Europe ponders new competition policy for defense procurement

Richard Rector

Although the European Union is steadily erasing the borders among its member states, defense spending among EU members remains largely segregated along national lines. Most member states award their defense contracts to national suppliers, primarily because member states are wary of sharing confidential defense information with suppliers from other nations.

This bias is strengthened by the fact that the EU lacks a cohesive regulatory framework for awarding cross-border defense contracts. As a result, the EU market is fragmented and inefficient because of limited economies of scale and the limited ability to finance significant research and development programs.

Under EU law, procurements are exempt from competition on national security grounds if they are conducted specifically for military purposes and are critical to a country's security. Most countries extensively use this exemption.

To address the obstacles that member states face in awarding defense contracts across borders, the European Commission, the EU's executive body, recently issued a Green Paper on defense procurement. The goal of the Green Paper is to stimulate debate on improving cross-border competition in the European defense market, while remaining sensitive to countries' security and confidentiality needs.

The Green Paper describes two potential ways of achieving this goal. The first would be for the commission to issue a non-legislative communication clarifying the legal framework for defense procurement. The communication also would define how the commission would interpret and apply that framework in the future.

The communication would not be legally binding, but would provide criteria for establishing when the national security exemption could be used. In cases in which the exemption does not apply, normal EU procurement rules would be used.
The second, more ambitious initiative addressed in the Green Paper suggests a totally new directive on defense procurement. The directive, which would constitute new law to be applied throughout the EU, would establish specific rules for the award of defense contracts not covered by the national security exemption.

One advantage of a new directive would be creation of rules tailored to and providing greater flexibility for the defense sector. The directive could identify specific categories of military equipment covered by the rules, identify cases in which the national security exemption would clearly apply, such as regarding nuclear equipment, and explain how it relates to other exemptions available under World Trade Organization agreements.

The directive also could establish procedures to enhance transparency and non-discrimination in EU defense procurement, such as a centralized system of publicizing contract opportunities; general use of negotiated procurement procedures; using non-competitive procedures in certain cases; and defining specific selection criteria in evaluating proposals.

The initiatives discussed in the Green Paper focus on enhancing intra-European competition rather than international competition. Nonetheless, creating a more open defense market in the EU could help U.S. firms as well.

Companies established in the EU with U.S. capital clearly would be able to participate in EU procurements under the same conditions as their European counterparts. A more competitive European market may lead to new partnerships and teaming arrangements on both sides of the Atlantic between European and American businesses.

As the Green Paper invites public comment on these potential changes by Jan. 31, the contemplated changes will not happen quickly. It does appear, however, that significant changes may be coming, so companies with interests in the EU defense community should track these developments in the coming year. n

Richard Rector is a partner in the Government Contracts Group of Piper Marbury Rudnick & Wolfe LLP in Washington. His e-mail address is richard.rector@piperrudnick.com.

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