EU Defence Ministers Agree to Establish European Defence Procurement ‘Code of Conduct’
November 29, 2005
The Defence Ministers from all European Union countries except Denmark, making up the steering board of the European Defence Agency (EDA), decided on 21 November 2005 to establish a voluntary intergovernmental regime—a code of conduct—for the European defence procurement market.
The new code of conduct will apply from 1 July 2006 to all procurement of materials and services of military application of over €1 million, even where national security measures are applicable. If there is no military application with national security concerns, the normal EU rules on public (government) procurement apply.
The main principles of the new EU Defence Procurement Code of Conduct are as follows:
- No Change in Contracting Powers: The final authority for contract award remains with the EU Member State national authorities.
- Equal Opportunities: Participating EU Member States should maximise fair and equal opportunities for all suppliers based in other participating Member States.
- Internet Publication of Tenders: A single online portal will be developed by the EDA to provide advance notification of invitations to tender for relevant defence contracts. The invitation to tender notification will briefly describe the contract, the procedures and time scales for the competition and the award criteria. A standard form contract award notice should also be published.
- Fair and Equal Treatment: The conduct of the competition should be fair. Equality of treatment should be assured in relation to the selection criteria (which should be transparent and objective), the specifications and statements of requirements (international standards should be used where possible), award criteria (these should be determined from the outset and the fundamental criterion should be that the selected bid is the most economically advantageous one in the particular circumstances) and the debriefing of unsuccessful bidders.
- Review Mechanism: There should be mutual transparency and accountability. In particular, the participating Member States should review data demonstrating how the new regime impacts defence procurement in practice.
- Comply or Explain: Where a Member State does not apply the regime in a particular case, it should explain to other Member States the reasons for this within the forum of the EDA. In addition to the general exceptions to the application of the code, it is recognised that there may be non-observance in cases of pressing operational urgency, follow-on work or supplementary goods and services and for extraordinary and compelling reasons of national security.
- Naming Is Only Sanction: There is no sanction for non-observance of the code, although incidence of non-observance should be reported.
- EDA Review and Monitoring: Although the EDA will not assume the role of an investigator, in order to have mutual visibility and reassurance about the operation of the system, the EDA will develop a monitoring and reporting system. Member States should co-operate with the EDA in this respect. The operation of the code of conduct will be kept under continuous review, and Member States agree to pursue progressively closer alignment of their policies and practices over time.
- Reporting Government Aid and Mergers to EDA: Member States agree to inform the EDA of any use of the exception in the EU Treaty (article 296). For security reasons the normal EU competition rules will not apply to the grant of state aid or to mergers.
- Mutual Assistance: Member States must ensure that they assist and expedite each others' contracted defence requirements. Where Member States are given the opportunity to sell into each others' markets, they must do everything possible to ensure dependable and competitive sources of supply. They should work to increase the level of mutual confidence by improving the predictability and dependability of their regulations and policies.
- Code of Best Practice for Sub-Contracting: The Member States should seek to ensure that fair competition and the benefits of the regime are driven down the supply chain. A code of best practice in the supply chain will be agreed with industry in order to promote transparency and fair competition at the sub-contract level. The regime will depend on there being mutual benefit in subscribing to it. In particular, opportunities for small- and medium-sized companies to sell should be expanded (probably as sub-contractors).
- Voluntary Compliance: The code of conduct does not involve any legally binding commitment. Member States will choose whether or not to participate, and those that do participate can withdraw at any time. Member States should confirm to the EDA by 1 April 2006 whether they intend to participate.
There are a number of exceptions to the code of conduct. It does not apply to the procurement of military equipment and services related to all of the following:
- Research and technology
- Collaborative procurements
- Nuclear weapons and nuclear propulsion systems
- Chemical, bacteriological and radiological goods and services
- Cryptographic equipment
The EDA is an agency of the European Union. All EU Member States participate in it, except Denmark. The EDA was created by the EU Council in July 2004. It has four main functions relating to defence capabilities development, armaments co-operation, the European defence technological and industrial base and defence equipment market, and research and technology.
Threats and Opportunities for Defence Contractors—the EU Defence Procurement Code and Other European Initiatives
While some EU countries have partly opened up their defence procurement markets, this is the first time the EU countries have decided together to do so as a matter of policy. It demonstrates a greater commitment to a pan-European defence market and the beginning of new competitive pressures and opportunities in European defence.
The new EU Defence Procurement Code will lead to more cross-border competition within Europe for defence contracts. There is a real risk that non-EU, particularly U.S., defence contractors will find themselves with even less opportunity to participate in European contracts. European sub-contractors are likely to find themselves faced with much more competition from their EU counterparts. If the EU Procurement Code achieves its goals, there will almost certainly be significant new consolidation in the European defence industry.
Those having cross-border defence contracts will need to consider how best to participate in the development of the ‘Code of Best Practice for Sub-Contracting’, particularly U.S. and other non-EU suppliers active in the European defence markets.
Other European developments pushing the defence business in the direction of an EU-wide military supply market include the recent work being done by the European Commission and European Defence Agency on standardisation and the European ‘Handbook for Defence Procurement.’ A failure to be aware of these and other EU developments, and a failure to take an early part in the once-only opportunity to influence European defence initiatives, could put contractors, particularly U.S. defence contractors, at a considerable disadvantage.
McDermott Will & Emery’s Brussels team has unique and extensive experience with the EU rules applicable to the defence procurement market. Our lawyers from some ten EU countries have many years’ experience dealing with the EU institutions. We can assist defence contractors in the following areas:
- Provide timely and relevant information on developments through reports and client “alerts”
- Develop strategies and plans to influence the EU process, including in the processes for establishing EU defence rules on equipment and service standards and norms, the ‘Handbook for Defence Procurement’ and the ‘Code of Best Practice for Sub-Contracting’
- Influence the continuing discussions and direction of the EU Commission and EDA regarding the “European Defence Procurement Code of Conduct”
- Obtain outcomes from the EDA and European Commission’s initiatives so (particularly U.S.) defence contractor interests are protected and enhanced
- Defend defence contractors before the EU Commission, European Courts and the EDA in EU defence procurement litigation and in administrative proceedings.
We can also provide defence contractors with an assessment of how these regulatory changes will impact their current and future tendering practices and business in Europe.
