-EU  collaborative  defence  R&T,  the  volume  of  defence 
equipment procurement, the volume of defence R&D expenses);  

  Data on the size of the defence industry. 

Once the proposed funding scheme is implemented, data on the financed projects should 
be  collected  by  the  managing  authority  of  EDIDP.  The  proposed  scope  of  such  data 
collection could be notably the following: 

63  Data for the 27 Member States participating in the EDA. Data from European Defence Agency, 2014.   

28 

 
                                                 
 
 
 
 
 

the number of cooperative projects implemented,  
the total value of cooperative projects implemented and co-financing level,  
the number of companies involved as consortium members and their size, 
the number of Member States involved, 
the number of SMEs involved in projects under the programme 

The collection of some of the above information could involve an additional burden on 
firms or Member States, therefore the detailed requirements may need to be investigated 
in more detail to ensure that the costs are not excessive. 

Additionally,  sources  and  methods  such  as  targeted  surveys  and  interviews  with 
stakeholders  could  be  used  in  the  future  to  analyse  the  extent  to  which  the  proposed 
legislation  has  met  its  objectives.  These  would  also  provide  more  detailed  feedback  on 
the efficiency of projects implemented under the EDIDP. 

It  should  be  also  recognised  that  the  quality  and  consistency  of  the  available  statistical 
data has been constantly improving over time, therefore there are reasons to believe that 
the above-mentioned sources can provide information that would be sufficient to monitor 
the performance of the proposed funding mechanism and its impacts on the EU defence 
market.  

The  Commission  should  regularly  monitor  the  implementation  of  the  programme  and 
annually report on the progress made in accordance with Article 38(3)(e) of Regulation 
966/2012.  

To  support  greater  efficiency  and  effectiveness  of  future  Union  policy  actions,  the 
Commission should draw up a retrospective evaluation report and send it to the European 
Parliament and to the Council. The report - building on relevant consultations of Member 
States  and  key  stakeholders  -  should  notably  assess  the  progress  made  towards  the 
achievement  of  the  objectives  of  the  EDIDP.  It  should  also  analyse  cross  border 
participation  of  SMEs  in  projects  implemented  under  the  programme  as  well  as  the 
participation of SMEs to the global value chain. 

29 

 
 
 
ANNEX 1: PROCEDURAL INFORMATION  

The  lead  department  for  this  SWD  was  the  Directorate-General  for  Internal  Market, 
Industry,  Entrepreneurship  and  SMEs  (DG  GROW)  of  the  European  Commission.  The 
evaluation  has  been  carried  out  by  Unit  I4  (Defence,  Aeronautic  and  Maritime 
Industries). 

As  part  of  the  evaluation  process,  an  inter-service  steering  group  (ISG)  was  set  up  to 
follow and steer the development of the proposal and its accompanying SWD. The ISG 
involved  the  following  Commission’s  departments:  Unit  I3  (Space  Data  for  Societal 
Challenges  and  Growth),  Unit  I4  (Defence,  Aeronautic  and  Maritime  Industries),  Unit 
G3 (Procurement Legislation and Enforcement) and Unit 01 (Economic Analysis) of DG 
GROW;  Unit  A3  (Horizon  2020  policy)  of  Directorate-General  for  Research  and 
Innovation; Unit  L6 (Stability  mechanisms and legal affairs) of Directorate-General for 
Economic  and  Financial  Affairs;  Unit  A3  (Internal  policies)  of  Directorate-General  for 
Budget;  Unit  B2  (Investment)  of  Directorate-General  for  Trade;  Unit  A3  (State  aid 
strategy)  of  Directorate-General  for  Competition;  Unit  H1  (Cybersecurity  &  Digital 
privacy)  of  Directorate-General  for  Digital  Single  Market;  Unit  G1  (Smart  and 
Sustainable Growth) of Directorate-General for EU Regional Policy; Unit B5 (Stability, 
Security,  Development  and  Nuclear  Safety)  of  Directorate-General  for  International 
Cooperation and Development; Unit C1 (Innovation and EIT) of Directorate-General for 
Education  and  culture;  Unit  D1  (Policy  Coordination,  International  &  Multilateral 
Relations  and  Legal  Affairs)  of  Directorate-General  for  Humanitarian  Aid  and  Civil 
Protection;  Unit  E2  (Skills  &  Qualifications)  of  Directorate-General  for  Employment, 
Social Affairs & Inclusion; Unit A1 (Energy policy coordination) of Directorate-General 
for  Energy;  Unit  B4  (Innovation  and  Industry  for  Security)  of  Directorate-General  for 
Migration  and  Home  Affairs;  Unit  A3  (Sea  basin  strategies,  Maritime  Regional 
Cooperation  and  Maritime  Security)  of  Directorate-General  for  Maritime  Affairs  and 
Fisheries;  Unit  B4  (Sustainable  &  Intelligent  Transport)  of  Directorate-General  for 
Mobility and Transport; Unit C1 (Value added tax) of Directorate-General for Taxation 
and Customs Union; Unit A2 (Work Programme) of the Joint Research Centre; Team H 
(Internal  market  for  goods,  energy  including  Euratom;  enterprise;  customs  union; 
environment)  and  Team  I  (CFSP  and  External  relations)  of  the  Commission  Legal 
Service; Unit D2 (Internal Market and Competitiveness) of the Secretariat-General; and 
European Political Strategy Centre.  

The ISG was established in March 2017 and met three times: on 17/03, 7/05 and 17/05.  

This evaluation has been carried out internally by the Commission departments, based on 
existing  external  expertise  and  research.  It  referred  to  multiple  external  studies  carried 
out by academia, public institutions, industry associations or consultancies specialised in 
the defence industry. 

30 

 
 
 
ANNEX 2: REFERENCES 

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31 

 
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32 

 
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