In January 2009, after a year-long debate (notable for many member states' seemingly relaxed attitude to, and low levels of interest in, the legislative process), the European Parliament approved a new Directive on the procurement procedures for certain works, supplies and services contracts awarded by contracting authorities in the fields of defence and security. Governments have traditionally considered that the existing EU procurement regime was ill-suited for many defence contracts. Among their main concerns were the facts that the existing regime has been developed for civil purchases and that its rules and procedures did not sufficiently take into account the specificities of defence and security sensitive contracts. As a result, governments made an almost systematic - and often unjustified - use of article 296 of the EC Treaty, which allows member states to take measures it considers necessary to protect national security, to exempt most of their procurement from the EU regime altogether.
To open up these contracts to the market, while creating a flexible and workable regime that safeguards the needs of national security interests, the Commission put forward a proposal for a defence-specific procurement Directive in December 2007. Only time will tell whether it meets the dual aim of ensuring open competition and safeguarding security interests, but some of the key features and challenges of the Directive are set out below.
What contracts are covered?
The new Directive applies to contracts for works, supplies and services related to military equipment (defined as equipment specifically designed or adapted for military purposes or intended for use as an arm, munition or war material).
In addition, it also applies to contracts that, although not related to military equipment, are equally sensitive and require special security measures, such as certain contracts awarded by police forces and border protection agencies. In many cases, military and security sensitive equipment is developed using the same technology, and produced by the same companies and their procurement shares similar characteristics, such as confidentiality requirements.
However, although the objective is to open defence contracts to competition, governments could still rely, in exceptional cases, on article 296 EC to exempt certain contracts where it is necessary to protect essential security interests. This would include contracts that are so sensitive that their very existence must be kept secret. That said, governments wishing to exclude contracts from the new Directive will be limited to truly exceptional cases, and one can certainly expect the Commission to monitor the use of article 296 EC more closely in the future.
Security of information
Unsurprisingly, given the sensitive nature of the procurements, the new Directive contains special measures to protect the security of information contained in tender documentation. To this end, contracting authorities may require bidders and their identified subcontractors to make a commitment to safeguard appropriately the confidentiality of all classified information in their possession or coming to their attention throughout the duration of the contract.
Security of supply
The new rules also allow governments to specify requirements on security of supply. These include, for example, a requirement on the tenderers to submit documentation that confirms that their governments do not prohibit the transfer of the goods or services being procured.
More surprisingly, in a public procurement context, these measures also include the possibility to require a commitment from the tenderer to establish and/or maintain the capacity to meet, on terms to be agreed, the additional needs of the contracting authority as a result of a crisis. This raises multiple issues.
First, it seems to allow the contracting authority to take account of requirements that are not strictly related to the subject matter of the contract (here, the potential additional needs), something that is not allowed in the public sector.
Second, the fact that the terms of supply of the additional needs still remain to be agreed suggests that a new contract, in procurement terms, may well be awarded when those needs are subsequently defined. There is an open question as to how a contracting authority will be able to award a new contract without a tender process - the imminence of a crisis may well justify direct awards.
Finally, these measures may also be quite demanding of tenderers who may be required to offer a commitment to provide a licence to the contracting authority for the production of spare parts and components, even in cases where they are no longer able (or have no commercial desire or interest) to provide these supplies.
One of the hotly debated issues during the legislative process concerned the importance of research and development, as a key to strengthening the EU defence technological and industrial base. Given that, unlike many other industries, R&D in the defence sector is today largely funded by the member states, it was feared, during the legislative process, that companies would no longer invest in R&D if they could not be confident of winning the resultant production, while governments could cut back investment if production could be carried out elsewhere. The position adopted, after considerable last-minute wrangling, was that to stimulate state-funded R&D in this field, the Directive offers maximum flexibility to award contracts for research supplies and services directly. However, a clear division between R&D and the production phases must be drawn and, despite intense lobbying efforts, a requirement was introduced that the contract for the production of the resulting research must be tendered openly. The effect this will have on R&D and on how the resultant contracts, which traditionally have been used to benefit some of the wider socio-economic interests of the member states, are used remains to be seen.
As in the existing public sector Directive, the contracting authority may ask, or may be required by a member state to ask, tenderers to indicate what share of any proposed contract they intend to subcontract. In addition, the new Directive also provides that contracting authorities may ask, or may be required to ask, the successful tenderer to subcontract a share of the contract, which may be up to 30 per cent of the total contract value. Unlike in the existing public sector directive the new Directive also provides that for such subcontracts the successful tenderer must conduct a form of transparent and competitive selection process, which excludes participation of the successful tenderer's subsidiaries or affiliated companies. There is, naturally, a concern on the part of some defence contractors that, in addition to them perhaps receiving less work than they may have anticipated under a particular contract, the Directive will also impose an onerous and time-consuming burden on them in terms of running competitions to give away "their" own work.
One major practical issue with which contracting authorities and tenderers will have to grapple is the point at which the competitive selection of subcontractors will have to take place. If such a process occurs before the submission of the main tender, then contracting authorities will have to take this into account when setting the timetable for their procurement, and build in enough time to allow tenderers to run this process. If it is envisaged that it will take place after selection of the successful tenderer, then a question arises as to the basis of this selection when the deliverability of such a large proportion of the contract remains uncertain.
The new Directive broadly adopts the remedies set out in the new Remedies Directive, including the requirement to implement a 10-day standstill between selecting the successful tenderer and concluding the contract, as well as the new remedy of ineffectiveness of concluded contracts for the most severe breaches of procurement law.
The new Directive is silent on the subject of offsets. Offsets are compensation that today many governments require when they procure defence equipment from non-national suppliers, and are intended to secure an economic return on defence investment (for example, a member state may require as a condition of the award of the contract that the contractor build a plant or create a certain number of jobs within a depressed economic region of that member state).Offset policies and practices vary greatly between member states - some do not require them at all, others require them by law, by guidance, or on an ad hoc basis. The way offsets are used in the procurement process also varies: in some member states, offsets are used as an award criterion, in others they are imposed as a condition for the performance of the contract.
In this context, offsets are problematic as they usually entail discrimination by their very nature and require considerations that, strictly speaking, may be unrelated either to a contractor's ability to perform the contract or to its subject matter. As such, they stand in direct contrast with the objective of the procurement regime. Rather than attempting to solve this sensitive and political issue through the procurement rules, the legislator opted to leave offsets out of the scope of the new Directive. Practice will reveal how (or whether) governments manage to comply with the provisions of the Directive and pursue their conflicting offsets policies.
Use of the negotiated procedure
Under the new Directive, contracting authorities have a free choice between the restricted procedure and the negotiated procedure with prior publication of a contract notice. The competitive dialogue procedure is also available for particularly complex contracts and the negotiated procedure without publication of a notice may be used in exceptional cases.
In the public sector, it is commonly considered that the negotiated procedure is the most flexible of all procedures, but also the least transparent, as it allows the contracting authority and the bidders to negotiate the terms of the contract. For this reason, in the public sector, the availability of the negotiated procedure is subject to strict conditions. In contrast, the competitive dialogue procedure, while it offers the possibility to discuss the specifications with the bidders, is seen as less flexible as it requires the contracting authority to follow a strict and structured process.
Under the Defence Directive, contracting authorities will always be able to use the negotiated procedure with notice, giving them the flexibility to negotiate all details of the contract. It therefore remains to be seen whether the less flexible competitive dialogue, the availability of which will be subject to conditions, will be used in this sector.
As usual with Directives, the end of the legislative process marks only the beginning of the story. Before the new Directive formally applies to individual contracts, it needs to be formally ratified by the Council and implemented in the national laws of the member states (within two years of publication of the final text in the Official Journal of the EU, expected later in 2009).