COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL establishing the European Defence Fund
Date: 2018-06-13
Institutions: Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs, European Commission
Subjects: European defence policy, European security, action programme, common security and defence policy, competitiveness, defence budget, defence expenditure, fund (EU), innovation, research and development

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 13.6.2018  SWD(2018) 345 final  COMMISSION STAFF WORKING DOCUMENT  IMPACT ASSESSMENT  Accompanying the document Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL establishing the European Defence Fund {COM(2018) 476 final} - {SEC(2018) 314 final}  
 
 
Table of contents 

Contents 

1. 

INTRODUCTION: POLITICAL AND LEGAL CONTEXT ............................................................... 2 

1.1.  Scope and context .............................................................................................. 2 
1.1.1.  Geopolitical and economic context and EU defence policy initiatives ........ 2 

1.1.2.  European Commission proposal: addressing the industrial angle ................ 3 

1.1.3.  Scope of the Impact Assessment .................................................................. 4 

1.2.  Lessons learned from previous programmes ..................................................... 4 
1.2.1.  Observations from first implementing experience of PADR and comparison 
of modalities between PADR and EDIDP.................................................................. 4 

1.2.2.  Feedback from Stakeholders ........................................................................ 5 

2. 

CHALLENGES AND OBJECTIVES .................................................................................................. 6 

2.1.  Problems drivers ................................................................................................ 7 
Increasing  costs  of  defence  equipment  and  high  R&D  costs  in  rapidly 
2.1.1. 
evolving technology environment .............................................................................. 7 

2.1.2.  Cuts in defence spending .............................................................................. 8 

2.1.3.  Limited  cooperation  between  Member  States  and  few  programmes  linked 
to EU priorities ......................................................................................................... 10 

2.2.  Problems that the Fund aims to tackle ............................................................. 13 
2.2.1.  Few projects along the entire cycle of capability development ................. 13 

2.2.2.  Fragmentation and lack of collaboration between undertakings ................ 14 

2.3.  Baseline scenario ............................................................................................. 18 
2.4.  Complementarity with other MFF programmes and Union's initiatives ......... 19 
2.5.  Objectives and eligible actions ........................................................................ 21 
2.5.1.  General objective ........................................................................................ 21 

2.5.2.  Specific objectives ...................................................................................... 21 

2.5.3.  Actions to be financed to achieve the general and specific objectives ....... 22 

3. 

PRIORITIES, RIGHT TO ACT, BUDGETARY AMOUNT ............................................................. 23 

3.1.  Prioritising actions ........................................................................................... 23 
3.2.  The right to act ................................................................................................. 24 
3.2.1.  The intended legal base .............................................................................. 24 

3.2.2.  The subsidiarity (EU added value) and proportionality ............................. 24 

3.3.  Appropriateness of the budgetary amount ....................................................... 25 
Introduction of Options ................................................................................... 26 
3.4. 

4.  DELIVERY MECHANISMS OF THE INTENDED FUNDING ...................................................... 27 

4.1.  Structure,  delivery  mechanisms  and  related  IPRs  varying  across  the 

Options ............................................................................................................ 27 

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4.1.1.  Programme Structure and Governance (management) ............................... 28 

4.1.2.  General delivery mechanisms..................................................................... 29 

4.1.3. 

Intellectual Property Rights ........................................................................ 31 

4.1.4.  Defence-specific characteristics ................................................................. 32 

4.2.  How do the Options compare? ........................................................................ 36 
4.2.1.  Overall expected impacts of the chosen Option ......................................... 38 

4.3.  Conclusions ..................................................................................................... 39 

5.  HOW WILL PERFORMANCE BE MONITORED AND EVALUATED?....................................... 40 

5.1.  Monitoring: implementation based indicators ................................................. 40 
5.1.1.  Success indicators in the short term ........................................................... 40 

5.1.2.  Success indicators in the medium and long term ....................................... 41 

5.2.  Additional indicators collected from applicants .............................................. 42 
5.3.  Additional indicators collected from the EDTIB ............................................ 43 
5.4.  Monitoring and Evaluation reports .................................................................. 43 

ANNEX 1: PROCEDURAL INFORMATION ............................................................................................ 45 

Lead DG(s), DEcide Planning/CWP references ........................................................ 45 
Organisation and timing ............................................................................................ 45 
Consultation of the Regulatory Scrutiny Board ........................................................ 45 
Evidence, sources and quality ................................................................................... 46 
Bibliography ............................................................................................................. 46 

ANNEX 2: STAKEHOLDER CONSULTATION ....................................................................................... 52 

Identification of stakeholders .................................................................................... 52 
Consultation methods ................................................................................................ 52 
Analysis of feedback from the Open Public Consultation ........................................ 52 
Analyses of feedback from position papers and consultations .................................. 54 
Stakeholders not supporting the objectives of the Fund:.......................................... 54 

Stakeholders supporting the objectives of the Fund ................................................. 54 

ANNEX  3:  EXAMPLE  ILLUSTRATING  FRAGMENTATION  IN  THE  EU  DEFENCE 

INDUSTRY ........................................................................................................................................ 57 

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Glossary 

Term or acronym 

Meaning or definition 

CARD 

CDP 

CSDP 

EDA 

EDIDP 

EDTIB 

EIB 

EU 

IPR 

MFF 

OCCAR 

PADR 

PCP 

PESCO 

R&D 

R&T 

SMEs 

TFEU 

Coordination Annual Review on Defence 

Capability Development Plan 

Common Security and Defence Policy 

European Defence Agency 

European Defence Industrial Development Programme 

European Defence Technological and Industrial base 

European Investment Bank 

European Union 

Intellectual Property Rights 

Multiannual Financial Framework 

Organisation for Joint Armament Cooperation 

Preparatory Action on Defence Research 

Pre-Commercial Procurement 

Permanent Structured Cooperation 

Research and Development 

Research and Technology 

Small and Medium-sized Enterprises 

Treaty on the Functioning of the European Union 

1 

 
 
 
 
 
1. 

INTRODUCTION: POLITICAL AND LEGAL CONTEXT 

1.1. 

Scope and context 

1.1.1.  Geopolitical and economic context and EU defence policy initiatives 

The EU’s geopolitical context has changed dramatically in the last decade. The situation 
in Europe's neighbouring regions is unstable and the EU faces a complex and challenging 
environment combining the emergences of new threats like hybrid and cyber-attacks and 
the  return  of  more  conventional  challenges.  Faced  with  this  context  both  European 
citizens and their political leaders share the view that more has to be done collectively to 
defend ourselves. 75% of Europeans support a common defence and security policy (1). 
In the joint declaration of 25 March 2017 in Rome, leaders of 27 Member States and the 
European  Council,  the European  Parliament  and  the  European  Commission  stated   that 
the Union will strengthen its common security and defence and foster a more competitive 
and integrated defence industry. 

In light of the above, Member States agreed to step up the work of the European Union 
(EU) in this area with a number of initiatives. Processes have been put in place to identify 
and  prioritise  common  capability  needs;  notably  through  the  Capability  Development 
Plan  ('CDP')  (2).  To  help  identify  opportunities  for  new  collaborative  initiatives,  the 
Coordinated Annual Review on Defence ('CARD') (3) can play an important role through 
monitoring of national defence plans. Furthermore, in the context of the EU's Common 
Security  and  Defence  Policy  ('CSDP')  a  Permanent  Structured  Cooperation  ('PESCO') 
has  been  set  up  (4)(5)  to  deepen  defence  cooperation  among  Members  States  who  are 
capable and willing to do so. Currently 25 Member States participate, which have made 
binding commitments relating for example to investment levels on defence equipment or 
cooperation  to  improve  the  interoperability  of  forces.  Its  implementation  will  be  rolled 
out  progressively  (6).  Within  PESCO  participating  Member  States  can  carry  out 
cooperative  projects  (7)  in  the  key  areas  of  the  commitments  relating  to  capability 
development and CSDP operations and missions.  

Key to  the Union to  strengthen its common security and defence and to implement  the 
Union's CSDP is to have a defence research and industrial base that is able to deliver the 
innovative and future defence equipment and technologies Europe needs. 

1 Special Eurobarometer 461 (2017). 
2 The CDP is produced by the European Defence Agency to address long-term security and defence challenges. It looks 
at future security scenarios and makes recommendations about the capabilities European militaries will need to react to 
a  variety  of  potential  developments.  The  CDP  is  a  comprehensive  tool  providing  a  picture  of  European  military 
capabilities over time. 
3 This monitoring is currently in a trial phase ahead of a full implementation planned for autumn 2019. 
4 OJ L 328, 12.12.2017, p. 19.  
5 Article 42(6) and 46 and Protocol 10 of the Treaty on European Union. 
6 Council Recommendation of 6 March 2018 (6588/1/18) concerning a roadmap for the implementation of PESCO. 
7 Council Decision (CFSP) 2018/340 of 6 March 2018 establishing the list of projects to be developed under PESCO. 

2 

 
 
                                                 
1.1.2.  European Commission proposal: addressing the industrial angle 

To address the industrial angle, the Commission decided to contribute by making use of 
its competences and the tools available to it under the Treaty on the Functioning of the 
European Union (TFEU).  

In his 2016 State of the Union, President Juncker announced a European Defence Action 
Plan and the creation of a European Defence Fund.  

On  7  June  2017,  the  Commission  adopted  a  Communication  launching  the  European 
Defence  Fund  ('the  June  Communication')  (8)  that  consists  of  two  windows:  a  research 
window  and  a  capability  window.  Under  the  research  window  the  Fund  can  finance 
collaborative  research  in  innovative  defence  products  and  technologies.  Under  the 
capability  window  the  Fund  can  finance  collaboration  in  the  subsequence  development 
phases. To address some of the most common challenges that Member States face when 
jointly  acquiring  defence  capabilities,  tools  will  be  proposed  that  Member  States  can 
voluntarily  apply  ('the  Financial  Toolbox').  These  tools  do  not  entail  EU  budgetary 
spending, but are a mechanism for financial coordination. 

A two-step approach was proposed: firstly, to test the approach, initial financing for both 
research and development would be made available under the 2014-2020 Multi-Annual 
Financial Framework ('MFF'); secondly, a dedicated Fund would be established under the 
MFF 2021-2027 scaling up the funding for collaborative research in innovative defence 
products and technologies and for subsequent stages of the development cycle, including 
the development of prototypes.  

In  the  first  step,  the  Commission  launched  under  the  research  window  a  Preparatory 
Action on Defence Research ('PADR'), with a total expected budget of EUR 90 million 
(9) over three years, in April 2017.  Operational since 2017, it is in its early stages with 
first  grant  agreements  signed  end-2017  and  beginning  of  2018.  Under  the  capability 
window  the  Commission  proposed  a  Regulation  for  a  European  Defence  Industrial 
Development  Programme  (EDIDP)  2019-2020  with  a  budget  of  EUR  500  million.  The 
Council and the European Parliament reached a provisional agreement on the EDIDP on 
22 May 2018. The EDIDP is planned to become operational in 2019. 

The  current  legislative  initiative  for  the  European  Defence  Fund  post-2020  ('the  Fund') 
relates to the second step of financial support under the 2021-2027 MFF.  

It  is  part  of  the  Commission's  proposal  for  the  new  2021-2027  MFF  (10).  Under  this 
proposal, the Fund will have a budget of EUR 13 billion (current prices).  

8 European Commission, Communication on launching the European Defence Fund, COM (2017) 295 final.  
9  The  budget  of  2017  and  2018  has  been  committed;  the  budget  for  2019  has  been  requested  to  the  budgetary 
authorities. 
10 European Commission, Communication on the Multiannual Financial Framework for 2021-2027, COM (2018) 321 
final. 

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1.1.3.  Scope of the Impact Assessment  

This  Impact  Assessment  supports  the  proposal  for  a  Regulation  of  the  European 
Parliament  and  of  the  Council  establishing  the  European  Defence  Fund  for  the  period 
2021-2027. 

The  legislative  proposal  is  distinct  from  the  specific  programme  implementing  the 
Framework Programme for Research and Innovation ('Horizon Europe') that focusses on 
civil  applications.  A  separate  impact  assessment  was  carried  out  to  accompany  that 
specific programme.  

The  legislative  initiative  does  not  relate  to  the  Financial  Toolbox,  which  complements 
this  initiative.  For  example,  under  the    Financial  Toolbox  standardised  models  are 
developed to help organise the financial planning and implementation of the acquisition 
phase of collaborative projects, which can address problems stemming from the lack of 
synchronisation  of  budgetary  procedures  (11).  Member  States  may  draw  upon  these 
models to facilitate or structure the design of projects financed by the Fund.   

The Impact Assessment satisfies the requirements of the Financial Regulation in respect 
of preparing an ex-ante evaluation.   

1.2.  Lessons learned from previous programmes 

1.2.1.  Observations  from  first  implementing  experience  of  PADR  and  comparison  of 

modalities between PADR and EDIDP   

The programmes established under the current MFF have been in place for a limited time 
and therefore do not offer important opportunities to learn and take the experience into 
account in the preparation of this programme. 

The  preparatory  action  on  defence  research  was  launched  in  April  2017  with  a  total 
budget of EUR 90 million over three years. It has started to bring first concrete results, 
with the first grant agreements signed at the end of 2017 and beginning of 2018, but all 
projects are still ongoing.  

The  applicants  to  the  2017  calls  cover  a  wide  geographical  area:  entities  of  25  EU 
Member States and Norway applied, including a large number of unique applicants: 187 
in  total.  The  projects  selected  for  funding  include  participants  from  17  EU  Member 
States. In terms of type of applicants, the proposals include private sector, both large and 
small  industry,  SMEs,  public  bodies  and  research  centres  and  universities.  SME 
participation is at 30% in the proposals without the PADR imposing strict rules on SMEs 
participation. This  SME participation rate has  been  retained in  the projects selected for 
funding  with 32%  participation of SMEs with a budget  value of 14%. This  data shows 
that  the  calls  of  the  first  year  of  the  PADR  had  a  good  response  and  attracted  strong 
interest from the sector. From this good response rate, the preliminary conclusion can be 

11 The Cooperative Financial Mechanism (CFM) developed by the EDA is an example of such a mechanism. 

4 

 
                                                 
drawn that relevant defence topics have been addressed and generated substantial interest 
from the sector. 

The proposed EDIDP Regulation for 2019-2020 will have a budget of EUR 500 million. 
The co-legislators reached a compromise agreement on 22 May 2018. The EDIDP should 
be operational from 1 January 2019.  

The  compromise  agreement  found  has  shown  the  political  will  of  the  co-legislators  to 
rapidly agree on the budget, set-up and implementing modalities of a programme for co-
financing of the development of defence products and technologies. 

Furthermore, some observations can be made as to which extent the PADR and EDIDP 
(based on the text of the provisional agreement) are aligned and whether there is scope 
for further simplification and streamlining:  

Whilst  both  windows  provide  financial  assistance,  through  grants  and  procurement  of 
studies,  a  number  of  differences  exist  relating  to  their  operating  modalities  -  mainly 
linked to the eligibility of entities (e.g. those relating to the location of the establishment, 
control of the company), funding rates, Intellectual Property Rights ('IPR'), and specific 
incentives  relating  for  example  to  the  participation  of  Small  and  Medium  Sized 
Enterprises ('SMEs').   

Whilst some differences could be well justifiable, others are merely the result of the fact 
that  the  programmes  have  been  set-up  separately  and  of  the  outcome  of  the  different 
adoption  processes.  In  particular,  differences  in  the  eligibility  conditions  seem  less 
justifiable, as both windows have the same general objective.  

1.2.2.  Feedback from Stakeholders   

To  give  all  stakeholders  the  possibility  to  comment,  the  Commission  initiated  an  Open 
Public  Consultation  on  the  Fund,  as  part  of  a  larger  consultation  exercise  on  all  policy 
areas  covered  by  the  EU's  long-term  budget  for  2021-2027.  The  Open  Public 
Consultation  ran  from  13  January  2018  to  9  March  2018.  Through  the  dedicated  web 
portal several position papers have been received.  

Several Stakeholders also contributed with separate written input.  

Annex 2 provides a synopsis report of the Stakeholder consultation. 

Stakeholders have been reached that are directly affected by the Fund, such as Member 
States, Industry and Research Institutions. In addition, Stakeholders have been reached, 
like citizens and  Non-governmental  Organisations,  that  have an  opinion on the subject, 
but  are  not  direct  beneficiaries.  The  latter  group  includes  Stakeholders  that  are  very 
critical to the initiative putting forward arguments of an ethical nature and arguing that 
resources should be better spent on civil sector and peacekeeping initiatives.  

The directly affected Stakeholders supported the initiative: they commented on the topics 
to be financed and made suggestions on the structure of the Fund and funding modalities:  

5 

 
  Research  Institutions  and  Industry  argued  that  long/mid-terms  research  priorities 
should be prioritised (technology push and disruptive research) with a view to long-
term competitiveness of the sector and providing capabilities. 

 

Industry  argued  that  the  Fund  should  be  set  up  as  a  holistic  capability-driven 
approach  covering  the  whole  technology  cycle,  outside  the  Framework  Programme 
for  Research  and  Innovation,  on  the  basis  of  a  single  regulation.  The  Fund  should 
align as much as possible the modalities of the two windows.  

  On  IPR  rules,  Stakeholders  were  united  in  their views  that  specific  IPR models  are 
needed  for  defence.  Research  Institutions  argued  for  preserving  the  rights  of  all 
participants in the projects and not only large industry.  

  On funding rates, views were shared that funding rates need to take into account the 
specifics of the sector. Research Institutions argued for higher financial contributions 
for research up to 100% to better cover indirect cost notably related to infrastructures. 
The  report  from  a  Group  of  Personalities  on  the  Preparatory  Action  for  defence-
related  research  (Group  of  Personalities  Report)  (12)  advised  that  the  rules  of 
participation of Horizon 2020 needed to be adjusted to address defence specificities 
and  that  the  applied  25%  flat  rate  to  cover  indirect  costs  is  too  low.  An  industrial 
association confirmed that the current funding rates of PADR and EDIDP only cover 
around  50%  of  the  real  industrial  costs,  which  contrary  to  the  civil  sector,  is  not 
appropriate  for  defence  as  there  is  one  customer  who  determines  the  requirements, 
timetables and export markets. Defence companies cannot risk investing in research 
activities for a product that may never be acquired by the customer or exported. 

  Several inputs called for a simple, but flexible approach:  Research Institutions plead 
for  one  simple  cost  method.  An  industry  association  argued  in  favour  of  lean 
processes,  single-point  leadership,  a  single  set  of  specifications  and  strong 
commitment from Member States as regards acquisition. The Group of Personalities 
Report found that options for co-funding by Member States should be considered e.g. 
through models like Pre-Commercial Procurement ('PCP'). Also the use of financial 
instruments in cases where there are civil spin-offs or in case of testing facilities has 
been suggested.  

2.  CHALLENGES AND OBJECTIVES  

The  below  section  presents  the  current  situation  and  problems  that  the  Fund  aims  to 
tackle,  focusing  first  on  the  problem  drivers,  then  identifying  the  problems  and  their 
consequences and concluding with the elaboration of the Baseline scenario. The building 
blocks of this analysis are presented in the Problem Tree (Figure 1) (13).  

12 European Union Institute for Security Studies and European Commission (2016)  
13 The numbers or letters in square brackets in the text of the next section refer to the blocks of problems as presented 
on the Problem Tree. 

6 

 
 
                                                 
Figure 1: Problem tree 

2.1. 

Problems drivers 

2.1.1.  Increasing  costs  of  defence  equipment  and  high  R&D  costs  in  rapidly  evolving 

technology environment 

The defence sector  is characterised by  increasing costs of defence equipment and by 
high  R&D  costs  [1]  that  limit  the  launch  of  new  defence  programmes  and  directly 
impact on the competitiveness and innovation capacity of the EU industry.  

The costs of successive generations of defence goods increase at a rate that exceeds by 
far  the  average  inflation  rates  for  civil  products.  Estimations  of  intergenerational  cost 
escalation easily reach figures as high as 5% or even 10% per year in real terms (14). It is 
a long-term trend in the defence sector and finds its roots in technological competition in 
a  field  where  relative  performance  is  paramount  and  the  competition  and  innovation 
frequently takes place at the technology frontier which is immensely expensive (15).    

This trend exerts a key structuring effect on the defence sector: “… the resulting rate of 
cost  escalation,  being  much  faster  than  any  peacetime  budget  growth  (or  decline),  has 
been the primary determinant (via changing ratios of budget to unit costs) of the numbers 
and types of equipment procured and, thence, of both  military  and industrial  roles and 
structures” (16).  Costs rising at a pace that cannot be matched by an equivalent increase 
in defence equipment budgets has led to a falling number of units that national budgets 
can afford, a reduction in the length of the series produced, a limited capacity to tap on 
economies of scale and a lower frequency of new development projects.  

14 Kirkpatrick (1995) and (2004); Pugh (1986), (1993) and (2009); Hove & Lillekvelland (2016); and Nordlund (2016). 
15 Hove & Lillekvelland (2016). 
16 Pugh (1993), p. 179. 

7 

 
 
 
 
 
                                                 
The magnitude of R&D expenses in relation to the recurring costs is also a key factor in 
the defence sector. The share of development costs in acquisition costs may significantly 
depend  on  the  type  of  equipment  developed,  25%  being  considered  as  a  good  average 
indicator  (17).  The  ratio  of  R&D  costs  to  recurring  costs  of  defence  programmes  is 
considered several times higher than the corresponding ratio for civil programmes (18).  

To provide an order of magnitude, the development costs of the Eurofighter Typhoon to 
the four partner nations are estimated at more than EUR 20 billion (prices of 2012) (19). 
This  figure  is  33  times  higher  than  the  combined  yearly  defence  R&D  budgets  of  24 
European  Defence  Agency  ('EDA')  participating  Member  States  other  than  France, 
Germany and the UK and more than 333 times higher than the defence R&D expenses of 
a  medium-sized  Member  State  such  as  the  Netherlands.  With  cost  increasing  steeply 
between  successive  generations  of  defence  systems,  many  of  the  future  development 
programmes will be beyond the financial capacity of individual Member States.  

Limited  and  dispersed  investments  will  fail  to  produce  the  necessary  effects  as  critical 
mass thresholds would not be reached. Literature provides evidence of such critical mass 
effects showing that below a certain threshold “it is not optimal to invest any money” (20).  

In view of the cost escalation, 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 
major defence systems and of new defence technologies is increasingly beyond the reach 
of single EU Member States. The resulting difficulties are further increased by the recent 
trends in defence spending described below.  

2.1.2.  Cuts in defence spending 

The  situation  of  the  defence  sector  has  been  further  exacerbated  by  important  cuts  in 
defence budgets across Europe [2] in the past 10 years, affecting in particular R&D and 
equipment expenditures. Between 2006 and 2013 real defence expenditure levels in the 
EDA participating Member States were reduced by 12% (21). Defence R&D expenditures 
suffered  more  and  their  share  in  total  defence  expenditures  is  expected  to  be  4.2%  in 
2016 compared to 4.9% in 2006.  

The  most  drastic  cuts  have  affected  defence  the  early  stages  of  the  R&D  cycle  i.e.  the 
Research &Technology ('R&T') expenditure: accounting for EUR 2.7 billion in 2006 it is 
estimated at EUR 2.1 billion in 2016 (a reduction by more than 22%). Defence R&T’s 
share in total defence spending has fallen from 1.32% to estimated levels of only 1.06% 
in 2015 and 1% in 2016, which is half of the benchmark level agreed on by the EDA’s 
Ministerial Steering Board in November 2007. 

17 Mauro (2017). See also Pugh (2009) and Maulny et al. (2018). 
18 European Parliament (2016), p. 33. 
19  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 (2001).  
20 Setter and Tishler, (2006), p.150.  
21 European Defence Agency (2018). 

8 

 
 
 
                                                 
Figure 2: Defence R&T expenditures as percentage of total defence spending 

Source: European Defence Agency, 2018, p. 40. 

Considering that defence R&T is the basis for the development of the future cutting edge 
defence technologies, such trends are particularly worrying and pose a serious challenge 
to the capacity to maintain EU’s defence industry competitiveness over the long term. 

Defence  equipment  and  R&D  expenditures  in  the  EU  are  also  substantially  lower  than 
those  of  the  United  States.  Figure  3  below  shows  that  in  2011  defence  equipment 
procurement expenses in the EU were three times lower and defence R&D expenditures 
were seven times lower than those of the United States.  

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

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

Finally, in the defence sector it cannot be expected that a lack of publicly funded projects 
could  be  offset  by  an  increase  in  privately  funded  investments  (22).  The  demand 

22 See for instance EUISS and European Commission (2016), p.43. Moura (2011) provides figures for France showing 
that State funding is significantly more important for firms who receive defence State R&D funding (37% against 8% 
for all enterprises performing R&D) while the level of self-funding is much lower (20% against 73%).  

9 

 
 
 
 
 
                                                 
addressed  to  the  industry  comes  almost  exclusively  from  States  and  in  particular  from 
their defence national budgets. The sector is also subject to a strict regulation by the host 
States,  the  production  and  exports  of  armament  being  subject  to  specific  authorisation 
systems.  Sensitive  technology  transfers  are  also  controlled  and  specific  dispositions 
aimed  at  ensuring  security  of  information  and  security  of  supply  are  also  put  in  place. 
Unlike  most  civil  sectors,  there  is  therefore  no  market  demand  composed  by  a  large 
number of independent customers that industry can freely serve on its own initiative. In 
view  of  the  fact  that  demand,  and  therefore  investment,  is  entirely  driven  by  Member 
States,  the  industry  would  normally  not  embark  on  substantial  spontaneous  self-funded 
defence  Research  and  Technology  or  development  projects.  It  will  rather  work  on 
demand  for  a  State  which,  being  in  a  situation  of  monopsony,  will  be  funding  the  full 
R&D  costs  through  a  contract  for  the  procurement  of  these  services.  The  Group  of 
Personalities  Report  notes:  “The  defence  market  is  unique  and  does  not  follow  the 
conventional  rules  and  business  models  that  govern  more  traditional  markets,  such  as 
those  for  consumer  goods.  A  clear  example  is  that  the  prevailing  worldwide  model  of 
product  development  for  large  defence  systems  involves  national  governments  funding 
almost 100% of the R&T costs” (23.) An assessment of the origin of the R&D budgets of 
French  companies  (24)  also  puts  in  evidence  the  importance  of  public  funding  and  the 
very low levels of self-funding for the enterprises that received defence R&D funding.  

2.1.3.  Limited cooperation between Member States and few programmes linked to EU 

priorities 

Despite  the  interplay  between  increasing  costs  and  decreasing  spending,  defence 
planning  and  defence  spending  on  R&D  and  procurement  of  equipment  has  remained 
largely  at  national  level  with  very  limited  cooperation  between  Member  States  in 
defence  equipment  investments  [3].  Additionally,  when  implemented,  only  few 
programs are also linked to EU capability priorities [3].  

Weak levels of collaboration are extremely worrying in a longer-term perspective: "static 
defence budgets and low equipment spending means that a competitive defence industry 
is not sustainable on a national basis anymore" (25). 

In  2015  only  16%  of  equipment  was  procured  through  European  collaborative 
procurement, far away from the agreed collective benchmark of 35% (Figure 4). This is 
the  second  worst  performance  observed;  while  the  best  level  attained  (2011)  was  still 
more than 10 percentage points short of the benchmark level.  

23 EUISS and European Commission (2016), p.43 
24 Moura (2011).  
25 European Union Institute for Security Studies (2007). 

10 

 
 
 
 
 
 
                                                 
Figure  4:  European  collaborative  defence  equipment  procurement  as  a  percentage  of  defence  equipment 
procurement [%] 

Source: European Defence Agency, 2018, p. 40. 

The share of European collaboration in defence R&T (estimated level for 2015 of only 
7.2%)  is  also  very  far  from  the  agreed  collective  benchmark  of  20%.  Since  2012 more 
than 90% of defence R&T has been run on a national basis. 

Figure 5: European collaborative defence R&T as a percentage of defence R&T spending [%] 

Source: European Defence Agency, 2018, p. 40. 

Several reasons can explain the reluctance of Member States to step up cooperation. 

First,  Member  States  may  desire  to  preserve  full  sovereignty  as  regards  some  types  of 
capabilities  and  therefore  attempt  to  keep  a  completely  independent  national  industrial 
capacity to sustain the latter. Considering however cost escalation and budgetary trends, 
cooperation has no viable alternative but for a very restricted set of areas.  

11 

 
 
 
 
 
Second, experience with past collaborative projects points to issues that can increase the 
costs  and  reduce  the  net  benefits  of  collaborative  projects  in  comparison  with  an 
equivalent one-nation project (26).  It should  however be noted that, even by taking into 
account  that  collaborative  projects  can  imply  additional  costs  compared  to  equivalent 
theoretical national projects, the development costs are shared amongst the participants. 
The  financial  burden  that  falls  on  the  individual  participating  Member  States  in  a 
collaborative programme is thus lower than if they had to undertake the development in 
isolation (27). This enables in particular the realisation of large projects that would not be 
affordable  for  a  single  Member  State,  as  well  as  achieving  higher  scales  of  production 
leading to lower unit costs. 

As  regards  the  difficulties  experienced  in  past  defence  collaboration  programmes,  the 
following elements can be noted. The governance of collaborative programmes is more 
complex  and  requires  an  additional  layer  of  discussions  and  negotiations  to  take  place 
and higher levels of transactions costs to be supported. Issues linked to a lack of common 
defence planning and of synchronisation of capability procurement policies and calendars 
between Member States have often limited or prevented the possibility for collaboration 
(28).  Problems  with  the  synchronisation  of  budgetary  procedures  also  have  a  negative 
impact  on  collaborative  projects  (29).  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 
(“juste  retour”  principle).  Duplications  are  thus  not  entirely  avoided  and  work  is  often 
not allocated in most efficient way.  

Last, but not least, the difficulty in defining common technical specifications has been a 
major  issue  (30).  Failure  to  harmonise  requirements  increases  the  system’s  complexity, 
inflates  costs  and  causes  delays.  It  reduces  the  benefits  of  collaboration  as  low 
commonality  has  also  negative  effects  on  economies  of  scale.  It  even  can  make 
collaboration  impossible  (31).  Standardization  and  interoperability  are  thus  reduced.  
Difficulty  in  agreeing  on  common  technical  specifications  can  be  the  result  of  national 
differences  stemming  from  diverging  doctrines,  assessments  of  needs  and  operational 

26 Comparing real collaborative and national projects does not provide clear evidence of an efficiency disadvantage of 
the former, the latter being also frequently affected by important cost overruns and delays. 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. Hartley (2018) looks at a limited sample of projects and notes that it 
shows  “national  projects  with  higher  cost  increases  compared  with  collaborative  projects  and  similar  delays”. 
Heuninckx (2008) also confirms that once collaborative defence procurement has been launched the cost overruns and 
delays of collaborative projects and similar national projects appear comparable. 
27 See for instance Hartley (1993). A recent report from the French Court of Auditors also underlines the importance of 
sharing development cost though collaborative programmes (Cour des Comptes 2018). 
28 In the 1980s 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 later (European Union Institute for Security 
Studies 2007). 
29 In some cases countries has to pay temporarily on behalf of other participating States facing issues with budgetary 
approval procedures (European Union Institute for Security Studies 2007). 
30 In the Tiger helicopter project two substantially different versions were developed to respond to respectively French 
and German specifications (European Union Institute for Security Studies 2007). The NH-90 helicopter has 22 versions 
and 60 standards thus significantly reducing the financial benefits of collaboration (Cour des Comptes 2018). 
31 The reasons for decision of the UK to withdraw from the Horizon frigate project included the impossibility to agree 
to common specifications with the other participating Member States (European Union Institute for Security Studies 
2007). 

12 

 
                                                 
requirements,  but  also  national  industrial  interest  can  be  a  motive.  When  capability 
priorities  are  commonly  agreed  at  the  EU  level,  notably  through  the  CDP  and 
implemented  under  PESCO,  a  higher  degree  of  convergence  regarding  the  above-
mentioned  elements  can  be  expected.  This  should  make  the  definition  of  common 
technical specifications easier. However, such joint definition of capability priorities has 
not  yet  been  sufficiently  prioritised  by  Member  States,  while  critical  shortages  of  key 
enablers, such as air-to-air refuelling and strategic lift have become apparent (32) and the 
need “to invest adequately” in a large area of key capabilities has been recognised by the 
Council of the European Union (33). 

2.2. 

Problems that the Fund aims to tackle 

The  roots  causes  described  above  challenge  the  capacity  of  the  EU  defence  industry  to 
sustain 
its 
competitiveness and leadership.   

technological  capabilities  necessary 

industrial  and 

to  preserve 

the 

2.2.1.  Few projects along the entire cycle of capability development 

A  first  major  consequence  of  increasing  costs,  defence  spending  cuts  and  limited 
cooperation  between  Member  States  is  the  general  lack  of  opportunities  in  terms  of 
new  major  defence  technological  and  industrial  projects  [A],  including  a  lack  of 
European  collaborative  programmes  (34).  Such  a  situation  puts  the  EU  industry  at  a 
serious disadvantage in a sector characterised by strong competition on technology and a 
high importance of R&D activities.  

The  cuts  in  defence  R&T  have  substantially  reduced  the  overall  opportunities  for 
scientists  to  deploy  efforts  in  this  field.  Lack  of  investments  pose  a  threat  even  in  the 
short term: troops deployed in mission often face new or unexpected threats which call 
for a quick generation of innovative solutions. This however “requires investing ex ante 
in a large scope of technological bricks, with the relevant funding to deliver appropriate 
performance and to be able to combine these bricks into new capabilities” (35).  

Moreover, in the long run the EU defence industry faces the serious threat of not being 
able  to  develop  the  technologies  of  the  future.  As  noted  in  the  Group  of  Personalities 
Report  "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 
reinforcement of industrial competitiveness and employment opportunities" (36). 

the  preservation  of  operational  and 

technological  advantage, 

The  potential  negative  effects  of  reduced  opportunities  to  engage  in  defence-related 
research are indeed not limited to the defence sector only. Defence research, in particular 
of  explorative  and  forward-looking  nature,  can  also  be  at  the  origin  of  major 

32 European Political Strategy Centre (2015). 
33 Council of the European Union (2016), p. 8. 
34 European Union Institute for Security Studies and European Commission (2016). 
35 Bellais (2018). 
36 European Union Institute for Security Studies and European Commission (2016), p.43. 

13 

 
                                                 
technological  breakthroughs.  Focused  on  technological  superiority,  rather  than  on 
profitability, defence research can play a specific role in the process of innovation and is 
often at the origin of major spin-off effects in the civilian economy (37).  

The  difficulties  that  the  sector  faces  are  even  more  substantial  as  regards  defence 
development  projects  through  which  technology  needs  to  transition  towards  final 
products  and  technologies.  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 is a 
lengthy  process  that  entails  important  technical  and  financial  risks  that  individual 
Member States may not assume 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.  At  the  development  stage  the  distance  to  the  acquisition  phase  is  shorter, 
which  requires  a  high  degree  of  customisation  to  the  needs  of  a  specific  client.  From 
industry’s point of view this implies high level of asset specificity and substantial sunk 
costs. The funding will be normally expected to come from the client.     

2.2.2.  Fragmentation and lack of collaboration between undertakings  

Limited collaboration of Member States in defence implies duplications and results in a 
defence  industry  that  remains  highly  fragmented  along  national  borders  [B].  The 
lack of integration on the demand side of the market, i.e. between Member States, 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  a  study  (38)  notes  that  five 
companies show a share of domestic sales in their turnover that is above 50% and for a 
majority of 20 companies the proportion varies in the interval 20%-50%. 

While  Europe  spends  three  times  less  on  defence  procurement  and  seven  times  less  on 
defence  R&D,  there  are  36  defence  platforms  and  systems  in  production  in  Europe 
against  only  11  in  the  US  (39).  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 

37  See  for  instance  Bellais  (1999).  The  author  also  notes  that  project  failure  should  not  be  necessarily  negatively 
perceived in the field of defence research: it provides a degree of reassurance that a given technological field cannot be 
usefully exploited by a potential adversary to achieve a military advantage. 
38 Masson (2015). 
39 Briani (2013b). Fragmentation is the highest in the land segment with 17 open production lines in the EU against 2 
in the US. In the naval segment the ratio is 5 to 1, while the air segment is more balanced. 

14 

 
                                                 
obtain  a  narrower  range  of  military  capabilities  in  a  less  productive  and  innovative 
industry" (40).  

Resulting duplications prevent the industry from achieving optimal size of production as 
comparatively small national markets are served in isolation following the prevalence of 
a  “systematic  bias  in  favour  of  a  domestic  solution”  and  “a  domestically  oriented 
organization of R&D” (41). 11 armoured infantry vehicles and personnel carriers are for 
instance in production in Europe (42). 

Combat  aircrafts  provide  another  illustration  of  the  fragmentation  of  the  EU  defence 
industry,  of  the  economies  and  efficiency  gains  foregone  as  a  consequence  and  of  the 
resulting  impact  on  industry’s  competitiveness.  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 field (43) noted that the total R&D 
costs  of  the  three  European  projects  together  largely  exceed  those  of  the  US-led  Joint 
Strike  Fighter  F-35  programme  while  the  total  expected  output  is  almost  1,800  units 
lower  and  divided  between  three  different  aircrafts  which  significantly  reduces  the 
economies of scale and learning.  

Annex 3 provides a more detailed assessment of this case. It shows that if only one of the 
three  above-mentioned  European  aircrafts  had  been  developed  and  had  realised  sales 
equivalent  to  those  of  the  existing  three  programmes,  the  R&D  cost  per  unit  produced 
could have been reduced by 41 to 76%. This very simple comparison only takes account 
of the distribution of R&D costs over a larger production scale, but ignores the effects of 
the other sources of economies of scale and learning.  

Existing  research  clearly  shows  that  the  expected  positive  impact  of  increased  scale  of 
production on the cost-effectiveness of the industry can be very 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 level (44). 

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 EU level but have often led to 
the  creation  of  “multi-domestic”  companies  (45).  Nor  has  the  prevalence  of  rigid  work-
share  arrangements  based  on  the  “juste  retour”  principle  allowed  achieving  the  full 
potential  of  cooperative  programmes  to  reduce  duplications  and  market  fragmentation. 
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. 

40 Briani (2013b) p.2. 
41 Bellais (2018). 
42 Briani (2013b) p.3. 
43 Briani (2013a).  
44  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%. 
45 Bellais & Droff (2013). 

15 

 
                                                 
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” (46). 

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 cross-border 
access to the defence industry supply chains. The latter have been predominantly set up 
on  a  national  basis  (47).  Access  for  new  suppliers,  especially  for  those  located  in  other 
Member States, remains limited (48) leading to low levels of cross-border engagement in 
the  defence  industry’s  supply  chains.  Dependence  on  defence  markets  is  shown  to 
substantially  and  negatively  affect  the  propensity  of  system  integrators  to  resort  to 
foreign  suppliers  (49).  Data  provided  by  the  Organisation  for  Joint  Armament 
Cooperation  ('OCCAR')  regarding  defence  programmes  managed  by  the  organisation 
(50),  estimates  that  approximately  5.6%  of  the  value  of  the  work  performed  in 
programmes  goes  cross-border:  2.4%  of  the  total  workshare  goes  cross-border  between 
the 12 States participating in Programmes managed by the OCCAR (51) and 3.2% goes to 
other States.  

Obstacles to the cross-border access to defence supply chains pose a serious challenge for 
a  large  number  of  companies  for  which  this  is  the  only  access  to  the  market.  These 
companies represent the vast majority of enterprises involved in the defence industry as it 
is  estimated  that  the  top  Tier  accounts  for  only  2%  of  the  companies  in  the  overall 
industry  supply  chain  (52).  The  Final  Report  of  the  European  Commission  Advisory 
expert  group  on  cross-border  access  for  SMEs  to  defence  and  security  contracts 
('Advisory  Group  Report  on  cross-border  access  for  SMEs')  explicitly  recognised  that 
“the  issue  of  cross-border  market  access  and  open  supply  chains  is  considered 
particularly important for the functioning of the European Defence Equipment Market” 
(53).  The  existence  of  important  barriers  to  cross-border  engagement  in  the  defence 
supply chains is also clearly recognised by a recent study (54).    

Barriers to the cross-border participation in the supply chains have particularly negative 
effects on SMEs’ capacity to take full benefits of 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” (55).  

46 European Parliament (2013) p.47. 
47  Constraints  to  cross-border  engagement  may  for  instance  originate  in  reasons  pertaining  to  national  autonomy, 
protection  of  the  ownership  of  defence  technology  and  associated  spillovers,  employment  generation  and  economic 
barriers  such  as  higher  costs  of  organisation  and  administration,  transaction  and  search  costs  (Europe  Economics 
2018). 
48 See for instance Ianakiev & Mladenov (2008); Ianakiev (2014).  
49 Oudot (2017). 
50 Data is based on a total of EUR 57.7 Billion, economic conditions March 2018 and relies on the Global Balance data 
collected by the OCCAR that allows comparison between the workshare and the cost share of Participating States in a 
Programme. 
51 States participating in and spending money on an OCCAR Programme. 
52 IHS (2016), p.25.  
53 European Council (2016), p. 7.  
54 Europe Economics (2018). 
55 European Parliament Resolution 2013/2125(INI), point 31. 

16 

 
                                                 
SMEs  play  an  important  role  in  the  defence  industry  and  are  “a  key  enabler  for 
competitiveness” (56). They have recognised strengths such as flexibility, innovativeness 
and specialised knowledge (57). A recent study (58) identified almost 1,600 SMEs active 
in  the  defence  sector  in  Europe  and  estimated  the  total  number  of  SMEs  in  defence 
supply chains at 2,000-2,500. 

Data  on  their  involvement  is  however  scarce.  It  is  estimated  that  they  account  for 
between 11 and 17 per cent share of the estimated defence equipment sales in the EU (59). 
The  share  however  varies  significantly  across  Member  States  and  segments.  Studies 
report a lower participation of SMEs in the sector compared to the manufacturing sector 
in  general  (60).  Defence  R&D  expenditures  appear  to  be  more  concentrated  in  large 
enterprises comparatively to other sectors, but SMEs active in the defence sector appear 
to be investing more in R&D that other SMEs (61). Data on the participation of SMEs in 
defence R&D projects is extremely limited (62).   

SMEs  in  particular,  but  also  suppliers  in  general,  assume  increasing  responsibilities 
through  the  extension  of  the  use  of  risk-sharing  partnerships  by  the  large  system 
integrators  where  the  costs  and  risks  of  development  are  distributed  across  system 
integrator  and  partners  in  its  supply  chain  (63).  System  integrators  may  also  exert  their 
market  power  to  extract  harsh  financial  conditions  from  suppliers  thus  limiting  the 
"cascading"  of  R&D  funding  down  the  supply  chain  (64).  Defence  SMEs  also  face  a 
number of additional challenges: 1) they suffer from important information problems (65); 
2)  they  face  difficulties  in  access  to  finance  (66);  3)  they  suffer  much  more  from 
administrative  burden  and  costs  (e.g.  related  to  IPR  protection);  4)  they  need  to  obtain 
quick return on investment (67). Mid-caps are also affected by some of these issues, but to 
a more limited extent than SMEs (68).  

The  problems  described  above  have  led  to  a  situation  where  the  defence  industry  in 
Europe  faces  a  serious  threat  of  losing  its  innovative  capacity  and  technological 
superiority in global competition [C]. Europe’s capacity to develop and produce high-
tech systems needed for its defence is thus threatened. 

56 European Commission Advisory Group Report (2016), p. 3. 
57 See for instance Europe Economics (2009b) and Europe Economics (2018). 
58 IHS (2017). 
59 Europe Economics (2009b). 
60 Europe Economics (2009a), Europe Economics (2009b) and Moura & Oudot (2016).  
61 Moura & Oudot (2016). 
62 Europe Economics (2018). 
63 European Commission Advisory Group Report (2016). 
64 Bellouard & Fonfria (2018). 
65 E.g. difficulties in obtaining information on future capability requirements and business opportunities, but also a lack 
of  visibility  to  large  companies,  in  particular  in  a  cross-border  context,  which  results  in  the  presence  of  important 
search and switching costs and of a preference for existing suppliers or suppliers closely located to the contractor (see 
for instance Europe Economics (2018), Ianakiev & Mladenov (2008); Ianakiev (2014). 
66 Europe Economics (2009b) and (2018), Bellouard & Fonfria (2018). 
67  European  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".  "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. 
68 Europe Economics (2018). 

17 

 
                                                 
2.3.  Baseline scenario  

As explained above, the current trends and identified problems and their drivers have not 
been  reversed  nor  is  it  likely  that  they  will  be  in  the  near  future.  The  existence  of 
cooperative mechanisms, such as under the EDA, have not been sufficient to reverse this 
overall  trend  of  diminishing  volumes  of  R&D  cooperation.  Whilst  initiatives  like  CDP 
and  CARD  address  some  of  the  previously  identified  issues,  notably  by  identifying 
priority European defence capability gaps and scope for coordination of defence planning 
and  cooperation,  and  whilst  PESCO  offers  a  new  framework  for  cooperative  projects 
between Member States, these initiatives neither specifically address the industrial angle, 
nor do they include funding to incentivise collaborative projects.  

Under the status quo (Baseline Scenario) the EU budgetary support under a small-scale 
PADR with an annual budget of around EUR 30 million focussing on a limited number 
of key research projects and under the EDIDP with an annual budget of around EUR 250 
million would continue until 2027. 

Given the costs of collaborative defence R&D projects and the long lifecycle of defence 
equipment, it is unlikely that these two small scale actions would be sufficient to bring 
about  a  sustainable  and  long-term  change  in  the  level  of  industrial  cooperation  and 
innovative  capacity  of  European  defence  industry.  Main  problems  identified  would  not 
be  sufficiently  addressed;  collaborative  investments  in  defence  R&D  projects  would 
remain comparatively limited.  

Furthermore, the identified differences between the two programmes would continue to 
exist, thereby foregoing scope for simplification and alignment and not responding to the 
wishes of many Stakeholders.   

Whilst other funding programmes under the 2021-2027 MFF are also to a certain extent 
accessible  for  defence  companies,  they  would  not  bring  about  the  required  change,  as 
they will not explicitly address the defence-specific problems described above. In case of  
EU  financial  instruments  limitations  apply  based  on  the  European  Investment  Bank's 
('EIB')  lending  conditions  excluding  the  involvement  in  sectors  as  ammunition  and 
weapons as well as military/police equipment or infrastructure (69). 

The Baseline Scenario is therefore not the optimal scenario. 

69  In  response to  the  European  Council call  of  19 October  2017  on  the EIB to  examine  further  steps  with a  view  to 
supporting  investments  in  defence  research  and  development  activities,  the  latter  approved  in  December  2017  the 
"European Security Initiative - Protect, Secure, Defend". As part of it the EIB will strengthen its support for Research, 
Development and Innovation for dual-use technologies, cybersecurity and civilian security infrastructure. The objective 
set  by  the  EIB  is  ambitious  as  it  targets  EUR  6  billion  in  total  financing  for  these  sectors  for  the  coming  3  years 
compared to the same envelope for the period between 2001 and 2016. The EIB's list of areas excluded from financing 
remains however unchanged. 

18 

 
                                                 
2.4.  Complementarity  with  other  MFF  programmes  and  Union's 

initiatives  

The implementation of the Fund will  take place in  close  coordination with  activities of 
the Commission and the High Representative for Foreign Affairs and Security Policy in 
the area of defence, including the Financial Toolbox. There will be close links between 
the Fund and projects implemented in the framework of PESCO.  

In  order  to  ensure  coherence  and  complementarity  in  the  promotion  of  the  defence 
interests  of  the  Union,  under  the  2021-2027  MFF  the  Commission  will  seek  to  ensure 
synergies with other EU initiatives in the field of civil R&D, such as security and cyber 
security, border control, coast guard, maritime transport and space.  

In particular synergies should be sought with:   

-  the  specific  programme  implementing  Horizon  Europe  with  a  focus  on  civil 
applications,  so  that  results  from  defence  R&D  will  benefit  civil  R&D  and  vice-versa. 
The  Fund  only  finances  defence  R&D  actions  aimed  at  supporting  the  capacity  for 
innovation and competitiveness of the defence industry in relation to high-tech defence 
systems. The Fund does not support pure basic research, which should be supported by 
other schemes, but it may include defence-oriented basic research likely to form the basis 
of  the  solution  to  recognised  or  expected  problems  or  possibilities.  The  projects  to  be 
financed by the Fund may thus benefit from the results of research projects funded under 
Horizon  Europe.  Results  from  Horizon  Europe  could  be  used  for  additional  defence-
oriented  research  and  development  activities  under  the  Fund,  given  that  defence 
applications have stricter certification and security requirements; 

-  the  Union  space  programme,  in  particular  its  components  Governmental  Satellite 
Communication (GOVSATCOM), Space Surveillance and Tracking Support (SST) and 
Copernicus.  This  may  be  done  notably  by  ensuring  technical  compatibility  where  the 
projects  make  use  of  global  navigation  satellites  system  (GNSS)  and  GOVSATCOM 
capabilities. This may also be done by developing upgraded sensors, exchange platforms 
for  classified  data,  applications  based  on  data  or  information  and  services  that  are 
provided by the space programme's components; 

-  EU  initiatives  in  the  field  of  cybersecurity;  such  as  those  announced  in  the  Joint 
Communication on cybersecurity (70). In particular the cyber security competence centre 
to  be  set  up  should  seek  synergies  between  the  civilian  and  defence  dimensions  of 
cybersecurity.  It  could  actively  support  Member  States  and  other  relevant  actors  by 
providing advice, sharing expertise and facilitating collaboration with regard to projects 
and actions as well as when requested by Member States acting as a project manager in 
relation to actions under the European Defence Fund; 

70  Such as those announced in the 2017 Joint Communication "Resilience, Deterrence and Defence: Building strong 
cybersecurity for the EU. The Joint Communication in particular notes that: “The high level of resilience required in 
cyber  defence  calls  for  specific  targeting  of  research  and  technology  efforts.”  It  also  notes  that  “The  cyber  defence 
projects or technologies developed by undertakings could benefit from European Defence Fund”. 

19 

 
                                                 
-  the  actions  identified  under  the  coordinated  civil  military  maritime  security  research 
agenda and with maritime transport, and; 

-  other  relevant  EU  programmes  in  the  field  of  security,  such  as  the  Internal  Security 
Fund and the Integrated Border Management Fund.   

The  Fund  also  complements  defence  activities  implemented  through  the  Connected 
Europe  facility  (as  regards  military  mobility)  and  the  European  Peace  Facility,  an  off-
budget instrument proposed outside the MFF. 

The defence sector has been proposed as an eligible sector for support through budgetary 
guarantees under the InvestEU Fund which is put forward as a cross-sectoral and over-
arching framework supporting investment in various policy fields, underpinned by an EU 
budgetary guarantee.  

Financial  instruments,  which  may  take  the  form  of  equity  or  quasi-equity  investments, 
loans or guarantees, targeting the defence sector are not in place under the current MFF. 
Their future deployment under the InvestEU Fund will thus make an important addition 
to  the  actions  supported  under  the  Fund,  also  considering  the  budgetary  efficiency  of 
these instruments. Financial instruments reduce financial risk, but contrary to grants, cost 
sharing is limited to situations in which risks materialise. 

The  possibility  to  use  financial  instruments  for  defence-specific  research  activities  is 
more limited as market uptake is usually not imminent and the specificities of the sector 
imply important difficulties in estimating the possibilities for the technology to be met by 
demand.  However,  financial  instruments  for  defence  development  projects,  which 
involve  very  substantial  costs  and  important  risks,  could  be  possibly  useful  to  support 
projects  in  specific  situations  where  for  instance  important  civil  spin-offs  or  large 
volumes of sales to other States are foreseen.  

Also  the  availability  of  financial  instruments  can  be  important  if  despite  EU  funding 
being provided at the top levels of the supply chains, severe constraints are still present 
hampering participation by suppliers located down the supply chains (71). This may put 
some suppliers in a situation where they need to wait for the production phase to recover 
R&D investments made for the project (72) with all the additional risks that this implies 
(73). Budgetary guarantees can be a fiscally efficient way to address risks in the supply 
chain and could facilitate its participation in individual projects by addressing the risks or 
capital funding bottlenecks encountered at that level (74).  

71 Such constrains may stem from acknowledged disadvantages of SMEs engaging in defence-specific R&D to access 
finance that may be particularly acute for SMEs and mid-caps (Europe Economics (2009), Europe Economics (2018)). 
The difficulties encountered can be further reinforced by the increased reliance on risk-sharing partnerships and even 
the of exercise of market power by Prime contractors. 
72 Bellouard & Fonfria (2018). 
73 For instance, Member States, as a sole client, may decide not to proceed with the production phase, or the supplier 
may not be retained in that phase. 
74 Unless such needs are already sufficiently covered by horizontal EU financial instruments whose availability may 
increase in case of a change of the restrictions to the lending or investment policy of the EIB or if other institutions are 
granted access to EU-supported Guarantee Funds in the future. 

20 

 
                                                 
The extent to which financial instruments can be applied depends on the extent to which 
limitations  continue  to  be  applied  in  the  lending  policy  of  financial  intermediaries 
(notably the EIB) towards defence-specific activities (75).   

To  enable  full  synergies  to  be  exploited,  it  is  proposed  to  introduce  the  possibility  of 
blending support under the Fund with the provision of financing backed by the Invest EU 
Fund.  

The  possibilities  for  deployment  of  financial  instruments  in  the  defence  sector  are 
amongst the elements explored in the framework of the Financial Toolbox developed by 
the  Commission  together  with  Member  States.  More  generally,  the  Financial  Toolbox, 
which  is  separate  from  the  current  legislative  proposal,  aims  to  further  facilitate  joint 
development  and  acquisition  of  defence  capabilities  through  the  standardisation  of  EU 
and  national  financing  mechanisms  ranging  from  pooling  to  joint  ownership.  The 
financing  models  for  capability  acquisition  included  in  the  Financial  Toolbox  can  also 
serve as a voluntary reference for Member States wishing to jointly procure the products 
and technology developed through the European Defence Fund and the Commission will 
thus ensure that the full potential for synergies is achieved.  

2.5.  Objectives and eligible actions 

The  Fund  will  support  and  incentivise  collaborative  defence  research  and  development 
projects  in  the  EU  by  providing  funding  from  the  EU  budget,  thus  contributing  to 
addressing  capability  shortfalls  in  the  EU.  The  intervention  aims  at  funding  the  entire 
cycle  of  collaborative  research  and  development  of  cutting  edge  defence  technologies 
and systems for modern armament and equipment programmes.  

The  Fund  finances  projects  in  line  with  capability  priorities  commonly  agreed  by 
Member States within the EU within the framework of the CSDP. 

2.5.1.  General objective 

In  the  above  context,  the  general  objective  is  to  foster  the  competitiveness,  efficiency 
and  innovation  capacity  of  the  European  defence  industry,  by  supporting  collaborative 
actions  and  cross-border  cooperation  between  legal  entities  throughout  the  Union, 
including SMEs and mid-caps as well as fostering the better exploitation of the industrial 
potential  of  innovation,  research  and  technological  development,  at  each  stage  of  the 
industrial, thus contributing to the freedom of action of the Union and its autonomy, in 
particular in technological and industrial terms. 

2.5.2.  Specific objectives 

Two specific objectives can be defined relating the research and development actions. 

75 Alternatively, the possibility of enlarging access to the relevant Guarantee Funds to institutions which are not bound 
by such restrictions could be contemplated. The viability of the latter possibility will however depend to some extent 
on the ability of such institutions to ensure equal access to the relevant financial instruments across the EU. 

21 

 
                                                 
(a) 
Support  collaborative  research  projects  that  could  significantly  boost  the 
performance of future capabilities; aiming at maximising innovation and introducing new 
defence products and technologies, including disruptive ones;   

(b) 
Support  collaborative  capability  development  projects  of  defence  products  and 
technologies consistent with defence capability priorities commonly agreed by Member 
States  within  the  framework  of  the  Common  Foreign  and  Security  Policy,  thus 
contributing to greater efficiency in defence spending within the Union, achieving greater 
economies of scale, reducing the risk of unnecessary duplication and as such reducing the 
fragmentation  of  defence  products  and  technologies  throughout  the  Union.  Ultimately, 
the Fund will lead to greater interoperability between Member States' capabilities. 

2.5.3.  Actions to be financed to achieve the general and specific objectives 

The scope of the actions will include actions from the lower level of maturity (upstream 
technology)  up  to  the  higher  levels  resulting  in  development  and  as  such  take  into 
account short-, mid- and long-term capability needs. The scope of the actions should thus 
range  from  research  in  critical  defence  technologies,  future  and  emerging  disruptive 
technologies,  defence  technology  demonstrators,  the  feasibility  and  definition  stage, 
design, prototypes, testing and up to standardisation/certification.  

To  support  and  leverage  cooperation,  only  collaborative  cross-border  actions  should  be 
financed consisting of consortia of at least three entities based in at least three different 
Member States. 

Given  the  Fund's  general  objective  of  fostering  the  European  defence  industrial  and 
scientific  base,  only  legal  entities  established  in  the  Union  or  associated  countries 
should be eligible for support. To ensure the protection of essential security interests of 
the Union and its Member States, the infrastructure, facilities, assets and resources used 
by the beneficiaries and their subcontractors in actions supported by the Fund should not 
be  located  on  the  territory  of  non-EU  States/associated  countries.  Beneficiaries  of  the 
Fund and their subcontractors should not be subject to control by a third country or third 
country entities. The Regulation frames exceptions, which are subject to conditions being 
met.  

In  view  of  the  observed  negative  effects  in  case  of  a  failure  to  agree  on  common 
technical specifications, this should be a condition in order to benefit from the Union's 
support  as  regards  in  particular  prototypes.  Also  the  intention  of  Member  States  to 
procure,  including  in  the  form  of  joint  procurement,  the  final  product  or  use  the 
technology  is  a  requirement  for  actions  concerning  prototyping  or  later  development 
stages.  

Figure 6 illustrates the objectives and conditions as regards the actions to be financed by 
the Fund. 

22 

 
 
 
Figure 6: Objectives and actions  

•foster an innovative and competitive European industrial and scientific base to 
meet Europe's priority defence capability needs by supporting collaborative 
research and development actions between legal entities, including SMEs and mid-
caps 

general 
obejctive 

specific 
objecitives  

eligible 
actions  

•support collaborative research projects of defence products and technologies 
•support collaborative capability development projects of defence products and 
technologies 

• (scope): full R&D cycle from defence-oriented basic research up to  certification. 
•(consortia): at least three entities based in at least three different Member States 
•(geographic): Union or associated countries 
•(entities) In principle Union and associated countries controlled entities.  
•(as of prototype stage) intention from buyers to procure, including through joint 
procurement  
•(as of prototype stage) actions based on common technical requirements  

3. 

PRIORITIES, RIGHT TO ACT, BUDGETARY AMOUNT  

3.1. 

Prioritising actions 

The  priorities  for  research  and  capability  development  will  be  essentially  based  on  the 
input  from  Member  States,  which  set  the  defence  priorities  in  the  framework  of  the 
CSDP  (76).  The  Fund  will  be  informed  by  the  priorities  identified  notably  through  the 
CDP and will take into account CARD, notably as regards the implementation of these 
priorities and the identification of new cooperative opportunities. Through this process, 
Member  States  will  be  incentivised  to  compare  and  define  their  projects  and  find 
common ground.  

The  priorities  for  funding  will  be  defined  in  the  annual  or  multi-annual  work-
programmes  drafted  by  the  European  Commission.  The  work  programme  will  take  the 
form  of  implementing  acts  that  will  be  adopted  in  line  with  comitology  procedures, 
where  on  a  proposal  by  the  Commission,  a  Programme  Committee  of  Member  States 
votes  by  qualified  majority.  Given  its  specific  role  in  the  EU  Treaty  in  supporting  the 
CSDP  policy,  the  EDA  will  have  an  observer  status  to  provide  its  views  and  expertise 
and the European External Action Service will be invited to assist. 

Once  adopted  the  work  programme  will  be  implemented  through  projects  normally 
selected with the help of independent experts after a call for proposals. 

76 Where appropriate, regional and international initiatives can be also taken into account when they serve the Union's 
security and defence interests. 

23 

 
 
                                                 
3.2.  The right to act 

3.2.1.  The intended legal base  

The European Defence Fund aims at fostering the competitiveness and innovativeness of 
the EU's defence technological and industrial base by supporting defence-oriented R&D 
activities.  It  is  based  on  the  TFEU  Titles  'Industry'  and  'Research  and  technological 
development and space' (Articles 173, 182, 183 and 188). 

Article 173 of the Treaty on the Functioning of the European Union (TFEU) constitutes 
the legal base for actions aimed at, inter alia, encouraging an environment favourable to 
the  development  of  undertakings  throughout  the  Union,  particularly  SMEs,  and 
favourable to  cooperation  between  undertakings  and  fostering  better  exploitation  of the 
industrial potential of policies of innovation, research and technological development.  

As  the  Fund  aims  at  fostering  the  competitiveness  and  innovativeness  of  the  EU's 
defence technological and industrial base by supporting defence-oriented R&D activities, 
its aim  and  its content  justify  the  choice  of  173  TFEU  as  legal  basis.  Defence-oriented 
research actions also form an integral part of the European Defence Fund. Their aim and 
content also justify Article 182 TFEU as an additional legal basis.   

Pursuant to the TFEU all research activities shall be covered by a multiannual framework 
research  programme.  The  basic  act  of  the  multiannual  research  and  innovation 
framework  programme  post-2020  Horizon  Europe  contains  the  necessary  provisions 
establishing  setting  out  the  links  between  the  framework  programme  and  the  specific 
programmes established by it on defence research and on implementing Horizon Europe 
(which has a focus on civil applications of research and innovation activities). 

The  detailed  provisions  for  Union  funding  to  defence  research  projects  and  its  budget 
allocation  are  fixed  in  the  current  Regulation  on  the  European  Defence  Fund,  which 
defines the rules of participation for defence research. Research and innovation activities 
carried  out  under  the  European  Defence  Fund  have  an  exclusive  focus  on  defence 
applications.  

3.2.2.  The subsidiarity (EU added value) and proportionality   

In today's world, guaranteeing security means dealing with threats that transcend borders. 
No  single  country  can  address  these  alone.  The  EU  will  need  to  take  greater 
responsibility  for  protecting  its  interests,  values  and  the  European  way  of  life,  in 
complementarity and in cooperation with NATO.  

Efforts  to  meet  the  EU's  level  of  ambition  in  security  and  defence  (as  endorsed  by  the 
European  Council  in  2016)  will  contribute  to  this  objective.  To  be  ready  to  face 
tomorrow's  threats  and  to  protect  its  citizens,  the  EU  needs  to  enhance  its  strategic 
autonomy.  This  requires  the  development  of  key  technologies  in  critical  areas  and 
strategic capabilities to ensure technological leadership. Greater cooperation at all levels 
is the only way to meet EU citizens' expectations.  

24 

 
By  encouraging  cooperation,  the  EU  can  help  maximise  the  output  and  quality  of 
Member  States'  investment  in  defence.  The  Fund  will  bring  EU  added  value  by 
incentivising joint research on and development of products and technologies in the area 
of  defence  to  increase  the  efficiency  of  public  expenditure  and  contribute  to  the  EU's 
operational autonomy. 

Decisions  on  defence  investments  and  defence  development  programmes  remain  the 
prerogative and the responsibility of Member States.  

The  proposed  policy  approach  can  be  expected  to  be  proportionate  to  the  scale  and 
gravity  of  the  identified  problems.  The  decision  to  sustain  investments  in  defence  and 
launch defence development programmes remains the prerogative and the responsibility 
of Member States. The EU cannot and should not make up for the low levels of defence 
investments of Member States.  However, as  explained in Section  2 it can  complement, 
leverage and consolidate their collaborative efforts in developing defence capabilities to 
support  the  European  defence  industry  and  respond  to  security  challenge.  This  would 
avoid  duplication,  allow  for  a  more  efficient  use  of  taxpayers'  money,  improve  the 
interoperability  of  defence 
and  boost 
equipment,  minimise 
competitiveness  and  innovation  in  the  European  defence  technological  and  industrial 
base. 

fragmentation 

The  initiative  is  therefore  clearly  limited  to  goals  that  Member  States  cannot  achieve 
satisfactorily on their own and where the EU can be expected to do better. The proposed 
Fund will aim at limiting financial and administrative costs. 

3.3.  Appropriateness of the budgetary amount 

The  Commission  proposed  the  budgetary  amount  for  the  Fund  in  its  proposal  for  the 
MFF  2021-2027:  EUR  13  billion  (current  prices)  of  which  EUR  4.1  billion  to  fund 
collaborative  defence  research  and  EUR  8.9  billion  to  fund  collaborative  defence 
development projects.  The proposed budget of the Fund for the MFF 2021-2027 has the 
appropriate magnitude to achieve a genuine impact.  

As  regards  defence  research  investment,  taking  into  account  the  scale  of  existing 
national defence research budgets and the high costs of developing cutting-edge defence 
technologies,  an  annual  budget  of  EUR  585.7  million  appears  appropriate  in  order  to 
make  a  substantial  difference.  It  is  in  line  with  the  conclusions  of  the  Group  of 
Personalities  Report  (77),  as  well  as  with  the  report  of  the  European  Parliament  on  the 
European  Defence  Union  of  November  2016  (78).  With  an  investment  of  EUR  585.7 
million on an annual basis the EU will match the Member States with the highest levels 
of R&T funding. If the data for 2014 is used as a reference and the UK is excluded, the 
Fund’s contribution will account for approximately 28% of the total defence R&T effort 
in  the  EU.  Indeed,  the  total  European  expenditure  on  defence  R&T  amounted  to 

77 European Union Institute for Security Studies and European Commission (2016).  
78 European Parliament report on the European Defence Union (2016/2052(INI) adopted on 22 November 2016 which 
notes that "the European Defence Research Programme will need a total budget of at least EUR 500 million per year 
over that period in order to be credible and make a substantial difference". 

25 

 
                                                 
approximately EUR 2 billion annually (79) in 2014. France spent approximately EUR 750 
million,  Germany  and  UK  just  below  EUR  500  million  annually.  Under  the  same 
assumptions  an  EU  investment  of  EUR  585.7  million  would  result  in  an  increase  from 
1.03% to 1.42% of the share of defence R&T in total defence spending, thus providing a 
significant  contribution  in  closing  the  gap  with  the  2%  EDA  Benchmark.  The  share  of 
EU collaborative defence R&T in total defence R&T will thus substantially increase to 
36.26%, a percentage that is largely superior to the EDA Benchmark of 20%.  

Defence development expenses in Europe in 2014 were approximately EUR 6.8 billion 
in 2014 (80). If the UK is however excluded, the figure is reduced to slightly more than 
EUR  3.5  billion.  On  this  basis,  an  annual  EU  contribution  of  EUR  1.27  billion  will 
represent approximately 26% of the total defence development spending and will make a 
substantial addition to Member States efforts in this field. Moreover, considering that in 
most cases the EU is expected to co-finance development projects, the total value of the 
investments  realized,  including  the  part  co-funded  by  Member  States  or  other  sources, 
will range between EUR 1.27 billion and EUR 6.35 billion per year depending on the rate 
of EU co-financing. No Benchmark concerning defence R&D expenses has been adopted 
in  the  EDA  framework,  but  the  data  on  the  benchmark  on  collaborative  defence 
equipment  procurement  presented  in  2.1.3  shows  a  significant  “collaboration  deficit”. 
Taking  into  account  the  average  ratio  of  R&D  to  equipment  expenses  in  EDA 
participating Member States, a study has estimated that the necessary collaborative R&D 
expenses to resorb this deficit would range between EUR 700 million and EUR 2 billion 
per year (81).  

3.4. 

Introduction of Options 

In order to assess as to how to deliver in the most optimal manner on the set objectives 
and  the  eligible  actions,  current  experience  -  however  limited  it  may  be  -  needs  to  be 
taken into account as well as possible scope for further alignment and simplification, the 
political  consensus  that  has  been  reached  on  the  EDIDP,  the  comments  received  from 
Stakeholders.  

Three Options will be assessed below focusing mainly on the best Fund architecture and 
delivery mechanisms, which have been built on two criteria: their structure as compared 
to the Baseline scenario and the depth of the changes that they introduce compared to the 
Baseline. In all three Options the budget is substantially higher than the Baseline scenario 
in line with the Commission's proposal for the MFF 2021-2027.   

1.1.1.  Option 1: Continuity 

79 Based on the EDA Defence Data for the 27 EDA participating Member States (European Defence Agency 2016). 
80  Based  on  EDA  Defence  Data.  The  amount  of  development  expenses  is  calculated  by  subtracting  the  amount 
corresponding to defence R&T from the data provided on defence R&D (European Defence Agency 2016). 
81 Mauro (2017). The variation takes account of different assumptions on the evolution of spending in respect to the 
EDA  benchmark  of  investment  and  R&D  expenses  reaching  20%  of  total  defence  expenditure  as  well  as  the  North 
Atlantic Treaty Organization spending target of 2% of GDP.  

26 

 
 
                                                 
Option  1  is  based  on  a  maximum  level  of  continuity  with  the  PADR  and  the  co-
legislator’s consensus on the EDIDP albeit with more than six times higher budget. 

1.1.2.  Option 2: Flexibility and simplification 

Option 2 builds on Option 1, but proposes to simplify the Fund's Structure by integrating 
the two windows in one single Fund covering the scope of the PADR the EDIDP. Option 
2 also introduces some limited content changes, for instance by expanding the scope of 
the instruments to achieve the Fund's objectives; thereby offering further flexibility and 
simplification for beneficiaries. 

1.1.3.  Option 3: Prescriptive 

Option 3 builds on the changes introduced in Option 2 as regards the Structure and the 
scope of instruments, but replaces other features of Option 1 and 2 thereby changing the 
approach  based  on  incentives  and  bonuses  under  Options  1  and  2  with  a  more 
prescriptive approach with obligations and a reinforced EU role. Option 3 represents an 
attempt  to  be  more  intrusive  in  addressing  the  identified  problems  through  a  more 
directive approach. 

The logic behind such definition of Options is presented in Figure 7 below. 

Figure 7: Definition of the Options 

4.  DELIVERY MECHANISMS OF THE INTENDED FUNDING 

A  detailed  assessment  of  the  key  differences  between  the  Options  and  of  their  main 
advantages and limitations is presented below; after which the trade-offs between each of 
the  Options  is  analysed  in  terms  of  their  ability  to  deliver  the  objectives  in  most  the 
optimal manner.  

4.1. 

Structure, delivery mechanisms and related IPRs varying across the 
Options 

The Options relate to variables in relation to the Fund's Structure, including: governance 
(4.1.1.);  general  delivery  mechanisms  including  funding  instruments,  funding  levels 
(4.1.2.), IPR  aspects  (4.1.3.),  and  defence-specific  mechanisms  linked  to  the  promotion 
of  cross-border  and  SME  participation,  PESCO-related  aspects  and  continued 

27 

 
 
cooperation  (4.1.4.).  The  visual  representation  of  such  factors  is  provided  in  Figure  8 
underneath.  

Figure 8: Array of delivery mechanisms across the three options 

4.1.1.  Programme Structure and Governance (management)  

Under Option 1 the existing structure and governance of the Baseline scenario would 
continue with a higher funding level; meaning two separate Programmes. Although such 
Structure  has  the  obvious  advantage  of  providing  certainty  and  continuity,  it  does  not 
take account of efficiency gains of streamlined processes for the two windows, which has 
been  put  forward  as  a  critical  success  factor  by  Stakeholders  (1.2.2),  and  scope  for 
alignment of rules of participation. Having different structures might lead to confusion, 
coordination problems and foregone opportunities for coherence and streamlining. 

Under Option 2 and 3, compared to the Structure under the Baseline scenario of having 
two  separate  programmes,  one  single  Fund  would  be  set  up.  It  would  allow  a  better 
harmonisation of rules of participation between PADR and EDIDP in view of supporting 
the  full  cycle  of  defence-oriented  research  and  development  of  defence  capabilities  to 
ensure the uptake of research results in the development stage.  

Concerning  Governance,  the  Fund  would  be  implemented  under  a  single  management 
mode.  Under  Option  2  and  3  the  Fund  would  be  implemented  directly  by  the 
Commission. Such structure would best ensure simple, streamlined and lean processes. It 
also is the most optimal way to allow the Commission to control, monitor, and possibly 

28 

 
 
 
correct  implementation  and  assume  its  accountability  towards  the  budgetary  Discharge 
Authority in line with its obligations under Article 317 TFEU. The financial expertise in 
implementing  the  EU  budget,  which  is  the  main  element  for  the  implementation,  is 
available in the Commission. In view of the specificities of the sector, management needs 
to be done in a secure manner. The Commission has the infrastructure and IT-systems to 
ensure secure handling and exchange of EU Classified Information (EUCI). Regulation 
1049/2001  on  access  to  documents  foresees  several  protection  layers  to  ensure 
confidentiality of defence documents.  

Direct  management  would  also  recognise  the  role  and  needs  and  technical  expertise  of 
end-users  (military)  and  national  governments  (Ministries  of  Defence)  when  defining 
defence priorities and when managing projects at technical level. Comitology procedures 
at work programme level ensure technical input from Member States.  

4.1.2.  General delivery mechanisms 

4.1.2.1. Instruments 

Under  Option  1  the  Fund  would  continue  to  rely  on  the  main  instruments  used  for 
research and development actions in the PADR and EDIDP under the Baseline scenario, 
which  are  principally  direct  grants  to  legal  entities  and  to  a  lesser  extent  procurement 
with  regard  to  studies.  The  grant  instrument  is  a  broadly  tested  instrument  not  needing 
major  further  adaptations  to  be  applied  to  the  defence  sector.  It  is  an  appropriate 
instrument  to  promote  defence  research  and  development  activities.  However,  this 
Option  does  not  provide  a  response  to  Stakeholder  feedback  advocating  for  more 
flexibility and funding possibilities that better adhere to the specificities of the sector.  

Under  Option  2  and  3,  the  Fund  could  introduce  further  flexibility  and  build  on 
experience  with  more  innovative  instruments  gained  through  other  existing  Union 
programmes, which allow for example for a) grants to groups of buyers to allow for PCP 
and b) for prizes to support demand for innovative solutions and user-driven innovation. 
It also allows for c) the use of financial blending operations. 

a) Grant to a consortium of buyers: 

In the 2014-2020 MFF other Union Programmes started to apply more innovative grant 
instruments to fund a group of procurers ('buyers group') to undertake together joint PCP 
in  cases  where  there  needs  to  be  a  close  link  between  procurer  ('public  buyer')  and  the 
contractor  ('research  organisation  or  company').    Given  these  specifics  the  innovative 
instrument of using grants to finance PCP could be a suitable solution in certain cases to 
achieve  the  objectives  of  the  Fund.  The  advantage  may  be  that  it  follows  well  the 
business  reality  in  the  sector  and  allows  EU  budget  financing  to  feed  into  a  project 
between industry and Member States where the management is done by the buyers group 
of Member States usually through a contracting authority/project manager.   

b)  Prizes: 

Also prizes could be a suitable instrument for specific defence research activities where 
organisations compete in offering the best solution to a specific technological challenge.  
29 

 
c)  Blending operations: 

As  explained  in  Section  2.4,  the  defence  sector  is  proposed  to  be  an  eligible  sector  for 
support  through  budgetary  guarantees  under  the  InvestEU  Fund.  In  order  to  allow  the 
exploitation  of  the  potential  of  blending  operations,  combining  funding  provided  under 
the European defence Fund and the provision of financing backed by the InvestEU fund, 
a standard clause enabling such operations is introduced under Options 2 and 3.   

The  combination  of  project-oriented  support  under  the  Fund  along  with  targeted 
financing  in  the  defence  sector  can  make  a  powerful  contribution  to  strengthening  the 
resilience  of  the  sector  and  addressing  the  vulnerabilities  observed,  in  particular  for 
innovative SMEs and Midcaps. 

4.1.2.2. Funding rates and reimbursement methods  

Under  Option  1  the  funding  rates  will  remain  unchanged  in  comparison  with  the 
Baseline  scenario.  More  projects  would  nevertheless  be  financed  because  of  the  higher 
budget available. Reimbursable eligible cost for grants will continue to be calculated ex-
post  on  the  basis  of  a  cost  declaration  ('cost  declaration  method').  Indirect  cost  will  be 
covered  by  continuing  to  use  a  25%  flat  rate  of  total  eligible  direct  costs  excluding 
subcontracting.  The  advantages  are  that  this  is  a  well-established  method  to  which 
participants of Horizon 2020 and PADR are used. Although the use of a flat rate limits 
administrative burden, the disadvantage is that it does not take into account concerns of 
Stakeholders  on  the  funding  levels  for  indirect  costs  being  insufficient  considering  the 
specificities of the sector.  

Option  2  takes  account  of  the  concern  of  Stakeholders  that  funding  levels  for  indirect 
cost  are  too  low  in  the  methodology  applied  in  the  Baseline  scenario.  The  specific 
characteristics  of  the  sector,  including  the  dependence  on  a  single  buyer  and  the 
important  limitations  to  commercially  exploit  the  results  from  defence-oriented  R&D, 
should be acknowledged. Under Option 2, flexibility will be introduced allowing better 
covering indirect cost, where appropriate.   

Option  2  also  introduces  the  possibility  for  simplification  measures  in  relation  to  the 
reimbursement method for grants to lower administrative cost through a single lump sum 
contribution.  However,  the  risk  in  relying  on  lumps  sums  is  that  ex-ante  estimations 
could be either too high, which would come at a cost for the budget, or too low which 
may lead to low uptake. It is also not a broadly tested method and the Commission has 
limited  experience  in  setting  the  right  level  of  lump  sum  due  to  different  costs  in  the 
various EU Member States. In the present case such risks would be mitigated by using 
the lump sum cost calculation for development projects where the majority of costs are 
co-funded  by  Member  States/  associated  countries  relying  in  their  experience  in 
determining cost reimbursement levels for such projects.   

Option 2 also takes into account that actions beyond the prototype phase and thus closer 
to product and technology finalisation may involve lower risks, whilst at the same time 
involving still substantial cost and needing continued commitment from Member States/  
associated countries to cooperate at these  later stage of development. In  balance, under 

30 

 
Option  2  the  EU  co-funding  for  R&D  actions  beyond  the  prototype  stage  would  be 
capped  at  80%.  This  maximum  level  of  funding  would  still  provide  the  necessary 
flexibility to achieve the objectives of the Fund.      

Under Option 3, a greater Union involvement as regards the development of prototypes 
would be established by providing a higher standard EU co-funding rate for prototypes. 
Whilst  this  may  seem  attractive,  there  are  important  drawbacks.  Higher  funding  by  the 
Union  and  lower  co-funding  by  Member  States  may  go  against  the  wish  of  Member 
States to stay in lead of the project in the prototype phase allowing them to take decisions 
as to project structure, workload distribution etc. A higher involvement of the Union may 
be received as too intrusive at the development stage and being a minority partner may 
also lower the commitment of participating Member States. It is also important to ensure, 
at this crucial stage of the development process, that Member States have the necessary 
commitment  to  and  ownership  of  the  project.  This  can  only  be  achieved  through  a 
significant financial commitment of Member States. A cap (for example of 50%) for EU 
funding  of  prototypes  could  be  envisaged  to  address  the  above  risks.  It  may  however 
have  financial  budgetary  implications  risking  that  the  first  prototypes  financed  already 
absorb a large portion of the available budget.       

4.1.3.  Intellectual Property Rights 

Intellectual  Property  Rights  (IPR)  arrangements in  the area of publicly funded research 
and development need to strike a balance between maximising the impact of the public 
funding for the benefit of the taxpayer and making attractive for the research community 
and industry the participation to the Fund.  

Under  Option  2  the  core  IPR  arrangements  are  the  same  as  those  under  the  Baseline 
scenario.  

As regards research actions, results of actions are owned by the beneficiaries  generating 
them beneficiaries with  small restrictions and right to use other co-beneficiaries' results 
for  the  exploitation  of  their  own  results  under  terms  and  conditions.  The  Union  has  a 
royalty-free  access  to  all  the  results  for  non-competitive  and  non-commercial  use. 
Member States/ associated countries have royalty free access to a report, which provides 
them  with  all  the  necessary  information  to  assess  the  content  of  the  action  and  of  the 
results, without revealing information on know-how. In the case that at a later stage, two 
or more Member States/ associated countries conclude a contract with a beneficiary of a 
project  to  further  exploit  the  results  funded  by  the  research  window  of  the  Fund  and 
owned  by  the  participant,  these  Member  States/  associated  countries  have  royalty  free 
access to those results.  

As regards development actions, in consistence with the EDIDP, the Union will not own 
IPRs  resulting  from  the  actions  funded  under  the  Fund,  as  at  this  stage  of  the 
development  the  Fund  is  mainly  co-funding  the  development  of  defence  products  and 
technologies.  It  is  for  the  Member  States/  associated  countries,  together  with 
beneficiaries, to define IPR arrangements.  

31 

 
However,  when  the  Commission  procures  a  study,  it  will  own  the  IPRs  and  grant 
Member States and associated countries a non-exclusive licence for use. 

Under Option 3, additional measures could be introduced to better allow the Union to 
ensure that the results are available in the EU and ensure its strategic autonomy. Under 
Option  3  for  development  projects  with  the  co-funding  of  Member  States/  associated 
countries  and  low  EU  budget  contribution,  the  rules  could  be  aligned  to  those  of  the 
PADR e.g. by asking a royalty free access right for the Union and providing a report to 
all the Member States/ associated countries.  

However,  Option  3  is  not  yet  mature  and  the  described  possibilities  have  not  been 
properly  tested  or  discussed  with  Member  States  or  the  wider  stakeholder  community. 
For these reasons this Option is not recommended to be implemented at the outset of the 
Fund.  Possibly  Option  3  could  be  further  considered  at  a  later  stage  when  more 
experience  with  the  IPR  provisions  has  been  attained  and  if  Stakeholders  agree  on  the 
added value. 

4.1.4.  Defence-specific characteristics 

4.1.4.1. Cross-border participation of SMEs and Mid-Caps 

As  explained  in  Section  2.2.2  cross-border  participation  at  the  level  of  the  defence 
industry supply chains is very limited and this affects in particular SMEs and to a lower 
degree mid-caps. 

The very introduction of an EU Fund supporting collaborative research and development 
projects  significantly  contributes  in  fostering  cross-border  collaboration  between  legal 
entities,  including  in  the  defence  supply  chains.  The  initiation  of  common  cross-border 
EU  projects  was  one  of  the  key  recommendations  of  the  Advisory  Group  Report  on 
cross-border access for SMEs (82).  

Measures aiming at enhancing cross-border participation and participation of SMEs and 
mid-caps in projects supported by the Fund can also be enacted in different ways. 

Under the Baseline scenario,  under the  PADR annual work programme  included topics 
where SMEs have higher chances to participate. For some specific calls for proposals, a 
wider collaboration was also required taking the form of an increased minimal number of 
participants from more Member States.  

As  regards  the  EDIDP,  several  dedicated  measures  of  incentivising  nature  have  been 
introduced in the Programme’s base legal act: 

  an award criterion for participation of SMEs and of cross-border SMEs (83) 

82 Advisory Group Report (2016) on cross-border access for SMEs, p.15. The report also advocates for investing more 
extensively  in  R&T  in  order  to  “create  additional  business  opportunities  and  enable  supply  chains  to  expand  more 
easily and to be more flexible.    
83 SMEs which are established in Member States other than those where the undertakings in the consortium which are 
not SMEs are established. 

32 

 
                                                 
  EU  funding  rate  bonuses  for:  participation  of  SMEs;  participation  of  cross-border 

SMEs; participation of mid-caps84 

  An  obligation  to  include  a  specific  category  of  projects  dedicated  to  SMEs  in  the 

work programme  

  a global target specifying that the work programme should ensure that at least 10% of 

the overall budget will benefit the cross-border participation of SMEs 

Considering  that  complex  combinations  of  different  funding  rate  bonuses  can  in 
particular make the budget allocation per category  of projects extremely difficult, a cap 
to the overall increase of funding rates through bonuses has been fixed at 35 percentage 
points. 

Under Option 1, the different approaches under the Baseline scenario as adopted for the 
PADR and the EDIDP will be preserved, taking in particular into consideration that some 
of  the  dissimilarities  can  be  linked  to  specific  features  distinguishing  research  from 
development.  For  instance,  research  actions  being  fully  funded  by  the  EU  budget,  EU 
funding rate bonuses are rendered inoperable by definition (85).  

To  operate  efficiently  a  system  based  on  incentives  however  needs  to  be  sufficiently 
simple  and  well  targeted.  It  will  also  benefit  from  a  strong  focus  on  stimulating  the 
participation of those categories of enterprises which face the highest barriers instead of 
dispersing the efforts. A high complexity and administrative burden can also undermine 
the efficiency of such a system in addressing the barriers to cross-border collaboration.   

Option 2 therefore foresees a simpler system that focuses on the main issue at stake, i.e. 
the  cross-border  participation  of  SMEs  and  mid-caps  (86).  It  relies  mainly  on  two 
components: EU funding rate bonuses for cross-border participation of SMEs and mid-
caps and an award criterion incentivising the creation of new cross-border cooperation, in 
particular through the cross-border participation of SMEs.  

The  focus  of  the  bonuses  is  put  on  the  most  challenging  issue:  the  cross-border 
participation  of  SMEs  and  mid-caps.  Stronger  incentives  are  provided  for  the  cross-
border participation of SMEs considering that they are affected by some types of barriers 
to  a  higher  degree  than  mid-caps.  This  allows  concentrating  the  incentives  on  the 
inclusion of those companies that suffer from both disadvantages linked to size and from 
barriers to cross-border participation. Funding rate bonuses also take into account the fact 
that increased cross-border participation may also have a cost, for instance in the form of 

84 Defined for the purpose of the EDIDP Regulation as meaning enterprises having a number of employees up to 3,000 
where  the  staff  headcount  is  calculated  in  accordance  with  Articles  3,  4,  5  and  6  of  the  Title  I  of  the  Annex  to  the 
Commission Recommendation 2003/361/EC and which are not SMEs. 
85  Absence  of  co-funding  also  implies  lower  political  pressure  on  the  definition  of  the  industrial  organisation  of  the 
projects.  In  addition,  in  research  projects  the  number  of  participating  entities  is  expected  to  be  lower  in  comparison 
with important development projects. 
86  Europe  Economics  (2018)  finds  evidence  pointing  at  “significant  barriers  to  cross-border  engagement  …  while 
problems faced by SMEs in a purely national context appear to be of a less significant magnitude” (Europe Economics 
2018, p. 36). 

33 

 
                                                 
additional  coordination, transaction and supplier searching costs that may be necessary 
when establishing new industrial partnerships (87).    

Flexible  bonuses  (88)  have  been  chosen  as  they  provide  a  continuous  incentive  and 
minimise the risks linked to possible errors in the definition of the thresholds. A cap to 
the  overall  increase  of  EU  funding  through  bonuses  (for  cross-border  SMEs  and  mid-
caps  participation  and  PESCO  projects)  ensures  that  the  level  of  ex  ante  uncertainty 
about  the  exact  amount  of  EU  funding  that  would  be  necessary  for  a  specific  call  will 
remain limited and will not pose a problem for the efficient implementation of the Fund.    

Bonuses are however applicable only to eligible actions that are not fully funded by the 
EU and, as a consequence, are not applicable to research actions in particular. The award 
criterion  usefully  complements  the  bonus  system,  incentivising  when  the  latter  are  not 
applicable and rewarding increased levels of cross-border participation.   

The introduction of a category of projects dedicated to SMEs in the work programme is 
not a direct answer to the core issue of incentivising the integration of cross-border SMEs 
and mid-caps in the supply chains of the large industrial players. Therefore no obligation 
for including such a category in the work programmes is proposed in the base legal act. 
Nothing  however  prevents  the  possibility  to  introduce  such  a  category  in  the  work 
programmes,  especially  if  the  experience  under  the  EDIDP  proves  to  be  positive.  The 
definition  of  the  work  programme  will  also  take  into  account  the  need  to  enhance  the 
possibilities for cross-border participation and of SMEs and mid-caps. 

Within the logic of Option 3 the approach based on incentives would be replaced by a 
stricter  set  of  mandatory  requirements  and  targets  applicable  at  the  level  of  individual 
projects. Moreover, unlike under Options 1 and 2 where full freedom is left as regards the 
process  through  which  sub-contractors  will  be  selected,  Option  3  could  impose,  for  a 
specified share of the value of a supported project, the use of procedures for the selection 
of  sub-contractors  such  as  open,  fair  and  transparent  competitive  calls  accessible  to  all 
EU legal entities fulfilling the conditions specified in the Fund’s legal base. 

Mandatory  targets  at  project  level  would  have  the  advantage  of  triggering  immediate 
change  in  the  industrial  organisation  of  projects  through  a  more  deterministic  process. 
Focus  would  shift  towards  achieving  concrete  results  determined  ex  ante.  Such  an 
approach  however  requires  high  levels  of  precision  in  defining  appropriate  quantitative 
targets and requirements. It implies a higher level of Commission intervention. In a field 
where  previous  experience  is  more  than  limited  and  reliable  data  and  information  is 
scarce, the risks involved would be  substantial.  In particular, if targets  for cross-border 
and SME participation are too demanding, the uptake of the Fund could be endangered as 
consortia would fail to fulfil the necessary criteria. Alternatively, unrealistic requirements 
may  induce  an  artificial  industrial  organisation  that  would  lead  to  inflated  costs  and 
distortions thus potentially defeating the very objective pursued.  

87 Europe Economics (2018).  
88 Where the EU funding rate is increased proportionally to the degree of cross-border participation of SMEs and mid-
caps.  

34 

 
                                                 
Imposing open section procedures will balance the advantages of higher transparency in 
the  selection  of  suppliers  against  increased  administrative  burden  and  complexity.  In 
addition, it is worth noting that previous experience with such systems implemented on a 
voluntary basis has not necessary brought satisfactory results (89).  

4.1.4.2.PESCO  

Eligible  collaborative  actions  developed  in  the  context  of  PESCO  should  ensure 
enhanced  cooperation  between  different  Member  States  on  a  continuous basis  and  thus 
directly  contribute  to  the  aims  of  the  Fund.  Such  projects  should  thus  be  eligible  for  a 
priority treatment.  

Under Option 1 and 2 the PESCO bonus would continue as it is proposed now under the 
Baseline scenario for EDIDP, meaning that for selected projects that are also undertaken 
in PESCO context ('PESCO projects') a financial bonus of 10% will be given. 

Under  Option  3,  in  addition  to  a  bonus,  the  Fund  could  foresee  that  work  programme 
would  give  priority  to  PESCO  projects  that  fulfil  the  eligibility  and  award  criteria. 
PESCO projects eligible for the Fund could also get direct funding without competitive 
selection.    Whilst  such  elements  can  reinforce  the  links  of  the  Fund  with  PESCO,  the 
value  added  of  their  introduction  is  very  limited  as  the  Programme  Committee  can 
already  decide  to  consider  PESCO  projects  as  priority.  The  introduction  of  the 
abovementioned  elements  may  meet  resistance  from  Member  States,  including  from 
those  who  do  not  participate  in  PESCO  that  may  consider  that  this  will  restrain 
unnecessarily the decisions of the Programme Committee. The approach proposed under 
Option 2 is thus considered preferable.     

4.1.4.3.Demonstration of an intent to collaborate beyond the procurement phase  

As  mentioned  in  Section  3.1  a  collaborative  approach  covering  the  entire  life-cycle  of 
defence  equipment  allows  rationalisation  of  through-life  costs  and  enables  very 
substantial efficiency gains and economies to be realised. Nevertheless, collaboration at 
the level of R&D and even procurement does not guarantee that the following stages will 
also  be  performed  in  a  collaborative  manner  enabling  the  materialisation  of  the  full 
potential economies and the preservation of the initial levels of interoperability. A good 
example  of  this  is  provided  with  regard  to  the  Transall  collaborative  project:  “The 
Transall was a joint effort of France and Germany, but once the Transall was put into 
service  cooperation  ended.  It  is  now  impossible  to  exchange  a  French  with  a  German 
Transall because the spare parts are no longer the same and the operational function of 
each has evolved in different ways” (90).  

Under  Option  1  and  2  the  Baseline  scenario  would  continue  whereby  the  consortium 
demonstrates for development actions that at least two participating Member States and/ 
or associated countries intend to procure jointly the final product or use the technology in 

89  An  example  of  past  experience  in  this  field  is  provided  by  the  Electronic  Bulletin  Board  established  in  the 
Framework of Code of Best Practice in the Supply Chain of the European Defence Agency. 
90 European Union Institute for Security Studies, 2007, p.21. 

35 

 
                                                 
 
a coordinated way. An award criterion is also in  place taking into account the potential 
efficiencies across the lifecycle of the developed defence projects and categories.  

Under the logic of Option 3, for actions pertaining to prototyping, testing, qualification 
and certification it could be envisaged to require the formal demonstration of the intent of 
Member  States/  associated  countries  not  only  to  procure,  but  also  to  continue 
collaboration  beyond  the  procurement  phase  by  performing  jointly  activities  such  as 
maintenance, repair and overhaul. A risk however exists that Member States/ associated 
countries may not be willing to demonstrate such intent so early in the development cycle 
which could reduce the number of projects proposed for funding and may endanger the 
achievement of the Fund's objectives. In addition, actions where Member States would be 
ready to  provide  evidence  of  their  intent  to  collaborate  beyond  the procurement  can  be 
catered for through the award criterion already in place under Options 1 and 2. 

4.2.  How do the Options compare? 

This  section  presents  a  short  overview  of  the  above  presented  three  Options  evaluating 
their efficiency and effectiveness in achieving the elements of the general objective of the 
initiative.  It  also  assesses  to  which  extent  each  option  adheres  to  the  overarching  MFF 
objectives  of  simplification,  flexibility,  coherence  and  synergies  and  focus  on 
performance.  

Table 1: Comparison of Options 

Elements Fund's general 
objective 

Support collaborative projects 
through the entire R&D cycle 

Leverage cooperation 
between legal entities, 
including SMEs, mid-caps. 

MFF Objectives (91) 

Simplification 

Additional flexibility 

Coherence and synergies 

Focus on performance 

Option 1 

Option 2 

Option 3 

+ 

+ 

- 

- 

- 

+ 

++ 

++ 

+++ 

+++ 

++ 

+ 

+ 

++ 

-/+ 

+ 

++ 

++ 

To summarise the comparison of Options, the following observations can be made:  

91 Comparison between new post-2020 MFF programme and PADR/EDIDP under the MFF 2014-2020. 

36 

 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
  Option  1  relies  on  the  obvious  advantage  of  continuity  with  the  Baseline  situation 
albeit with a higher budget. Being based on the PADR and on the architecture of the 
EDIDP and with more funding it is expected to be more effective and deliver better 
results compared to the Baseline scenario. However, the separation between research 
and development can hamper achieving the full potential of coherence, synergies and 
simplification. Also, a Fund running over a longer period may require higher degrees 
of flexibility than short term programmes such as the PADR and the EDIDP and may 
benefit  from  additional  delivery  mechanisms  to  achieve  the  Fund's  objective  in  the 
most optimal way. Therefore, compared to the other two Options, a lower efficiency 
and  effectiveness  in  achieving  the  Fund's  objectives  and  the  overarching  MFF 
objectives are expected. 

  Option  2  builds  on  the  strengths  of  the  Baseline  scenario  and  the  higher  funding 
levels  of  Option  1  but  maximises  synergies  and  introduces  simplification  by 
introducing  one  single  and  coherent  Fund  providing  support  for  the  full  cycle  of 
research  and  development  of  defence  capabilities  covering  activities  from  defence-
oriented  basic  research  up  to  the  end  of  the  development  process.  It  will  thus 
maximise  the  synergies  between  the  two  windows  of  the  Fund.  An  additional 
flexibility will be put in place, through measures such as the introduction of a wider 
array of support instruments. The introduction, for the development phase, of support 
mechanisms such as grants to consortia of buyers (e.g. PCP) allowing EU support to 
reach  industry  through one  single  procedure  (procurement)  coordinated by  Member 
States/ associated countries could be an important measure of simplification too. The 
introduction  of  lump  sums  can  also  provide  a  valuable  contribution  in  reducing  the 
administrative  burden  for  all  actors  involved,  to  facilitate  enhanced  cooperation 
between  them  and  increase  the  efficiency  of  the  Fund  compared  to  Option  1. 
Therefore,  compared  to  Option  1,  Option  2  is  expected  to  be  more  efficient  and 
effective in achieving the Fund's and the overarching MFF objectives. 

  Option 3 incorporates many of the advantages of Option 2 compared to the Baseline 
scenario and Option 1 but relies on a more prescriptive approach aimed at addressing 
the identified problems in a more intrusive way with the aim to reach results faster. 
However,  while  this  approach  may  have  a  better  focus  on  achieving  results,  it  also 
implies important risks, especially with regard to the uptake and thus to the capacity 
of  the  Fund  to  achieve  its  objectives.  The  more  so  because  the  available  data  and 
information as well as prior experience are extremely limited. Ultimately, being too 
prescriptive  without  disposing  of  the  necessary  analytical  tools  and  experience  can 
become  counterproductive  by  discouraging  participation  by  industry  and  Member 
States/ associated countries and resulting in less projects applying for support. This is 
a  substantial  risk  also  because  the  inputs  from  Stakeholders  did  not  plead  for  such 
measures.  Because  of  the  additional  requirements,  Option  3  may  come  with  higher 
administrative burden for stakeholders. Therefore, compared to the Baseline scenario 
and Option 1 and 2, the expected positive impact on effectiveness coming from of the 
more  prescriptive  approach  under  Option  3  is  offset  by  the  high  risks  involved  and 
higher  burdens.  The  risks  of  an  insufficient  uptake  in  particular  questions  the 
effectiveness  of  the  Fund  in  providing  sufficient  support  to  collaborative  projects 
through the entire research and development cycle of defence oriented products and 

37 

 
technologies.  As  a  consequence,  Option  3  in  inferior  to  Option  2  and  cannot  be 
considered as the preferred option.  

  However, even if Option 3 as a package when assessing the design of the Fund’s base 
legal  act  implies  too  high  risks,  it  may  be  worthwhile  considering  the  potential 
benefits  of  some  of  its  individual  elements  at  a  later  stage  when  implementing  the 
Fund  as  an  intermediate  approach  between  Options  2  and  3.  When  considered 
appropriate and supported by the Programme Committee, individual elements of the 
type examined under Option 3 could be taken into consideration in the definition of 
the work programmes or when publishing calls for proposals. 

4.2.1.  Overall expected impacts of the chosen Option 

The  Fund  under  the  preferred  Option  2  is  expected  to  boost  the  competitiveness  and 
innovation capacity of the European defence industrial base in the most optimal way, in 
particular:  

 

Improved  economic  efficiencies  in  the  defence  industrial  base  and  capturing  size 
effects  by  reducing  duplications  and  enabling  economies  of  scale  (92).  This  will 
improve  the  competitiveness  of  the  EU  defence  industry,  resulting  in  reduced 
dependence on non-EU sources for critical defence technologies.  

  A  more integrated European  Defence Technology and  Industrial Base  ('EDTIB')  by 
reducing the barriers to cross-border collaboration and by reducing fragmentation of 
demand and supply along national lines.  

  Enhanced  cross-border  involvement  of  SMEs  and  mid-caps  in  the  defence  supply 

 

chains and establishment of cross-border partnerships.  
Improved  defence  technology  by  enhancing  the  quality  and  the  variety  of 
technologies  being  developed  in  the  EU,  enabling  better  use  of  limited  budgetary 
resources  and  stimulating  the  EDTIB  to  also  develop  technologies  in  fields  that 
currently lack sufficient investment. 

  Enhanced  Member  States'  collaboration  in  defence  R&D  projects  by  establishing  a 
framework  for  more  efficient  collaboration  and  by  incentivising  common  technical 
requirements.  

  Benefit for the Member States as buyers through lower unit costs of equipment and 
allowing them to develop and procure the modern defence equipment needed (93) as 
well as improving interoperability. 

Wider economic effects would include positive macroeconomic effects, similar to those 
of  other  categories  of  public  spending,  as  regards  effects  on  Gross  Domestic  Product 
(GDP),  tax  and  employment,  but  significantly  higher  as  regards  impacts  on  R&D(94). 
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 

92 See Section 2.2.2 for more detailed information on the importance of economies of scale and learning in the sector. 
93 According to Middleton et al. (2006) a correlation can be established between past levels of defence R&D spending 
and the quality of the defence equipment in the inventories of the corresponding country. 
94 See for instance Europe Economics (2013). 

38 

 
                                                 
USD  7.2  billion  (minimum)  (95).  Investments  in  defence  R&D  may  also  improve  the 
productivity of the economy by transferring resources to highly productive activities.  

The initiative is also expected to have positive societal impacts. High skilled jobs in a 
high  tech  intensive  sector  that  are  at  risk  due  to  the  lack  of  new  programmes  may  be 
secured. Evidence from past collaborative projects suggests that an important number of 
jobs  across  different  Member  States  will  be  supported  (96).  Such  projects  traditionally 
require highly  skilled  engineering and technical staff and involve specialised  skills  that 
have  proved  to  be  highly  transferable  towards  a  wide  range  of  both  defence  and  civil 
activities (97).  

Finally, the initiative is expected to contribute to filling capability gaps in the EU and 
improving the quality of the defence products and technologies available to the Member 
States. Thereby standardisation will be fostered as well as interoperability of equipment. 
This  will  enable  significant  savings,  in  support  and  maintenance,  repair  and  overhaul 
activities, and will facilitate joint operations. 

4.3.  Conclusions 

This Impact Assessment highlights the need for an EU initiative aimed at supporting the 
competitiveness and innovation capacity of the European defence industrial base that will 
allow  strengthening  European  strategic  autonomy  and  reducing  dependencies  for  key 
defence competencies and capabilities. This is of key importance for the credibility of the 
EU's  foreign  and  defence  policy.  As  explained,  cooperation  is  an  effective  way  to 
achieve this, since it is likely that in the long run no single European country can afford 
to  maintain  a  full-spectrum  defence  industrial  base  and  corresponding  defence 
capabilities on its own. The EU can make a substantive contribution to fostering defence 
cooperation  schemes  and  provide  targeted  incentives  to  support  legal  entities  in 
developing  new  defence  products  and  technologies  while  bearing  in  mind  the 
specificities  of  the  defence  market  where  solely  Member  States  as  end-users  create  the 
demand. 

A  globally  competitive  defence  industry  in  Europe  is  not  only  crucial  from  a  defence 
perspective, it is also economically significant. European defence companies yield high 
annual turnovers and are important employers of highly skilled individuals. Furthermore, 
important synergies exist between the defence and civil sectors. Investing in the defence 
sector produces positives externalities not only in terms of direct creation of high value-
added within the EU, but also indirect spill-over in other sectors. It will bring benefits to 
the  whole  “eco-system”  including  notably  SMEs  and  Research  Institutions,  as  well  as 
prime contractors. 

95 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. For other examples see also Bellais (1999). 
96 Hartley (2008), p. 9. See also more general estimations on employment effects of investments in the defence sector 
in Oxford economics (2011) or Europe Economics (2013). 
97 Hartley (2008). 

39 

 
                                                 
Defence  R&D  forms  the  basis  for  Member  States  to  foster  an  effective  and  credible 
defence capability – and this is where the EU could play a key role to move away from 
the  status  quo.  Currently,  defence-oriented  research  and  development  is  primarily  a 
national affair where incentives to cooperate are lacking or inadequate. The Commission 
should  incentivize  maturing  technologies  and  mitigating  risks  upstream  in  the 
development  and  implementation  of  programmes,  while  striving  for  inclusiveness  and 
promoting cross-borders partnerships within the EU.  

To conclude, this Impact Assessment recommends Option 2 as the most optimal way for 
implementing the Fund, with a view to:  

  promoting the integration and strengthening of the global competitiveness of the 

EDTIB; 

  supporting  the  development  of  defence  products  and  technologies  in  the  EU  by 
acting as a catalyst for R&D cooperation programmes in Europe in key capability 
areas; this should lead to follow-on collaborative defence investment programmes 
aiming at answering Member States’ future capability needs and at strengthening 
the development of future capabilities through increased cooperation;  

  ensuring EU added value - the added value of a European approach lies with its 
ability  to  coordinate  a  wide  variety  of  stakeholders  ranging  from  national 
Ministries  of  Defence  (as  exclusive  customers)  to  defence  industries  (as  sole 
providers of defence products) in order to achieve outputs to the benefit of all, yet 
without substituting national efforts. 

5.  HOW WILL PERFORMANCE BE MONITORED AND EVALUATED? 

5.1.  Monitoring: implementation based indicators 

To monitor the intervention and to allow for corrective action if necessary, a monitoring 
system will be developed. Indicators based on existing sources of data/ implementation 
reports  will  allow  giving  an  indication  of  the  fulfilment  of  the  objectives.  These 
indicators  are  not  politically  sensitive  or  expensive  to  collect.  Drawbacks  are  that  they 
can only give an indirect indication, some are long term indicators and it is difficult to set 
a  baseline  and  target  value  to  achieve.  A  particularity  with  defence  capability  research 
and  development  projects  is  the  long  lead  times  from  idea,  through  research  and 
development,  until  there  is  a  product  on  the  market.  It  is  not  uncommon  with  ten  or 
fifteen  years  from  research  and  /  or  development  to  procurement.  This  implies  that  the 
long  term  effects  of  the  Fund  will  not  measurable  within  the  time  span  of  one 
Multiannual Financial Framework.  

5.1.1.  Success indicators in the short term 

In the short term, the implementation of the Fund is expected to tackle problem drivers 
through two key elements: 

Make  more  funding  available:  The  establishment  of  the  Fund  will  make  an 
• 
increased amount of funding available in the EU. This increasing funding should better 
equip  the  EDTIB  to  better  cope  with  the  ever-increasing  unit  costs  of  product 

40 

 
development.  Making  more  funding  available  will  contribute  to  preserve  existing 
industrial, technological and defence capabilities and to potentially develop new ones. 

• 
Incentivise  cooperation:  EU  funding  is  expected  to  incentivise  and  be  linked  to 
the  condition  of  cross-border  cooperation.  This  is  expected  to  decrease  fragmentation, 
create economies of scale and create a further streamlining of R&D activities. As a result, 
it will also lead to increased effectiveness and efficiency in the use of available funding 
and thus, in the longer term, increase the innovative capacity of the EU defence industry 
in as well as its competitiveness. 

The short term success of the Fund will thus be measured in terms of increased number 
and value of European defence research and development collaborative projects.  

5.1.2.  Success indicators in the medium and long term 

In  the  medium  and  long  run,  the  impact  of  the  Fund  is  expected  to  strengthen  the 
competitiveness  of  the  EU  defence  industry  and  to  enhance  the  strategic  defence 
autonomy of Europe. Arguably, the most important aspect of this competitiveness is the 
ability  of  the  EDTIB  to  meet  Europe’s  defence  needs,  as  well  as  the  defence 
requirements  of  Member  States.  Technological  independence  is  a  key  component  of 
strategic  autonomy.  Therefore,  the  security  of  supply  for  critical  defence  equipment, 
technology and defence material is considered essential. By ensuring the competitiveness 
of  the  EU  defence  industry,  the  establishment  of  the  Fund  will  contribute  to  the  wider 
security objectives of the EU. 

The  second  aspect  is  the  EDTIB’s  competitiveness  vis-á-vis  global  competitors.  The 
value of defence systems can only be interpreted in relative terms, i.e. as compared to the 
performance of the equipment possessed by rivals. As a result, being able to keep ahead 
of – or at least keep pace with – potential adversaries is essential for the armed forces. 
The  Fund  is  expected  to  strengthen  the  EDTIB’s  ability  to  deliver  such  high-end 
equipment for EU member states’ defence forces. 

These impacts could be delivered through four core mechanisms. 

First, development of new defence technology through investment in a portfolio 

• 
of innovative R&D programmes; 

• 
Second, greater harmonisation of requirements leading to greater commonality of 
systems  and  increased  interoperability  between  European  nations  thus  increasing  the 
ability of European forces to fight effectively together; 

Third,  maintaining  and  developing  high-end 

• 
industrial  competences  and 
infrastructure  that  preserve  European  strategic  autonomy  in  key  defence  capabilities 
(including support, maintenance and upgrade of existing systems); 

• 
Finally, creation of a more efficient defence enterprise across Europe that is better 
able  to  target  spending  on  battle-winning  capabilities  and  strategic  advantage  over 
adversaries. 

41 

 
The  medium  and  longer  term  success  will  thus  be  measured  by  assessing  European 
technological  superiority  on  the  global  market  and  the  ability  of  the  EDTIB  to  deliver 
priority capabilities to European Armed Forces. 

The  Figure  below  outlines  the  problem  drivers,  the  corresponding  proposed  indicators 
and how they link to the overall general objective. A target value to achieve is not set yet 
as no previous experience is available. 

Figure 9: Monitoring indicators and the related objectives  

Network  indicators  (98)  can  be  developed  based  on  the  implementation  reports.  The 
network  indicators  are  able  to  provide  insights  into  the  level  of  cooperation  and  a 
measure  of  how  it  evolves  over  time.  However,  these  indicators  are  not  suitable  for 
monitoring. They are in particular relevant for the evaluation of the Fund when sufficient 
data is available. 

5.2.  Additional indicators collected from applicants 

These  indicators  are  however  not  sufficient  to  provide  a  full  picture  of  the  different 
objectives.  Innovation  indicators  (99)  could  also  be  useful.  The  level  of  research  and 
development is  a  measure of the innovative capability. In turn,  innovative capability in 
the  field  of  defence  where  technological  superiority  is  vital;  is  a  driving  force  for  a 

98  Weighted  degree  or  cluster  coefficient  to  measure  how  cooperation  in  EDTIB  evolves  and  the  number  of 
relationships and level of cooperation. 
99 Measuring the level of R&D in company collected from participating entities. 

42 

 
 
 
                                                 
competitive EDTIB. For this reason the different calls could include a set  of indicators 
for the applicants to reply to along with their application. These indicators could be: a) 
Turnover related defence / military activity b) Number of employees working on defence 
/  military  related  matters  c)    Level  of  privately  funded  research  and  development 
activities d) Level of publicly funded research and development activities. d) Number of 
new cooperation opportunities as a result of previous Fund participation last 12 months. 

This  information  would be cost effective  to collect and provide important  insights as  it 
would  allow  a  comparison  before  and  after  participation  to  the  Fund.  However,  the 
company-level  data  would  be  sensitive  and  /  or  classified  and  needs  to  be  treated 
accordingly.  The  data  at  aggregated  level  only  would  be  releasable  as  part  of  a  public 
evaluation report. 

5.3.  Additional indicators collected from the EDTIB 

Implementation  based indicators and additional indicators collected from applicants are 
however  not  sufficient  to  establish  a  baseline  for  the  EDTIB  to  compare  with.  To  date 
there is no reliable comparable data for the EDTIB. It is therefore appropriate to establish 
a  mechanism  to  acquire  the  necessary  data.  The  collection  of  this  data  should  cover  a 
representative  sample  of  the  EDTIB,  not  only  from  participating  entities,  allowing  for 
comparative analysis. This will allow for an indication of the impact of the Fund on the 
EDTIB as a whole. As such it will cover the spin-off effects for the whole of EDTIB and 
provide  more  information  on  its  effects.  This  will  help  to  better  evaluate  the  Fund  and 
potentially offer more relevant policy options to improve the Fund over time. However, it 
will  be  more  expensive  and  EUROSTAT  needs  to  be  ready  to  help  establish  the  data 
gathering  procedure.  Potentially  the  indicators  listed  in  chapter  5.2  could  be  collected 
from  the  wider  EDTIB  as  part  of  the  Structural  Business  Statistics  data  or  the 
Community Innovation Survey.  

Collecting  this  type  of  information  from  the  EDTIB  is  sensitive  as  the  data  may  be 
considered  as  EU  Classified  Information.  Companies  cannot  be  obliged  to  reply  and 
might be reluctant to provide information. 

5.4.  Monitoring and Evaluation reports 

Based on the monitoring scheme proposed above an annual performance review could be 
foreseen  where  results  will  be  progressively  available.  Monitoring  information  will 
include in the early years information on input indicators (such as number and types of 
projects); and depending of the length of the projects half way through the programming 
period information on output indicators would become available; progressively followed 
by information on results indicators (such as subsequent procurement by Member States 
and patents) in the later years of the Fund.   

An interim evaluation of the Fund will be performed once there is sufficient information 
available about the implementation of the Fund and timing  will be aligned with that of 
the ex-post evaluations of the PADR and the EDIDP at the latest four years after the start 
of the implementation. 

43 

 
The  Commission  will  carry  out  a  final  evaluation  is  at  the  end  of  the  implementation 
period when the lion-share of projects will have been finalised.  

44 

 
 
ANNEX 1: PROCEDURAL INFORMATION 

Lead DG(s), DEcide Planning/CWP references 

The lead department for this evaluation was the Directorate-General for Internal Market, 
Industry,  Entrepreneurship  and  SMEs  of  the  European  Commission.  In  particular,  the 
evaluation has been carried out by Units I4 and I5 (Defence 1 and 2). 

Organisation and timing 

As per the Better Regulation Guidelines on impact assessments and ex-ante evaluations, 
an inter-service steering group was set up to follow and steer the process. For this impact 
assessment it included the following Commission’s departments: the Directorate-General 
for  Internal  Market,  Industry,  Entrepreneurship  and  SMEs  (lead  service);  Budget; 
Communications  Networks,  Content  and  Technology,  Competition;  Economic  and 
Financial  Affairs;  European  Political  Strategy  Centre;  Eurostat;  Migration  and  Home 
Affairs;  Mobility  and  transport;  Research  and  Innovation;  Secretariat-General;  Legal 
Service; Trade; as well as European External Action Service.   

The  inter-service  steering  group  met  for  the  first  time  on  7  February  2018  and  was 
involved – through three meetings and several written exchanges  – in the process from 
the drafting of the Staff Working Document.  

Consultation of the Regulatory Scrutiny Board 

An  informal  upstream  meeting  was  held  on  26  January  2018  with  Regulatory  Scrutiny 
Board representatives where early feedback and advice was provided without prejudging 
the  subsequent  formal  deliberations  of  the  Regulatory  Scrutiny  Board.  On  11  April  the 
Regulatory Scrutiny Board issued a positive opinion on the Report.  

The board recommended clarifying the legal base of the initiative and potential overlaps 
with  research  funded  in  the  other  Horizon  Europe  specific  programme,  to  adjust  the 
narrative on delivery mechanisms to  allow for a  more selective approach, and to  better 
justify the proposed direct management mode for the Fund. The impact assessment report 
has been amended accordingly, in line with the board's recommendations.  

Section  3.2.1  of  the  Impact  Assessment  has  been  fully  updated  in  line  with  the  first 
recommendation.  The  wording  of  Section  2.4  has  been  improved  and  now  clearly 
explains  the  delineation  between  the  European  Defence  Fund  and  the  specific 
Programme  implementing  Horizon  Europe  with  regard  to  civil  applications.  To  better 
explain  the  delineation  and  strengths  and  weaknesses  of  the  different  options,  the 
wording across Section 4.1 has been adjusted and also the assessment of the Options in 
Section  4.2,  which  now  includes  the  possibility  to  implement,  on  a  case-by-case  basis 
and where appropriate, some measures inspired by the logic of Option 3. Finally, specific 
wording to justify the direct management mode is included in Section 4.1.1. 

45 

 
Evidence, sources and quality 

The analysis presented in this document was based on several data sources, in particular: 
various  data  sources,  academic  papers,  consultations  with  Member  States  and 
Stakeholders (see bibliography below and Annex 2). It builds on the ex-ante evaluation 
(100)  prepared  in  June  2017  for  the  proposal  of  the  EDIDP,  supported  by  an  external 
study, which analysed existing data and literature.  

It is important to point that one of important risks concerning any evaluation to be carried 
out with regards to the defence sector is the lack of publicly available statistical data on 
this  industry.  In  particular,  Eurostat  does  not  have  separate  statistics  on  defence  or  the 
defence  industry  (civil  and  military  use  are  not  separated),  whereas  data  from  Member 
States is often classified. 

Work on this Impact Assessment was predominantly carried out in-house. As far as the 
academic papers  and other publications used  for the Impact Assessment are concerned, 
these are provided in the bibliography (overleaf). 

Bibliography 

Aerospace and Defence Industries Association of Europe (ASD), Position Paper on 
Providing a Concept For The European Defence Research Programme (EDRP), 2017 
[Accessed at http://www.asd-europe.org/position-paper-on-providing-a-concept-for-the-
european-defence-research-programme-edrp on 20 March 2018] 

Aerospace and Defence Industries Association of Europe (ASD), Position Paper on the 
Proposal for a Regulation establishing the European Defence Industrial Development 
Programme (COM), 2017 

Bellais, R. & Droff, J., 'La nécessaire réorganisation de l'industrie de défense en Europe', 
Revue Défense Nationale, Comité d'études de défense nationale, Paris, 2013, pp. 47-52.  

Bellais, R., ‘Chapter 6: The Economic Imperative of Europeanizing Defense Innovation’, 
N. Karampekios et al. (eds.), The Emergence of EU Defense Research Policy, Springer 
International Publishing AG, 2018, pp. 93-109. 

Bellais, R., ‘Production d'armes et puissance des nations’, L’Harmattan, Paris, 1999. 

Bellouard, P. & Fonfria, A., ‘Prime Contractor/SME Relationship. How to Best Manage 
and Fund Cooperative Programmes’, ARES Policy Paper, 2018. 

Briani, V., 'The costs of non-Europe in the defence field', Centre for Studies on 
Federalism and Instituto Affari Internazionali, April 2013a. 

Briani, V., 'Armaments duplication in Europe: A quantitative assessment', CEPS Policy 
brief, No. 297, Brussels, 16 July 2013b. 

100  European  Commission  Staff  Working  Document  SWD  (2017)  228and  its  annexes.  It  includes  a  list  of  literature 
sources. 

46 

 
                                                 
Council Decision (CFSP) 2017/2315 of 11 December 2017 establishing permanent 
structured cooperation (PESCO) and determining the list of participating Member States. 

Council Decision (CFSP) 2018/340 of 6 March 2018 establishing the list of projects to be 
developed under PESCO. 

Council of the European Union, ‘Council conclusions on implementing the EU Global 
Strategy in the area of Security and Defence’, Brussels, 14 November 2016. 

Council Recommendation of 6 March 2018 (6588/1/18) concerning a roadmap for the 
implementation of PESCO. 

Cour des Comptes, La Coopération Européenne En Matière D’armement - Un 
renforcement nécessaire, soumis à des conditions exigeantes, 2018. 

Europe Economics, “Study on R&D/R&T contracting policies in support of SMEs”, 
London, 2009a. This work has received funding from the European Defence Agency. It 
reflects only the author’s views. 

Europe Economics, “Study on the Competitiveness of European Small and Medium sized 
Enterprises (SMEs) in the Defence Sector, London, 2009b.  

Europe Economics, The economic case for investing in Europe's defence industry, 
London, 2013.  This work has received funding from the European Defence Agency. It 
reflects only the author’s views. 

Europe Economics, Defence SMEs and Defence Supply Chains - Final Report, London 
2018. 

European Commission Advisory Group Report, ‘European Commission Advisory expert 
group on cross-border access for SMEs to defence and security contracts: Final Report 
and Recommendations’, Brussels, 2016  

European Commission Public Consultation, On EU funds in the area of security, 2018 
[Accessed at https://ec.europa.eu/info/consultations/eu-funds-area-security_en on 20 
March 2018 on 20 March 2018] 
European Commission DG Communications Networks, Content & Technology Final 
Report Quantifying the impact of Pre-Commercial Procurement (PCP) in Europe based 
on evidence from the ICT sector, 2015. 

European Commission Staff Working Document SWD (2013) 279 of the European 
Commission of 24 July 2013 accompanying the document “Towards a more competitive 
and efficient defence and security sector”. 

European Commission Staff Working Document SWD (2017) 228 of the European 
Commission of 7 June 2017 “ 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”. 

47 

 
European Commission Staff Working Document SWD (2017) 220 of the European 
Commission of 29 June 2017 "In-depth interim evaluation of H2020".European Council, 
European Council meeting (15 December 2016) – Conclusions, Brussels, 15 December 
2016.European Defence Agency, Guidelines for facilitating SMEs' access to the defence 
market, Brussels, 2015. 

European Defence Agency, Table EDA-27 Collective and national data 2005-2014, 2016 
[Accessed at http://www.eda.europa.eu/docs/default-source/brochures/eda-collective-
and-national-defence-data-2005-2014-(excel).xlsx on 20 March 2018] 

European Defence Agency, ‘Defence data 2006-2016’, Brussels, 2018 [Accessed at 
https://www.eda.europa.eu/docs/default-source/documents/eda-defence-data-2006-2016 
on 20 March 2018] 

European External Action Service, ‘Launching the European Defence Fund, 07 June 
2017’, Brussels, 2017 

European Commission, Communication from the Commission to the European 
Parliament, the Council, the European Economic and Social Committee and the 
Committee of the Regions – Launching the European Defence Fund, COM (2017) 295 
final, 2017. 

European Commission, 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 - A Modern Budget for a Union that 
Protects, Empowers and Defends - The Multiannual Financial Framework for 2021-2027, 
COM(2018) 321 final, 2018. 

Council of the EU, Proposal (15536/17) for a Regulation of the European Parliament and 
of the Council establishing the European Defence Industrial Development Programme 
aiming at supporting the competitiveness and innovation capacity of the Union's defence 
industry (First reading) - General approach, June 2017. 

European Parliament Committee on Industry, Research and Energy, Draft Report 
2017/0125 (COD) on the 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, 
2017. [Accessed at http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-
//EP//NONSGML+COMPARL+PE-608.022+01+DOC+PDF+V0//EN&language=EN on 
20 March 2018]. 

European Parliament, Resolution 2013/2125(INI) of 21 November 2013 on the European 
Defence Technological and Industrial Base. [Accessed at 
http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P7-TA-
2013-0514+0+DOC+XML+V0//EN&language=GA on 20 March 2018] 

Resolution  2013/2125(INI)  of  the  European  Parliament  of  21  November  2013  on  the 
European Defence Technological and Industrial Base. 

48 

 
European Parliament, Directorate-General for External Policies, Study: The future of EU 
defence research, Brussels, 2016. 

European Parliament, Directorate-General for External Policies, The Development of a 
European Defence Technological and Industrial Base (EDTIB), Brussels, 2013.  

European Parliament, Report on the European Defence Union (2016/2052(INI)), 2016. 
[Accessed at http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-
//EP//TEXT+REPORT+A8-2016-0316+0+DOC+XML+V0//EN on 20 March 2018] 

European Political Strategy Centre (EPSC), 'In defence of Europe: Defence integration as 
a response to Europe's strategic moment', EPSC Strategic Notes, Issue 4, Brussels, 15 
June 2015. 

European Union Institute for Security Studies (EUISS), 'Lessons learned from European 
defence equipment programmes', Occasional paper, No. 69, Brussels, 2007. 

European Union Institute for Security Studies (EUISS) and European Commission, 
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Achievements and Prospects', Public Procurement Law review, Vol. 17, Issue 3, Sweet 
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London, 2016, pp. 208-230. 

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Ianakiev, G., 'Defence Offsets: Regulation and Impact on the Integration of the European 
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49 

 
IHS, ‘Analysis of defence-related SMEs’ composition in EU’, 2017. This work has 
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views. 

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50 

 
 
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51 

 
 
 
 
 
ANNEX 2: STAKEHOLDER CONSULTATION  

This  annex  is  the  synopsis  report  of  stakeholder  consultation  activities  carried  out  to 
prepare the proposal for a Regulation of the European Defence Fund 2021-2027 to seek 
stakeholders' views on the goal, structure and implementing modalities of the Fund.  

The stakeholder consultation built upon the views already obtained when setting up two 
limited  testing  programmes  under  the  2014-2020  EU  budgetary  period;  namely  the 
Preparatory  Action  on  Defence  Research  (PADR)  launched  in  April  2017  and  the 
Commission  proposal  for  a  regulation  for  a  European  Defence  Industrial  Development 
Programme (EDIDP) adopted in June 2017. 

Identification of stakeholders 

The identified stakeholders cover those that are directly affected by the Fund and have a 
high level of awareness of the initiative, such as Member States, Industry and Research 
Institutions.  It  also  covers  stakeholders  that  may  have  an  opinion  on  the  subject,  e.g. 
citizens  and  certain  Non-governmental  Organisations  with  strong  views  and  committed 
to the subject.  

Consultation methods 

To  seek  external  advice  in  the  short  and  longer  terms  on  defence  research  policy 
Commissioner Bienkowska convened a group of sixteen high-level persons active in the 
area  of  defence; 
industry,  research  organisations,  European/  national 
parliaments,  and  policy-focussed  institutes.  Following  regular  conversations  and 
consultations  this  'Group  of  Personalities'  published  a  report  on  "European  Defence 
Research - the case for an EU-funded R&T programme" (Group of Personalities Report) 
in January 2016. 

including 

To  give  all  stakeholders  the  possibility  to  comment,  the  Commission  initiated  an  Open 
Public  Consultation  on  the  European  Defence  Fund,  as  part  of  a  larger  consultation 
exercise  on  all  policy  areas  covered  by  the  EU's  long-term  budget  for  2021-2027.  The 
Open Public Consultation ran from 13 January 2018 to 9 March 2018. The questionnaire 
was accessible in 23 EU languages.  

Through  the  Open  Public  Consultation  web  portal  also  five  Position  Papers  have  been 
received by Non-governmental Organisations and Research Institutions.  

In  addition  to  the  Open  Public  Consultation,  the  Commission  received  position  papers 
from the industrial organisations and some Member States.   

Analysis of feedback from the Open Public Consultation 
The  response  rate  to  the  consultation  on  the  Fund  (101)  was  low:  48  replied  have  been 
associations,  Non-governmental 
received 

enterprises,  business 

from  private 

101 European Commission Public Consultation (2018). 

 
 
 
  
                                                 
 
Organisations, public authorities, research and academia and a religious community (see 
figure below). A likely reason for the low uptake could be that, being part of a general 
consultation exercise where a set of standardised questions has been asked focussing on 
past experience, the questions were only applicable to a limited extent to the Fund (102). 
Also  for  this  reason  five  respondents  have  submitted  position  papers  allowing  them 
provide their views and opinions. 

Type of respondent (n=48) 

20

15

10

5

0

Private
enterprise

Business
association

NGO

public
authority

Research/
academia

religious
community

Other/ no
answer

The Consultation asked questions on the importance of the policy challenges, conceived 
EU-added  value,  and  experience  with  current  funding  possibilities  under  the  European 
Defence Fund.  

A large majority of respondents (84%) considers that the policy challenge that the Fund 
aims to address is rather to very important. Only 2% of respondents are of the view that 
this  is  not  an  important  challenge.  When  asked  to  what  extent  the  programmes  adds 
value, compared to what Member States could achieve at national, regional and/or local 
levels;  92%  considered  the  programme  adds  value:  with  37.5  %  believing  that  it  adds 
value to some extent; 42% to a fairly large extent and 12.5% to a large extent. Only 2% 
found that it does not at all add value. 

The  Table  below  shows  which  obstacles  respondents  considered  to  a  lesser  or  large 
extent to  hamper the achievement of objectives of the fund  under the 2014-2020 MFF.  
Although it is difficult to draw conclusions from the below given the limited number of 
replies and limited the operational experience with the Fund, some observations can be 
made: administrative burden and the difficulty to ensure sustainability after the funding 
period are considered as the most burdensome obstacles by respondents. On the contrary, 
respondents were less concerned about possible insufficient use of financial instruments, 
insufficient stakeholder involvement, or administrative capacity to manage the projects. 

102 Most questions asked about the respondents experience with programmes under the current EU budgetary period 
2014-2020.  It  should  be  kept  in  mind  that  the  European  Defence  Fund  has  been  only  operational  to  a  very  limited 
extent at the moment of the Open Public Consultation.   

 
 
 
 
                                                 
Obstacle 

Large 
extent 

administrative 

High 
burden and delays 
Lack of critical mass 
Insufficient 
administrative capacity 
to manage 
Lack of flexibility 
Difficulty  of  combining 
EU  action  with  other 
public interventions 
Insufficient 
performance 
Difficultly 
sustainability 
projects  
Insufficient 
financial instruments 
Insufficient 
involvement 
stakeholders 

to  ensure 
of 

focus  on 

use 

10 

11 
6 

8 
12 

6 

17 

3 

10 

Fairly 
large 
extent  
26 

15 
15 

23 
13 

15 

12 

13 

12 

Some 
extent 

Not at all 

Total 
no 
respondents 

7 

11 
14 

9 
16 

8 

6 

11 

13 

1 

6 
5 

3 
3 

9 

5 

8 

7 

44 

43 
40 

43 
44 

38 

40 

35 

42 

Analyses of feedback from position papers and consultations  
A first broad distinction can be made between those Stakeholders that do not support the 
objectives of the initiative and those that do support it:   

Stakeholders not supporting the objectives of the Fund: 

The Stakeholders that oppose  the initiative or are very critical to  it mainly  put  forward 
arguments of an ethical nature. According to a Non-governmental Organisation the Fund 
is not a good instrument to preserve jobs and growth, as it diverts resources from the civil 
research to the military industry leading to 'crowding out effects' whilst the civil sector 
contributes more to growth and jobs. This contributor also argued that the Fund will not 
strengthen  the  European  military  industry,  as  nothing  is  done  to  overcome  Member 
States' tendencies to serve short-term national industrial interests and as the meaning of 
European  strategic  autonomy  is  not  defined  and  no  requirements  are  set  to  resolve 
duplication of weapon systems. The contributor concluded that military solutions are not 
the best to support a global peaceful economic growth. Money should be rather spent to 
address  the  security  challenges  in  a  peaceful  and  sustainable  manner;  for  example 
through  humanitarian  aid  programmes.  Another  contributor  underlined  that  the  EU 
should  focus  on  long-standing  human  security  and  sustainable  peace  and  not  on  the 
business  interests  of  the  defence  industry.  It  also  called  to  ban  ethically  problematic 
technologies  from  funding  and  to  establish  an  advisory  body  to  elaborate  ethical  and 
legal guidelines.    

Stakeholders supporting the objectives of the Fund 

The Group of Stakeholders with a high awareness of the Fund expressed their support for 
the  initiative.  This  Group  covers  Research  Institutions,  Member  States  and  defence 
companies and  business associations. Inputs received from these  Stakeholders focussed 

 
 
 
on (I) the type of activities that the Fund should finance and on (II) the structure of the 
Fund and delivery mechanisms. 

(I) Topics to be financed 

A Research Institute argued that Defence Research should combine a top-down approach 
(capability  pull)  with  a  bottom-up  approach  (technology  push),  as  the  latter  provides 
insights and guidance to decision-makers on most relevant technologies and challenging 
that  determine  strategic  autonomy  and  technological  leadership.  European  research  and 
innovation activities on critical defence technologies should be intensified to ensure own 
up-to-date  applications  and  the  EU’s  strategic  autonomy.  The  Institute  identified  seven 
grand defence-technology challenges for Europe post-2020 and proposed research topics 
within these challenges: artificial intelligence and autonomy; digital battlefield; quantum 
technologies  for  defence  applications;  advanced  radar  technologies;  power  supply  and 
efficiency;  next-generation  effectors;  human  performance  enhancement.  Another 
Research Institute underlined that there should be a balance between short-term goals and 
long/mid-terms research priorities to improve competitiveness. In its view it is important 
to  support  new  technologies  and  advanced  concepts  (emerging,  disruptive,  or  coming 
from other sectors) that can have a major impact on future defence capabilities and those 
that provide solutions for interoperability and common standards. Also input from other 
research organisations argued to reinforce the inclusion of lower RTL research to enable 
disruptive  results.  An  industrial  association  identified  four  top  level  capability  areas  in 
which investments are needed: Gaining Information Superiority: Enabling Expeditionary 
Operations:  Protecting  EU  Territory:  Maritime  Mobility  and  Operational  Capability  at 
Sea.  To  support  such  top-level  capability  areas,  the  Fund  could  fund  research  and 
development  projects  in  Mission  oriented  projects,  Capability  development  projects, 
Critical technologies, and disruptive technologies. A research association welcomed the 
Fund  as  an  important  step  towards  intensified  defence  cooperation.  Harmonisation  and 
synchronization of capability development projects are necessary for the effectiveness of 
the  fund.  It  recommended  setting  up  a  “European  Requirements  and  Synchronisation 
Evaluation Office or board”. As the most important technical and cooperation decisions 
of  a  major  capability  development  project  are  taken  in  the  early  stages  and  as  they  are 
also  the  least  costly  phase  of  capability  development,  it  recommended  focussing  the 
funding on the first phase of each project. This would allow supporting more projects and 
a higher contribution percentage. 

(II) Structure of the Fund and funding modalities 

An  industry  organisation  argued  for  a  holistic  capability-driven  approach  to  the  whole 
technology  cycle,  based  on  integrated  planning  for  both  research  and  development.  It 
recommended  establishing  the  Fund  separately  from  the  Framework  Programme  for 
Research and Innovation, on the basis of a single regulation covering both the research 
and the capability window. The Fund should align as much as possible the modalities of 
the  two  windows,  but  also  taking  into  account  the  differences  between  research  and 
development actions.  

 
 
On  Rules  of  Participation,  a  research  organisation  put  forward  that  the  Fund's  rules  of 
participation should build as much as possible on those for the EU civil programmes and 
only differentiate where necessary. As regards third country participation: It commented 
that  that  rules  should  be  set  avoiding  dissemination  of  knowledge  beyond  EU  member 
States.  

On IPR rules, Stakeholders were also united in their  views that IPR models need to be 
adapted for defence. Research Institutes asked for a specific attention to IPR rules, which 
should preserve the right of all participants in the project and not only large industry.  

All inputs received on the funding rates shared the view that funding rates need to take 
into  account  the  specifics  of  the  sector.  As  regards  the  research  window  100%  EU 
financial  contribution  is  necessary  according  to  one  research  organisation.  Different 
research institutes argued that the cost of infrastructures needs to be covered. The Group 
of Personalities Report advised that the rules of participation of Horizon 2020 needed to 
be adjusted to address defence specificities. In particular, they argued that a percentage 
higher  than  25%  to  cover  indirect  costs  should  be  allowed.  An  industrial  association 
commented that the funding rates cover in reality only around 50% of the real industrial 
costs,  which  contrary  to  the  civil  sector,  is  not  appropriate  for  defence  as  there  is  one 
customer  who  determines  the  requirements,  timetables  and  export  markets.  Defence 
companies  cannot  risk  investing  in  R&T  activities  for  a  product  that  may  never  be 
acquired by the customer or exported.  

On  simplification  and  flexibility:  Several  inputs  called  for  a  simple,  but  flexible 
approach:    A  research  institute  plead  for  one  simple  cost  method.  An  industrial 
association argued that "the Golden Rules of successful cooperative programmes must be 
followed: lean processes, single-point leadership, a strong participation and commitment 
from  Member  States  to  the  acquisition  road,  and  a  single  set  of  specifications".  The 
Group  of  Personalities  Report  found  that  options  for  co-funding  by  Member  States 
should be considered e.g. through models like PCP.  

 
 
 
 
ANNEX 3: EXAMPLE ILLUSTRATING FRAGMENTATION IN THE EU DEFENCE INDUSTRY  

As  mentioned  in  Section  2.2.2,  one  relevant  illustration  of  the  fragmentation  and  the 
resulting  impact  on  the  competitiveness  of  the  industry  can  be  found  in  relation  to 
combat aircraft. The Table below provides a comparison between the R&D costs and the 
expected sales of the three European aircrafts (Eurofighter Typhoon, the Rafale and the 
Gripen)  and  the  US-led  Joint  Strike  Fighter  F-35  programme.  It  is  mainly  based  on 
figures provided in the 2013 study on the costs of non-Europe in the defence field (103) 
with the addition of recent data on the Joint Strike Fighter F-35 programme because of 
the magnitude of the difference in the corresponding figures.  

Table:  Comparison  between  the  European  aircraft  projects  and  the  US-led  Joint  Strike 
Fighter (104) 

The Table clearly illustrates the difference in the size of the expected production output 
between the three European Programmes and the Joint Strike Fighter F-35 Programme. 
One  can  note  that  even  with  the  most  recent  figures  on  the  Joint  Strike  Fighter  F-35 
Programme  (105),  which  show  lower  expected  sales  and  more  importantly  substantially 
higher R&D costs, the level of R&D costs per unit remains comparable to those of the 
European aircraft because the scale of production is still greatly superior (106). To provide 
a  simple  illustration  of  the  consequences  of  fragmentation,  the  last  three  columns  were 
added to the table showing the difference in the amount of R&D costs per unit that could 
have  resulted  if  only  one  EU  project  has  been  realised  with  sales  equivalent  to  those 
achieved by the existing three.  

103 Briani (2013a).  
104 The Eurofighter Typhoon Programme is a programme performed in cooperation by four EU Member States (UK, 
DE, IT and ES). The Joint Strike Fighter F-35 is a US-led Programme performed in collaboration with partner nations 
that include four EU Member States (UK, IT, NE, DK). The remaining two programmes are national ones (they would 
thus not be affected by possible additional costs of cooperation as described in Section 2.1.3).   
105 Unites States Government Accountability Office (US GAO) 2017, p. 165. 
106 It is important to note that looking only at the data on costs does not provide information on the differences in the 
performance  of the  different  aircrafts.  The  Joint  Strike  Fighter F-35  is  for  instance a  more  recent  project integrating 
very  advanced  technologies.  The  objective  here  is  not  to  provide  a  comprehensive  assessment  of  the  different 
programs, but to only demonstrate the effects of fragmentation and scale.  

R&D Costs (mEUR)Units envisaged/producedR&D costs per unit (mEUR) R&D costs per unit if single EU project (mEUR) Change in R&D cost per unit if single EU project (%)Eurofighter19.4807072816-41%Gripen1.48020471-83%Rafale8.610294297-76%Total European Programmes29.5701.20525JSF F-35 (US-led)19.3403.0036JSF F-35 (US-led)63.8392.45726Data source Briani (2013) for columns 1 to 3; columns 4 to 6 - own calculations on the basis of the data from Briani (2013)Data source US GAO (2017) for columns 1 to 3; column 4  - own calculations on the basis of the data from US GAO (2017)