EUROPEAN COMMISSION

Brussels, 30.11.2016

SWD(2016) 407 final

COMMISSION STAFF WORKING DOCUMENT

Evaluation of Directive 2009/81/EC on public procurement in the fields of defence and security

Accompanying the document

Report from the Commission to the European Parliament and the Council on the implementation of Directive 2009/81/EC on public procurement in the fields of defence and security, to comply with Article 73(2) of that Directive

{COM(2016) 762 final}

Contents

1.Introduction

2.Background

2.1.Government expenditure on defence and security

2.1.1.Estimate of defence procurement expenditure

2.1.2.Procurement of defence equipment

2.1.3.Outlook in defence and security expenditure

2.2.The rationale for Directive 2009/81/EC

2.2.1.The specific problem to be addressed by Directive 2009/81/EC

2.2.2.General and specific objectives

2.2.3.The operational objective and the main features of the Directive

2.3.Baseline: the situation before Directive 2009/81/EC

2.3.1.Regulatory patchwork

2.3.2.EU-wide publication of business opportunities

2.3.3.Cross-border awards

3.Evaluation questions

4.Method

4.1.OJ/TED data

4.2.Other data sources

4.3.Stakeholders consultations

4.4.Methodological issues and data availability

5.Implementation state of play

5.1.Transposition

5.1.1.The transposition process (August 2011-May 2013)

5.1.2.Technical analysis of transposition measures

5.1.3.Offsets / industrial return regulations in the context of transposition

5.2.Compliance activities concerning individual procurement cases

5.3.Uptake of the Directive

5.3.1.Defence and security procurement under the Directive

5.3.2.Defence and security procurement under the civil procurement Directives

6.Answers to the evaluation questions

6.1.Effectiveness

6.1.1.Competition, transparency and non-discrimination

6.1.2.Use of exemptions

6.1.3.Member States security concerns

6.1.4.Changes in the industrial base (EDTIB)

6.1.5.Conclusions on effectiveness

6.2.Efficiency

6.2.1.Costs of procedures

6.2.2.Costs compared to benefits

6.2.3.Administrative burden

6.2.4.Conclusions on efficiency

6.3.Relevance

6.3.1.The objectives of the Directive

6.3.2.New developments after the adoption of the Directive

6.3.3.Conclusions on relevance

6.4.Coherence

6.4.1.Internal coherence

6.4.1.Coherence with the framework of EU public procurement law

6.4.2.Directive 2009/43/EC

6.4.3.CSDP and a European capabilities and armaments policy

6.4.4.Cooperation in defence procurement

6.4.5.Conclusions on coherence

6.5.EU added value

7.Conclusions

8.Annexes

Annex I – Procedural information

Annex II – Stakeholder consultations

Annex III – Methods and analytical models

Annex IV – Complementary data

9.Bibliography

Glossary

1.Introduction

The legal basis for this evaluation is Article 73(2) of Directive 2009/81/EC (the Directive), which states that “the Commission shall review the implementation of this Directive and report thereon to the European Parliament and the Council by 21 August 2016. It shall evaluate in particular whether, and to what extent, the objectives of this Directive have been achieved with regard to the functioning of the internal market and the development of a European defence equipment market and a European Defence Technological and Industrial Base, having regard, inter alia, to the situation of small and medium-sized enterprises. Where appropriate, the report shall be accompanied by a legislative proposal”.

The purpose of the evaluation is, therefore, to assess the functioning of the Directive and, to the extent possible, its impact on the market and on the industrial base. As to the scope, the whole of the Directive is subject to evaluation. Time-wise, the evaluation covers the period from the transposition of the Directive (2011) until the end of 2015. The situation before the transposition of the Directive is taken into account as baseline. Given the short time that has elapsed since the transposition deadline, and even more since its actual transposition by Member States, it can be expected that the conclusions about the Directive’s impact on the European Defence Equipment Market (EDEM) and, especially, on the European Defence Technological and Industrial Base (EDTIB) would be very difficult to reach 1 . In that context, the evaluation assesses whether we are on track to meet the objectives set by the Directive. From a geographical point of view, the evaluation focuses on the 28 Member States of the EU and 2 EEA 2 countries (Norway and Iceland).

2.Background

This section seeks to provide background information that is essential for the evaluation of the Directive. This includes, first and foremost, data on Member States’ expenditure on defence and security and, in particular, on procurement. It also provides a brief description of the Directive and its different components, its objectives and the problems it was intended to solve; the key source in this respect is the Impact Assessment that accompanied the Commission’s proposal (the Impact Assessment) 3 . The background section also includes a description of the baseline, i.e. what the situation was like before the adoption of the Directive.

2.1.Government expenditure on defence and security

Government expenditure on defence and security in Europe accounts for a significant share of the nations’ GDP and the total public spending. For example, the guideline agreed by NATO Allies state that at least 2% of GDP should be allocated to defence spending. Meanwhile, according to the recent data for the European NATO countries 4 , defence expenditure in 2015 accounted for 1.45% of their GDP 5 . Similar range of estimates is provided by the European Defence Agency (EDA), which reports that defence expenditure of the 27 EDA Member States 6 in 2014 was around 1.42% of their GDP 7 and equalled roughly 195 billion EUR 8 .

According to Eurostat COFOG classification, defence expenditure (GF02) 9 equalled 1.3% of GDP for the EU-28 and amounted to roughly 187.4 billion EUR in 2014 (or 192.8 billion EUR, if the EEA countries were included). The highest levels of total expenditure on defence were found in Greece (2.7% of GDP), followed by the United Kingdom (2.2 % of GDP) and Estonia (1.8% of GDP), whereas Luxembourg (0.3 % of GDP), Ireland (0.4 % of GDP) as well as Austria and Hungary (both 0.6 % of GDP) reported comparatively low expenditure on defence 10 .

Figure 1: General government expenditure on defence in 2014 [% of GDP]

Source: Eurostat, http://ec.europa.eu/eurostat/statistics-explained/index.php/Government_expenditure_on_defence

As presented on the graph above, in all countries except for Romania, the major part of the total general government expenditure on defence (GF02) in 2014 was spent under military defence (GF0201) 11 . Eurostat estimates that military defence expenditure in the EU accounted for around 1.2 % of GDP of EU-28 in 2014, which in monetary terms equalled roughly 165.7 billion EUR ( Table 1 ). If the EEA counties were added, the total would increase to roughly 170.6 billion EUR.

Table 1: Government expenditure on military defence [value in million EUR]

Source: Eurostat, general government expenditure by function (COFOG) [gov_10a_exp]

The total general government expenditure on military defence can be further disaggregated into specific national accounts components (ESA 2010), such as personnel costs (e.g. wages, salaries as well as employers' social contributions) and, among other, the cost items that can serve as a proxy for the estimate of the value of public procurement linked to the military defence function of the general government, as presented in the following section.

2.1.1.Estimate of defence procurement expenditure

The estimates of the military defence procurement expenditure by general government of EU-28 and EEA countries are presented in Table 2 below. This is the closest possible proxy of the maximum potential value of defence procurement expenditure, irrespective of whether the Directive is legally applicable to specific purchases. It is, therefore, the main expenditure estimate used in this evaluation, to assess the extent of application of the Directive, including the volume of exempted procurement (see in particular Sections 5.3.1.1., 6.1.1.1., and 6.1.2.1.).

In line with the methodology applied to calculate the total expenditure on works, goods and services for the general government in civil procurement 12 , the estimate was based on the following aggregates extracted from COFOG classification for military defence (GF0201) by the general government: ‘gross fixed capital formation’ 13 and ‘intermediate consumption’ 14 . ‘Social transfers in kind – purchased market production’ 15 , which are added to the estimate of government procurement expenditure in the civil sector were equal to zero in all countries in the military defence sector 16 .

Table 2: Government procurement expenditure on military defence [value in million EUR]

Source: Eurostat, general government expenditure by function (COFOG) [gov_10a_exp]

As presented in Table 2 , in 2014 the largest budgets were at the disposal of the UK military sector (around 28 billion EUR), followed by Germany and then France (14.5 billion EUR and 13.9 billion EUR per year respectively). The disproportionately low value of military defence expenditure for Romania can be most probably explained by the fact that, in contrast to other countries, significant amounts relating to civil defence were reported by Romania (e.g. 0.8% of GDP in 2014).

The overall value of defence procurement expenditure by general government by the 28 EU Member States and EEA countries remained stable over the investigated period of time, ranging between 81 to 82 billion EUR per year. Neither has it changed significantly since the same analysis was carried out in the Impact Assessment - the average annual defence procurement expenditure in 2000-2004 calculated for EU-25 Member States was estimated at roughly 79 billion EUR 17 (not adjusted for inflation).

2.1.2.Procurement of defence equipment

The overall value of military defence procurement expenditure, as presented in Section 2.1.1 above, was estimated based on the data provided by Eurostat (COFOG). Unfortunately, this source of data does not allow obtaining more detailed breakdowns within the selected functions of government. In particular, components which could serve as comparators of the three procurement contract types (i.e. works, goods and service contracts) are not available in COFOG.

However, the expenditure on military equipment, which constitutes a fraction of the total defence procurement expenditure, is estimated by EDA and NATO. NATO divides defence expenditure into four main categories: equipment 18 , personnel 19 , infrastructure 20 and other 21 , while the EDA recognises the following breakdowns under the total defence expenditure: personnel, investment (equipment procurement and R&D), other expenditure (including infrastructure/construction), operation and maintenance. The EDA estimate of the value of defence equipment procurement, as presented in below, covers: the national defence equipment procurement, European collaborative defence equipment procurement and other collaborative defence equipment procurement.

Figure 2: Defence equipment procurement [value in billion EUR]

Source: EDA, Defence Data 2014, http://www.eda.europa.eu/docs/default-source/documents/eda-defencedata-2014-final  

The total defence equipment procurement expenditure reported by 27 EDA countries, accounted for nearly 30 billion EUR in 2013 and roughly 25.9 billion EUR in 2014. National defence equipment procurement was equal to around 20.2 billion EUR in the last year for which data was available (2014). As previously explained, the value of military equipment acquired in a given year constitutes a fraction of the total defence procurement expenditure, but it also constitutes the part of public spending that would be the most appropriate to serve as a denominator when evaluating the publication rate for the procurement of goods under the Directive.

2.1.3.Outlook in defence and security expenditure

Although defence spending has generally been decreasing since the end of the Cold War, there are multiple indications that due to recent changes in the geopolitical climate mainly driven by the terrorist threat, and deteriorating relations with Russia following the annexation of Crimea, the downward trend may reverse in the nearest future. In the NATO Annual Report 2015, it was noted that ‘in 2015, there was real progress toward fulfilling the commitment made in Wales. The first aim of the Wales pledge is to stop the cuts to defence spending: 19 countries are expected to have met this aspect of their commitment in 2015’ and ‘In 2015, 16 NATO members not only stopped the cuts to their defence budgets but increased their defence spending in real terms. Twelve of these countries are forecast to have increased their defence spending as a percentage of GDP in 2015’. As far as year 2016 is concerned, the signs of the new trend have recently also appeared via media coverage: according to Jens Stoltenberg NATO Secretary General ‘The forecast for 2016, based on figures from allied nations, indicates that 2016 will be the first year with increased defence spending among European allies for the first time in many, many years’. The latter was confirmed in a NATO Press Release of 4 July 2016 22 .

This trend may have an impact on the amount of defence procurement expenditure and, therefore, on the application of the Directive in the future.

2.2.The rationale for Directive 2009/81/EC

This section seeks to set out, on the basis of the Impact Assessment, the rationale for the EU intervention, i.e. the adoption of the Directive 2009/81/EC. The Directive regulates public procurement procedures for the award of certain works, supply and service contracts in the fields of defence and security. In essence, it provides that defence and sensitive security contracts, which fall within its scope of application, are not excluded, and whose value is above certain thresholds 23 , have to be awarded following competitive tendering procedures based on the principles of transparency and equal treatment.

Prior to the Directive, the award of such public contracts fell within the scope of Directives 2004/18/EC or 2004/17/EC (the civil procurement Directives), subject to the relevant Treaty-based derogations, in particular Article 346 TFEU (Article 296 TEC before 2009) 24 , and to the “secrecy” exclusions 25 .

2.2.1.The specific problem to be addressed by Directive 2009/81/EC

The specific problem identified in the Impact Assessment 26 – was that many Member States used Article 296(1)(b) TEC (now Article 346 (1)(b) TFEU 27 ) extensively, exempting almost automatically the procurement of military equipment from EU public procurement rules. Similarly, Member States exempted sensitive security contracts systematically on the basis of Article 296(1)(a) and/or Article 14 of Directive 2004/18/EC 28 . Derogations which should have been the exception according to the Treaty and the case law of the Court of Justice were, in practice, the rule 29 .

In the fields of defence and security, EU public procurement rules (Directives 2004/18/EC and 2004/17/EC) were rarely applied in practice. As result, most defence and security contracts were awarded on the basis of diverse national rules and administrative practices. This often led to a regulatory patchwork which was hindering the establishment of a common European defence equipment market and to non-compliance with the principles of the Treaty, in particular the fundamental freedoms of the internal market and the principles of non-discrimination and transparency, including the development of “buy-national practices”.

The main cause of the problem was deemed to lie in the general structure of EU civil public procurement rules (Directives 2004/18/EC and 2004/17/EC), which failed to address the specificities of defence and sensitive security procurement. These specificities were: the high degree of complexity, which calls for flexibility, and the special needs to ensure security of supply and the protection of classified information (security of information) 30 .

2.2.2.General and specific objectives

Together with the other elements of the so-called “defence package” that was proposed in 2007 31 , the Directive seeks to support the establishment of an open and competitive EDEM. This is expected to benefit both the supply and the demand side: European companies should obtain a larger “home” market, and competition should help public purchasers to get best value for money, thus saving scarce financial resources 32 .

A more open, competitive and efficient market should help suppliers to achieve economies of scale, optimise production capacity and lower unit production costs, thus making European products more competitive on the global market. This should, in turn, strengthen the competitiveness of European defence industry, by fostering consolidation across national boundaries, helping to reduce duplication, and enhancing industrial specialisation. Indeed, the gradual establishment of the EDEM is essential for a strong EDTIB that can provide the military capabilities that Member States need 33 . The Impact Assessment made it clear that the Commission can play a role in this area via the establishment of a more coherent regulatory framework, but emphasised that, “as sole customers of defence equipment, it is for Member States to reform the demand side of the market” 34 (i.e. via harmonisation of requirements and consolidation of demand).

Finally, the specific objective of the Directive, as defined in the Impact Assessment, implied “a properly functioning regulatory framework at the EU level for the award of contracts in the field of defence and security. This means that EU procurement law must effectively implement the principles of the Treaty for the Internal Market in the field of defence and security and, at the same time, ensure Member States security interests.” 35 .

2.2.3.The operational objective and the main features of the Directive

The operational objective of the Directive is to limit the use of the exemptions, in particular under Article 346 TFEU, to exceptional cases, in accordance with the case law of the EU Court of Justice. The majority of contracts in the field of defence and security, including those for the procurement of arms, munitions and war material, should thus be awarded on the basis of the rules of the Directive in order to foster the application of the principles of the Treaty. At the same time, Member States' security interests must be respected 36 .

The Directive seeks to achieve this operational objective by coordinating the different national rules and laying down provisions tailor-made to the specificities of the defence and security sectors. Key elements of the Directive addressing such specificities include:

–Defence-specific exclusions: the Directive contains exclusions that have been adapted or newly created in order to accommodate the specific situation of the defence and security sectors. These are the exclusions on international rules, disclosure of information, intelligence activities, cooperative programmes, contract awards in third countries, and government to government sales. Some of the exclusions laid down in the Directive can relate to defence cooperation in procurement.

–Flexible procedures: use of the negotiated procedure with publication of a contract notice is authorised without the need for specific justification in order to allow the flexibility required to award sensitive defence and security contracts;

–Security of Supply: the particular importance of this issue for defence and security procurement and the specific needs of the Member States justify specific provisions. The Directive allows contracting authorities to address Security of Supply needs through criteria for the selection of suitable candidates and tenderers, contract performance conditions, and award criteria;

–Security of Information: protection of classified information is crucial for the award and execution of many defence and sensitive security contracts. The Directive addresses Security of Information in several provisions: as requirement for the tendering and contracting phase (Article 7), as cause for exclusion (Article 13), as contract performance condition (Articles 20 and 22), and as selection criterion (Articles 39 and 42).

–Review: in order to ensure compliance with transparency and competition obligations, the Directive establishes a specific review system. This system is largely based on the rules applicable to civil procurement 37 , but contains some provisions adapted to the domains of defence and sensitive security.

–Subcontracting: in contrast with the civil procurement Directives that provide only very limited obligations with regard to subcontracting, the (defence procurement) Directive contains a detailed set of provisions laid down in Articles 21 and Title III (Articles 50-54). These provisions, in particular, allow contracting authorities to require that successful tenderers subcontract a certain share of the main contract and/or put proposed subcontracts out to competition. At the same time, these provisions, set basic rules for the fair and transparent awarding of such subcontracts. This approach is built on the assumption that competitive subcontracting would give to sub-suppliers, and especially SMEs, a fair chance of gaining access to the supply chains of big system integrators located in other Member States.

To summarise, the Directive aims at addressing the problems identified (extensive application of exemptions and non-application of competitive procurement procedures) through a set of rules specifically adapted for the defence and security sectors. The increased application of competitive procurement procedures based on transparency and equal treatment is expected to lead to more openness and transparency in defence procurement, as well as more clarity and legal certainty. This should bring about cost-savings for public authorities and a more open and efficient market and, in turn, be a contributing factor towards a stronger and more competitive industrial base in Europe. The intervention logic is presented in Figure 3 overleaf.

Figure 3: Intervention logic

2.3.Baseline: the situation before Directive 2009/81/EC

This description of the situation before the Directive is based on the analysis contained in the Impact Assessment and a study “Openness of Member State’s defence markets” by Europe Economics of November 2012 (the Baseline Study). The baseline situation was also reported in the Staff Working Document accompanying the 2013 Communication “Towards a more competitive and efficient defence and security sector” 38 .

2.3.1.Regulatory patchwork

As explained above in Section 2.2., before transposition of the Directive, exemptions were used extensively and EU public procurement rules (Directives 2004/18/EC and 2004/17/EC) were rarely applied in practice in the defence and security sector. Most procurement contracts were awarded on the basis of different national rules 39 . Each Member State followed different rules as regards publication, technical specifications, and procedures.

With particular regard to publication, the extent to which contract notices were published (either at the EU or national level) differed widely. The frequency of publication and accessibility of contract notices also varied greatly across Member States 40 .

2.3.2.EU-wide publication of business opportunities

The Impact Assessment found that, in the reference period 2000-2004, the publication in the field of defence was relatively rare, even with regards to non-military and non-sensitive procurement such as uniforms or certain services. The publication levels appeared to be even lower, if not marginal, for military procurement; in these cases, publication seemed to concern mainly procurement of “simple”, low value equipment, as well as non-sensitive works and services 41 .

According to the Baseline Study, more than 1 500 notices for defence contracts 42 of a value of roughly 4 billion EUR were published on Tenders Electronic Daily (OJ/TED) 43 from 2008 to 2010 included. On top of that, nearly 300 notices for contracts of roughly 4.76 billion EUR were published on the Electronic Bulletin Board (EBB) of the EDA 44 .

Table 3: Contracts advertised on OJ/TED and EBB in 2008-2010 [number of contracts, value in million EUR]

Source: The Baseline Study, p. 30

Hence, in the period 2008-2010, 1 844 defence contract notices were published EU-wide. The total value of these contracts was estimated to be nearly 8.8 billion EUR 45 , which was equivalent to 3.3% 46 of the EU’s total defence procurement expenditure in the same period (263.23 billion 47 EUR, 2008-2010). In the context of comparisons with the baseline which will be made later in this evaluation, it shall be noted that the Baseline Study referred to defence procurement expenditure as reported by the EDA, while in this report, the main source of data used to determine defence procurement expenditure is Eurostat COFOG database 48 (see: Section 2.1.1.). If the baseline OJ/TED and EBB data were compared with the 2008-2010 COFOG defence procurement expenditure, the share would increase to 3.6%. Nonetheless, if the filtering OJ/TED of notices would be more conservative (as the one applied in this report, see: Section 5.3) the percentage would probably decrease, potentially to a figure close to the baseline estimate of 3.3%. For the above explained reasons, the share of 3.3%, despite its caveats, has been maintained as the reference figure for the baseline period.

2.3.3.Cross-border awards

According to the Baseline Study, cross-border contracts published in OJ/TED and EBB in 2008-2010 amounted to 2.26 billion EUR 49 . Consequently, the share of cross-border awards published through the above channels in the reference years equalled 0.86% 50 of the total defence procurement expenditure.

3.Evaluation questions

The following table contains a list of questions that will be addressed in the course of this evaluation, to guide the analysis of the performance of the Directive. The questions are grouped under the five evaluation criteria that will look into the effectiveness, efficiency, relevance, coherence and EU added value of the Directive.

Table 4: Evaluation questions

4.Method

The analysis presented in this document was based on several data sources, in particular: notices published in OJ/TED, data published by EDA and NATO, IHS Jane’s Defence & Security Intelligence database and Eurostat, as well as consultations with Member States and stakeholders (including a public on-line survey). The findings of this evaluation are compared with the situation before the entry into the force of the Directive, as analysed in the Baseline Study.

As mentioned in the introduction, the evaluation covers years 2011-2015. Given the short time that has elapsed since the entry into force of the provisions, it can be expected that the conclusions about the Directive’s impact on the EDEM and, especially, the EDTIB would be very difficult to reach. Therefore the present evaluation assesses whether we are on track to meeting the objectives it sets and the expectations made at the time of its adoption. The problem of insufficient time lag of this evaluation has been already pointed out in the Baseline Study: “A comparison in 2016 of, say, 2013-2015 with 2008-2010 might not capture much of the Directive’s impacts: 2013 is only one year later than the end of the transposition phase. Comparisons in 2017 of 2014-2016 (or possibly 2015-2016) with 2008-2010 would offer a better chance of capturing impacts.” 51 Similarly, it has been also pointed out in the Impact Assessment that ”Given the life cycle of defence equipment (and their related services, especially maintenance), an evaluation of the economic impact should be contemplated in the long term (no sooner than 10 years).” 52 .

4.1.OJ/TED data

The main source of data used in this evaluation was extracted from OJ/TED, which is the online version of the Supplement to the Official Journal of the EU dedicated to European public procurement. The OJ/TED dataset contains information provided by national contracting authorities about procurement procedures they implement(ed) and includes for instance the Common Procurement Vocabulary (CPV) 53 chosen to describe the subject-matter of the contract, the price of awarded contracts, the name of the winning firm and the legal regime applied (the Directive or the civil procurement Directives).

Procurement transactions which were of particular pertinence in the context of this evaluation were those published on notices dedicated to defence and security procurement 54 . Additionally, the analysis also covered a subset of publications on voluntary ex-ante transparency notices (VEATs) when the contracting authority indicated that the publication falls under the Directive and notices published under the civil procurement Directives, if their subject matter was linked to defence or/and security. The latter was established by retaining notices which referred to CPV codes listed in Table 42 and Table 43 in Annex III.

From the analytical point of view, the most valuable information about procurement comes from the contract award notices, as they refer to procedures that have been concluded (i.e. contracts which were attributed to a particular company for an agreed price). For this reason, the following analysis is mainly based on the contract award notices.

Before launching any descriptive analysis of OJ/TED publications, the raw dataset was subject to manual scrutiny in order to verify its quality. The analysis of OJ/TED data included in this evaluation is based on the manually corrected datasets, unless specified otherwise. The scope of manual corrections is explained in detail in Annex III.

4.2.Other data sources

In addition to OJ/TED data, data from other sources were also used, in particular:

Eurostat: COFOG data ( http://ec.europa.eu/eurostat/web/government-finance-statistics/data/database ) and Structural business statistics (SBS) data ( http://ec.europa.eu/eurostat/web/structural-business-statistics/data/database ),

IHS Jane’s ( http://www.janes.com/ ), especially the following modules: Jane's Defence Procurement, Jane’s Defence Industry & Markets,

The European Defence Agency (EDA) ( https://www.eda.europa.eu/ ),

Stockholm International Peace Research Institute (SIPRI) ( https://www.sipri.org/ ),

North Atlantic Treaty Organization (NATO) ( http://www.nato.int/ ),

AeroSpace and Defence Industries Association of Europe (ASD) ( http://www.asd-europe.org/home/ ).

The extent to which each of the above data was used and the limitations linked to its scope or availability, if any, are described in Annex III (Method). This Annex contains also references to other ancillary data sources used to underpin this evaluation.

4.3.Stakeholders consultations

The stakeholders consultation methods for this evaluation have been designed to reach all potential stakeholders as well as the general public, and to gather detailed technical feedback from more directly involved stakeholders and experts. In the light of this, the consultations included an internet-based public consultation (online survey) and several complementary consultation meetings with key stakeholders. More information is provided in Annex II.

4.4.Methodological issues and data availability

The current evaluation has been carried out without encountering major unexpected problems linked to methodological and/or data analysis issues. The economic research underpinning this evaluation relied heavily on descriptive statistics of the OJ/TED dataset which was available in a structured format and fit for automated processing. The raw OJ/TED was subject to manual scrutiny to ensure its adequacy and corrected for basic errors or missing information. Additionally, examination of the data, especially with regards to the contract award values, has also been performed by the representatives of two Member States who volunteered to complete the missing information for their countries. As such, the manual corrections affected less than 5% of the observations, which suggest that the original dataset was of a relatively good quality.

Some data availability issues where encountered in areas where such problems could have been expected (e.g. procurement exempt from the application of the Directive). This part of the market was analysed using data from a private provider (IHS Jane’s), which as such was not technically demanding, but rather raised questions about its coverage/completeness and potential overlaps with OJ/TED. The estimation of compliance costs under the Directive also included “business as usual” costs and costs deriving from national legislation. It was impossible to disentangle the above components of the cost estimate due to technical limitations in the raw dataset used. More information about the methodology used is provided in Annex III.

As far as the EDTIB impact is concerned, it was noted that definite conclusions are difficult to draw at this stage, as insufficient time has elapsed since the adoption of the Directive and potential impact on the industry would need more time to materialise. In parallel, there were also issues with the unavailability of recent data about the industry (e.g. beyond 2014) in Eurostat and/or ASD. Additionally, the main Eurostat database which is typically used to describe patterns across chosen industries – the Structural business statistics (SBS) - is not well adapted to the defence sector, as it partially covers non-defence activities (e.g. civil aerospace and shipbuilding). This problem is known and has been mentioned in several previous publications about the defence sector, including the Baseline Study: “The ‘defence industry’ is not an industry in a statistical sense. There is no classification ‘defence equipment’ in the EU’s Nomenclature générale des Activités économiques dans les Communautés Européennes (NACE).” 55 .

Notwithstanding those limitations, the evaluation is based on a review of best available quantitative and qualitative evidence of causality between actions and effected changes. It made extensive use of stakeholders' and experts' view on the functioning of the different provisions of the Directive.

5.Implementation state of play

This section includes an overview of the process that led Member States to convert the Directive into their national legal orders with some significant delays for some Member States, a summary of the results of the technical analysis of the transposition measures adopted by Member States process, a brief description of developments concerning the related issue of offsets regulations, some background information on the Commission departments’ activities to ensure compliance with the Directive, and, finally, a quantitative analysis of the uptake of the Directive.

5.1.Transposition

5.1.1.The transposition process (August 2011-May 2013)

Under Article 72 of the Directive, Member States had to “adopt and publish the laws, regulations and administrative provisions necessary to comply with the Directive” (i.e. transpose it in their national legal orders) by 21 August 2011. Only 3 Member States had notified complete transposition of the Directive to the Commission by 21 August 2011, and a fourth Member State notified complete transposition in September 2011.

The Commission therefore opened infringement procedures against 23 Member States (Article 258 TFEU) by sending letters of formal notice. As a result, by March 2012, 15 additional Member States had notified complete transposition. For the remaining 8 Member States (Austria, Bulgaria, Germany, Luxembourg, the Netherlands, Poland, the United Kingdom, and Slovenia) the Commission continued the infringement procedures for non-communication of transposition measures and issued reasoned opinions 56 . By September 2012, Austria, Bulgaria, Germany and the United Kingdom notified complete transposition and the Commission closed the infringement procedures relating to them.

In September 2012, the Commission decided to refer Poland, the Netherlands, Luxembourg and Slovenia to the Court of Justice since these Member States had not notified the complete transposition of the Directive 57 . By April 2013, these four Member States did so and the Commission closed the infringements procedures. The Commission did not consider the transposition measures notified by Portugal to be complete and issued a reasoned opinion in March 2013 58 . Following the reply of the Portuguese authorities and notification of further transposition measures in April 2013, this infringement procedure was also closed.

It is, therefore, only from May 2013 that the provisions of the Directive have been fully transposed in the national legal orders of all Member States.

5.1.2.Technical analysis of transposition measures

The Commission departments have analysed Member States’ transposition measures to verify their conformity with the provisions of the Directive. The Commission departments have not identified fundamental problems in terms of conformity of national transposition measures, i.e. problems that would jeopardise the overall functioning of the Directive. However, this analysis has shown that, in several Member States, there are certain issues to be clarified on the transposition in national legislation of some specific provisions of the Directive.

This Section of the SWD is based on a preliminary analysis conducted in the context of the evaluation of the Directive. It is without prejudice to the Commission’ position concerning possible breaches of Union law.

5.1.2.1.Scope, thresholds and exclusions

The correct transposition of the provisions defining the scope of the Directive (Articles 1 and 2), and the exclusions (Article 12 and 13) is an essential pre-requisite for the uptake of the Directive, and compliance with the principles of competition, transparency and equal treatment. These provisions have been broadly transposed in a correct manner. One Member State seems to have transposed Article 2(c) broadening the scope with regard to the award of contracts for non-military security. Similarly, another Member State seems to have broadened the scope of Article 2(a) by referring to military “and law enforcement purposes”.

Article 9(5) third subparagraph provides that the application of the Directive to each lot may be waived if the lots are below a certain value. In one Member State, a small change in the wording of the corresponding national provision could allow contracting authorities/entities to waive such application in cases different than those provided for in the Directive.

Two Member States have transposed Article 12(c) without including the words “purchasing for its purposes”. One Member State seems to have broadened the scope of Article 13(b) by referring to the purposes of the bodies pertaining to the intelligence system rather than to intelligence activities.

5.1.2.2.Negotiated procedure without publication

Since it allows contracting authorities to derogate from the fundamental requirements on transparency and EU-wide competition, the correct transposition of Article 28 on the use of the negotiated procedure without publication of a contract notice is also essential. Only very few and particular issues have been identified with the transposition of this provision. In one Member State, the time limit of five years in Article 28(3)(a) does not refer to “recurrent contract”. Another Member State did not transpose the provision in Article 28(4)(b) obliging contracting authorities/entities to disclose the possible use of the procedure as soon as the first project is put up for tender. Four Member States seem not to have transposed the second part of the same provision laying down an obligation to take into account the cost of subsequent works or services to calculate the estimated value of the contract for the purposes of the thresholds under Article 8.

5.1.2.3.Exclusion grounds (Article 39)

Four Member States did not transpose Article 39(1) fourth subparagraph or at least the reference that clarifies that contracting authorities/entities’ requests of evidence about the personal situation of a candidate or tenderer have to relate, where needed, to natural persons such as company directors. One Member State seems to have extended the scope of mandatory exclusion grounds of Article 39(1) to economic operators submitting multiple offers and to those involved in the preparation of procurement documents. Two Member States broadened the possibility for contracting authorities/entities to waive mandatory exclusion grounds provided for in Article 39(1) third subparagraph.

Two Member States have not transposed Article 39(2)(d) providing for the exclusion for grave professional misconduct, and another Member State has not transposed Article 39(2)(e) on the exclusion of economic operators which lack the reliability to exclude security risks. Two Member States have not transposed Article 39(2)(h) on the exclusion of economic operators who are guilty of serious misrepresentation in supplying the information on their personal situation or who have not supplied such information; in one Member State, the corresponding national provision narrows the scope of this exclusion ground.

5.1.2.4.Time limits (Articles 33 and 34)

Two Member States transposed Article 33(3) by referring directly to the time limit of 22 days, instead of making it clear that the normal time limit is 36 days and 22 days is the absolute minimum that cannot be in any way shortened further.

Article 34(4) provides time limits for the contracting authorities/entities to send to economic operators additional information on the contracts documents. Five Member States have either not transposed this provision, or slightly reduced through different mechanisms the time available to economic operators.

5.1.2.5.Other issues related to the rules on contracts

According to Article 5(2), groups of economic operators may submit tenders or put themselves forward as candidates. In one Member State, the corresponding national provision allows contracting authorities/entities to exclude groups of undertakings if based on objective reasons.

Article 18(3)(a) second subparagraph provides that contracting authorities/entities, when drafting the technical specifications, have to accompany every reference to standards with the expression “or equivalent”. One Member State seems to have converted this provision into national law without including this wording.

Article 22, third subparagraph provides that Member States have to recognise the security clearances which they consider equivalent to those issued in accordance with their national law. This means that, where there are bilateral security agreements or arrangements concerning the equivalence of security classifications and security requirements, contracting authorities/entities have to recognise security clearances granted by the national security authority of the other Member State party to this agreement or arrangement 59 . In two Member States national legislation do not explicitly provide for this obligation to recognise security clearances in the above-mentioned circumstances.

In two Member States, the national provisions corresponding to Article 29(3) allow contracting authorities/entities to conclude framework agreements with a single economic operator without defining all the terms for the award of specific contracts based on the agreement.

Article 32(1) provides for the minimum content to be included in the notices for publication at EU level; one Member State has not transposed this provision in its national legislation. In addition, Article 32(5) prohibits contracting authorities/entities to publish notices at national level before the date on which they are sent to the Commission for publication at EU level. It also provides that notices published at national level cannot include information other than that contained in the notices sent for publication at EU level. In two Member States, the relevant national provisions do not contain the explicit prohibitions lay down in Article 32(5).

Article 37(1) lays down an obligation on contracting authorities/entities to draw up a written report on the selection procedure, and provides for mandatory elements to be included in the report. In two Member States, the national provisions do not mention all these elements.

Article 38 regulates various aspects of the conduct of procedures. Two Member States appear not to have expressly transposed Article 38(1), which sets out the sequencing of procedures from the application of exclusion grounds to the qualitative selection and the award of the contract. In two Member States, the provisions transposing Article 38(3) third subparagraph do not lay down the obligation, in case of re-publication of contract notice, to invite the candidates selected upon the first publication.

Article 38(5) regulates the situation where the contracting authorities/entities exercise the option of reducing the number of solutions or of tenders. In three Member States, this provision has not been transposed.

One Member State appears not to have transposed in national legislation Article 49(1) and Article 49(2) on abnormally low tenders. According to these provisions, where tenders appear to be abnormally low, contracting authorities/entities have to request in writing details of the constituent elements of the tender and to verify these elements by consulting the tenderer.

5.1.2.6. Subcontracting

Article 21(1) lays down i.a. a prohibition to require successful tenderers to discriminate against potential subcontractors on grounds of nationality. Two Member States seem not to have explicitly transposed this provision. One Member State appears not to have transposed any of the provisions on subcontracting (Articles 21 and 50 to 53).

5.1.2.7. Rules to be applied to reviews

According to Article 56(3), Member States are obliged to ensure that contracting authorities/entities cannot conclude the contract before the review body’s decision. One Member State seems not to have transposed this provision, and another has introduced changes that make the prohibition less stringent.

Article 57(2), fourth subparagraph, imposes an obligation on contracting authorities/entities to include in the communication of the award decision a summary of the relevant reasons and a precise statement of the exact standstill period applicable. Two Member States have not transposed this provision in national legislation, and one has not included the reference to the statement of the applicable standstill period.

Article 58 allows Member States to provide for specific derogations from the standstill period. One of these derogations concerns contracts based on a framework agreement. However, according to Article 58(c), Member State which decide to use this option have to ensure, in two specific cases, that such contracts based on a framework agreement are ineffective. Four Member States seem to have used the option, but not explicitly transposed these provisions on ineffectiveness. In one Member State, the national provision provides for ineffectiveness only in one of the two cases.

Article 60(1) imposes on Member States the obligation to provide for ineffectiveness of contracts in specific cases. It seems that two Member States have not transposed this provision, while three Member States appear not to have included in the relevant national provisions all the cases for ineffectiveness. Article 60(3) provides that Member States may enable review bodies not to declare contracts ineffective when this is required by overriding reasons relating to a general interest; the same provision clarifies that economic interests directly related to the contract do not constitute such overriding reasons. In one Member State, the national provision transposing Article 60(3) admits such economic reasons to be overriding reasons. In addition, six Member States have not transposed either Article 60(4) or Article 60(5), which provide for mandatory non-application of ineffectiveness in given cases.

5.1.3.Offsets / industrial return regulations in the context of transposition

This section addresses the issue of offsets regulations, which is highly relevant in the context of the process of transposition of the Directive. The practice of concrete offsets or industrial return requirements in specific public procurement procedures is covered below in Section 6.1.1.4.

Offsets are compensations that many governments in the world require when they procure defence equipment from non-national suppliers. This is often to ensure an economic/industrial return on defence investment. Offsets can take various forms: they can be directly related to the subject-matter of the contract, indirect but limited to the military sphere, or indirect non-military.

Whatever their form, offsets requirements are, from an EU law standpoint, restrictive measures which go against the basic principles of the Treaty, because they discriminate against economic operators, goods and services from other Member States and impede the free movement of goods and services. They can only be justified on the basis of one of the Treaty-based derogations, in particular Article 346 TFEU. However, these derogations must be limited to exceptional and clearly defined cases, and the measures taken must not go beyond the limits of such cases. They have to be interpreted strictly, and the burden of proof that the derogation is justified lies with the Member State which invokes it 60 .

The Impact Assessment highlighted the negative and discriminatory effects of offsets upon procurement procedures. It noted that offsets “give a considerable advantage to big prime contractors, which normally have better means than smaller competitors to arrange offsets deals”; “if military offsets are required, prime contractors have to sub-contract to companies located in the buying country. Consequently, they cannot use the most competitive sub-contractors to organise their supply chain, but must give preference to sub-suppliers of a certain nationality”; “if non-military offsets are required, the same effect spills over into civil markets: non-military contracts are awarded on the basis of nationality than competitiveness” 61 .

The Impact Assessment assessed a number of options with regard to offsets, and concluded that not mentioning them in the proposal for the Directive was the best-suited one 62 . In fact, since offsets requirements violate basis rules and principles of primary EU law, a secondary law instrument like the Directive cannot allow, tolerate, or regulate them. The Impact Assessment added that the issue of compatibility of offsets with EC law had to be addressed in the light of the Treaty and the Commission’s Interpretative Communication 63 .

Before the adoption of the Directive, 18 Member States maintained offsets regulations requiring compensation from non-national suppliers when they procured defence equipment abroad 64 . These regulations obliged contracting authorities to systematically (i.e. for all contracts or for all contracts above a certain value) require offsets when purchasing defence equipment from foreign suppliers abroad. They were clearly incompatible with EU primary law as well as the correct transposition and application of the Directive.

Consistently with the option selected with the Impact Assessment, the Commission departments therefore engaged, since 2010, with Member States to make sure that these offsets regulations were abolished or revised in the context of the process of transposition of the Directive. Member States have indeed either abolished or revised their offsets regulations. The content of revised offsets regulations varies significantly across Member States, but they have one key feature in common. Under the revised regulations, offsets are no longer required systematically (i.e. for all contracts or for all contracts above a certain value) in connection with defence purchases from abroad based on grounds of clear economic nature. The revised rules provide that offsets can only be required, following a case-by-case analysis, where the conditions of Article 346 TFEU are met.

The revised offsets regulations of those Member States that have chosen to maintain them in place do not seem per se incompatible with EU law. The question remains, however, of whether - and to what extent - the concrete application of these revised rules in procurement practice in individual cases is compliant with EU law, and in particular with the strict conditions for the use of Article 346 TFEU.

5.2.Compliance activities concerning individual procurement cases

Section 5.1. above describes the Commission activities concerning the transposition of the Directive, and the related issue of offsets/industrial return regulations. This paragraph seeks to explain the Commission departments’ work so far about compliance of Member States’ concrete individual procurements with the rules of the Directive.

It should be pointed out that, in the period 2011-2015 (and also until September 2016), the Commission departments have received only 1 complaint from an economic operator involved in a specific defence procurement procedure, and no complaint from economic operators involved in procedures for the procurement of high-value, complex military equipment. As it emerged in the stakeholders' consultations with regard to access to review procedures, defence companies only usually have one customer in each country, and therefore try not to antagonise them. This may also help explain the absence of complaints to the Commission. It should be pointed out, however, that the absence of complaints from competitors, which have the potential of providing comprehensive and well-substantiated information, severely affects the compliance activities of Commission departments, due to the difficulties of gathering ex officio such information about concrete defence procurement procedures. Other relevant factors in this context are the relative novelty of the rules, and the sensitivity of the sector.

In the period 2011-2015, the Commission departments contacted Member States authorities to seek clarifications on 11 individual procurements. In 2016, further contacts concerning other 17 individual procurements have been undertaken. The main focus of these exchanges has been clarifications about the legal grounds for the non-application of the Directive and, in some cases, for the use of offsets/industrial return requirements.

5.3.Uptake of the Directive

As explained in Section 2.3., before the entry into force of the Directive, the publication of defence and security procurement was relatively limited and took place mainly through OJ/TED publications under the civil procurement Directives and on the EBB run by the EDA. According to the Baseline Study, in the period 2008-2010, 1 844 defence contract notices were published EU-wide for the estimated total value of around 8.8 billion EUR. The following sections discuss how the situation has changed in the EU since the adoption of a legal instrument dedicated to defence and security procurement.

5.3.1.Defence and security procurement under the Directive

Since the entry into force of the Directive, more than 8 700 notices have been published in OJ/TED under the standard forms dedicated to defence and security procurement 65 . As explained in Section 4 and Annex III, following a manual scrutiny of the raw OJ/TED data, around 250 notices have been removed from the original dataset, mainly because their subject matter was judged as not being related to defence and security procurement. Additionally, contract award notices from Belgium and the Netherlands have also been manually corrected by the representatives of the respective Member States. All analysis of OJ/TED data included in this document is based on the manually corrected dataset. The retained dataset related to publications under the Directive contained 8 526 notices ( Table 5 ).

Table 5: Notices published under the Directive, by year and type [number of notices]

Source: OJ/TED, manual corrections by DG GROW

Upon entry into force, the uptake of the Directive was almost immediate and has shown a clear upward trend. As presented in Figure 4 , the use of procurement notices available under the Directive has been increasing each year, with the exception of the subcontract notices 66 which clearly stagnated at barely a few publications per year.

Figure 4: Notices published under the Directive, by year and type [number of notices]

 
Source: OJ/TED, manual corrections by DG GROW

A total of 3 682 contract award notices has been published in OJ/TED over the analysed period of time, containing 7 145 distinct contract awards 67 . The difference stems from the fact that a single contract award notice may refer to the award of one or many contracts (contract awards). Out of the total number of contract awards notices published in 2011-2015, 3 121 contained just one contract. The remaining 15% of notices featured many awards – the largest number in the sample was a notice containing 365 separate awards.

Figure 5: Contract award notices and awards published under the Directive, by year [number of notices and awards]

Source: OJ/TED, manual corrections by DG GROW

The number of awards (awarded contracts) published under the Directive was in a steady increase over the last five years, rising from only 18 in 2011 to 2 931 awards in 2015 ( Figure 5 ). The total number of awarded contracts equalled, after manual corrections, 7 145 in 2011-2015.

5.3.1.1. Use of the Directive by countries

The total value of 3 682 contract award notices published under the Directive accounted for nearly 30.85 billion EUR over the five years which are covered by the current analysis (2011-2015). However, the extent to which Members States implemented the Directive remained uneven. In terms of the number of notices published, more than 70% of the publications concerning awarded contracts were made by authorities from five Member States: Germany, France, Italy, Poland and the United Kingdom ( Table 6 ).

Table 6: Contract award notices published under the Directive, by country and year [number of notices]

Source: OJ/TED, manual corrections by DG GROW

Between 2011 and 2015 there were no publications of contract award notices by contracting authorities from six countries: Cyprus, Greece, Ireland, Malta, Luxembourg and Spain 68 . It shall be noted however that these countries have published a number of contract award notices with a defence-related subject-matter under the civil procurement Directives. Spain for example, kept on publishing under the civil regime even after transposition of the Directive.

In terms of the contract value, an overview of publications by Member States also shows significant differences across the EU, as presented in Table 7 . More than a half of the value of published contracts has been awarded by authorities from the United Kingdom (nearly 17 billion EUR over the analysed five years, albeit this result was heavily influenced by one contract award notice valued at around 6 billion GBP 69 ). France, Poland, Germany and Italy followed in the ranking (with publications estimated at approximately 5 to 1 billion EUR).

Table 7: Contract award notices published under the Directive, by country and year [value in million EUR]

Source: OJ/TED, manual corrections by DG GROW

The contracting authorities from the United Kingdom not only published the largest contract under the Directive, but also as much as 20 out of 44 contract award notices featuring the total value exceeding 100 million EUR (Table 8).

Table 8: Contract award notices with values above 100 million EUR published under the Directive in 2011-2015, by country [number of notices]

Source: OJ/TED, manual corrections by DG GROW

The differences between countries were also significant for contracts below 100 million EUR. The box and whisker plots for each country presented in Figure 6 illustrate the median, quartiles, the range of data and its outliers.

Figure 6: Distribution of contract award notices with values below 100 million EUR published under the Directive in 2011-2015, by country [value in million EUR]

Source: OJ/TED, manual corrections by DG GROW

As seen on the graph, most observations are concentrated around the low value contracts with the right tail of the distribution being considerably longer. The majority of high value observations / outliers (marked by dots) were noted for the United Kingdom and France.

When analysing the awarded contracts in more detail, it appears that high value contracts carried out under the Directive were rather few. The reported contracts frequently concerned various auxiliary defence activities e.g. repair and maintenance services, building management services, logistic services, etc.

The examples of selected high value published under the Directive are provided in Table 9 overleaf.

Table 9: Examples of high value contracts published under the Directive [value in million EUR]

Source: Source: OJ/TED
Note: Negotiated with publication – negotiated procedure following the publication of a contract notice; Negotiated without publication – negotiated procedure without the publication of a contract notice; Restricted - restricted procedure.

In line with the methodology of this evaluation, Table 9 only includes contracts that have been awarded until 31 December 2015.

However, by looking at contracts that have been advertised under the Directive (via the publication of a contract notice) but have not yet been awarded, it is possible to identify signs of an increasing use of the Directive for major military equipment contracts. The most prominent example is the contract notice published under the Directive by the German authorities for the design, construction and delivery of 4 multi-purpose combat ships (with option for 2 additional vessels), including the integration of all systems, equipment and materials provided, and the training of relevant staff 70 . The Danish authorities published under the Directive contract notices for the procurement of new armoured patrol vehicles and of new artillery systems 71 . Although it does not concern highly complex systems, another example of a significant procurement of military equipment launched under the Directive is the acquisition of around 90 000 assault rifles by the French authorities 72 .

5.3.1.2. Reported and estimated value of contract award notices

As explained in Section 4.1 and in Annex III, the original dataset contained around 17% of contract award notices which were published without the final price of awarded contracts. Following a round of manual corrections carried out by the Member States representatives 73 , this ratio has dropped to 15%. The overview of missing values by country, after the implementing corrections by Member States, is provided in Table 48 in Annex IV. The table shows that in some Member States the share of missing values was still significant, notably in Sweden where it reaches as much as 85% of all observations, followed by Denmark (48% of the contract award notices did not contained information on the contract value) and Germany (41%). In order to compensate the above information gaps, the missing information on values was imputed using average contract values 74 .

The result of such estimation is presented in Figure 10 below. The total value of contract award notices published under the Directive in 2011-2015 increased from 30.85 billion EUR to an estimated value of roughly 34.55 billion EUR.

Figure 7: Reported and estimated value of contract award notices published under the Directive, by year [value in million EUR]

Source: OJ/TED, manual corrections by DG GROW

An overview of the raw and estimated values at country level is presented in Table 10 below. For countries where the occurrence of missing values was relatively high, the difference between the raw and estimated data is substantial, notably in Sweden (an increase from 19.2 to 130.5 million EUR over the analysed period of time).

Table 10: Reported and estimated value of contract award notices published under the Directive in 2011-2015, by country [value in million EUR]

Source: OJ/TED, manual corrections by DG GROW

To summarize, the total value of defence and security procurement published under the Directives accounted for around 30.85 billion EUR in 2011-2015 (based on the raw dataset), or around 34.55 billion EUR if the missing values were imputed. The imputed figure gives a rough projection of the additional value of procurement that has probably been carried out under the Directives, but which cannot be effectively analysed due to the incomplete fulfilment of reporting obligations. To avoid estimation uncertainties 75 , this report is mainly based on the raw dataset, unless clearly specified.

5.3.1.3. Use of procedures

The Directive foresees six types of procedures that can be used in order to award defence and security contracts: restricted procedure, negotiated with publication of a contract notice, negotiated without publication of a contract notice, competitive dialogue and two types of accelerated procedures (restricted and negotiated).

The procedures with prior advertising and call for competition accounted together for 60% of the number of contract award notices and 76% in terms of value of notices (see: Section 6.1.1.3). The negotiated procedure without publication of a contract notice is the most used one in terms of the number of contract award notices published (nearly 38%), while the highest value of contract was awarded following the negotiated procedure with publication of a contract notice (55%). The restricted procedure was the second most frequently used (nearly 29% of contract award notices), but it accounted for just 18% of their value. The use of the competitive dialogues as well as of the two types of accelerated procedures was relatively marginal.

The significant use of the negotiated procedure without publication of a contract notice may also be due to the award of follow-on contracts related to original contracts awarded in previous years (as part of on-going defence equipment programmes).

Figure 8: Contract award notices published under the Directive in 2011-2015, by type of procedure [%]

Source: OJ/TED, manual corrections by DG GROW

The average and median values of contracts by procedure type are provided in Table 11 . The procedure with the highest average value was the competitive dialogue, which is not unexpected since this procedure was conceived for large and complex projects.

Table 11: Contract award notices published under the Directive in 2011-2015, by type of procedure [value in million EUR]

Source: OJ/TED, manual corrections by DG GROW

The table above also shows what could have been derived from the pie charts in Figure 8, namely that the negotiated procedure with publication has been used for procurement of a much higher average value than the negotiated procedure not open to competition (24 million EUR to 5.7 million EUR respectively). This significant difference was mainly driven by the previously mentioned high value contract awarded by the UK through the negotiated procedure with competition. The table also confirms that the average contract value was relatively small (around 10 million EUR) and the median was around 1 million EUR.

5.3.1.4. Contract types

As far as contract types are concerned, more than a half of published contract award notices related to service contracts (56%), followed by supply and works contracts (roughly 40% and 4% respectively). In value terms, the dominance of services is even more apparent – three quarters of all contracts concerned services ( Figure 9 ). This again was due to the fact that the largest awarded contract, worth nearly 6 billion GBP, was related to services. The remaining two categories followed with the shares of roughly 20% (supplies) and 4% (works contracts).

Figure 9: Contract award notices published under the Directive in 2011-2015, by type of contract [%]

Source: OJ/TED, manual corrections by DG GROW

The above patterns are confirmed when looking at average and median contract values by contract type presented below ( Table 12 ).

Table 12: Contract award notices published under the Directive in 2011-2015, by type of contract [value in million EUR]

Source: OJ/TED, manual corrections by DG GROW

As previously explained, the average value of service contracts has been heavily influenced by a single high value contract, therefore the value of median is probably more telling in this context. Finally, the presented data reiterate what has been already mentioned i.e. that average and median contract values have been rather small, especially in the framework of the defence sector.

The following two tables (Table 13 and Table 14) present the most frequently purchased items according to the CPV divisions under which the contracts were advertised. CPV-50 (repair and maintenance services) top the list in terms of the number of observations, followed by CPV-35 (equipment for security, fire-fighting, police and defence), CPV-34 (transport equipment) and CPV-45 (construction works) 76 .

Table 13: Top 10 CPV divisions by number of contract award notices published under the Directive in 2011-2015 [number of notices]

Source: OJ/TED, manual corrections by DG GROW

As far as the value of contracts is concerned ( Table 14 ), CPV-75 (administration, defence and social security services) was the division which featured the highest value of contracts, followed by divisions CPV-50 and CPV-35 (i.e. the two divisions, which open the list sorted by the number of observations).

Table 14: Top 10 CPV divisions by value of contract award notices published under the Directive in 2011-2015 [value in million EUR]

Source: OJ/TED, manual corrections by DG GROW

5.3.1.5. Division into defence and security contracts

As explained in the earlier sections, the Directive covers not only the defence, but also the sensitive security procurement. For this reason, the extent to which it is actually used for purchases in one of the two domains has been subject to scrutiny within the framework of this evaluation. As the OJ/TED database contains no field that would enable filtering contracts against this criterion in an automated way, the affiliation of the awarded contracts to either of the domains was carried out manually - contracts awarded under the Directive have been classified as belonging to either defence or security domain, based on common knowledge and/or desk research aimed at determining the profile of the contracting authority/entity (the details of the work undertaken are presented in Annex III).

Figure 10: Share of defence and security procurement under the Directive in 2011-2015, by number and value [%]

 
Source: OJ/TED, manual corrections by DG GROW, without corrections received from Belgium and the Netherlands

As it can be seen from the graph above, the defence purchases dominated by far the procurement carried out under the Directive with more than 9 out of 10 contracts referring to this category. The security contracts accounted for just 7% of the number of notices and 3% of their value.

5.3.1.6.Use of Voluntary ex ante transparency notices

Voluntary ex-ante transparency notices (VEAT) may be published if a contracting authority/entity considers that the award of a contract does not require prior publication of a contract notice in OJ/TED. This may be the case, for example, if the conditions justifying use of the negotiated procedure without publication of a contract notice, set out in Article 28 of the Directive, are met.

In completing the VEAT notice, the contracting authorities/entities express their intention to conclude a contract and provide, among others, the justification for the award of a contract without prior publication of a contract notice in OJ/TED. They will then observe a standstill period before the contract is concluded. This gives economic operators the opportunity to challenge the decision of the contracting authority and obtain pre-contractual remedies should a challenge be upheld. The advantage to the contracting authority is that the penalty of mandatory ineffectiveness does not apply in the event of a challenge to a contract awarded after the standstill period has elapsed.

Since the entry into force of the Directive, 1 272 VEATs related to defence or security procurement have been published in OJ/TED. The uptake of this tool for ex-ante transparency was fairly imminent – it rose from 19 notices in 2011 (published only by France and Denmark) to nearly 250 in the following year and then remained fairly static at ca. 320-340 notices per year.

Table 15: Voluntary ex-ante transparency notices published under the Directive, by country and year [number of notices]

Source: OJ/TED, manual corrections by DG GROW

The implementation of this legal instrument was uneven across countries, with authorities from the UK, Denmark, Finland, Poland and France being the most frequent users. At the same time, the following 11 countries did not publish any VEATs related to the Directive in 2011-2015: Austria, Cyprus, the Czech Republic, Estonia, Hungary, Ireland, Iceland, Luxembourg, Malta, Portugal and Romania.

5.3.2.Defence and security procurement under the civil procurement Directives

As mentioned in Section 2.3, before the adoption of the Directive, defence and security procurement open to competition was carried under the civil procurement Directive and published on OJ/TED or, as foreseen in the Code of Conduct, advertised through the EBB. Despite the adoption of a sector–specific legal act in 2009, the publications of contracts covered by defence and security-related CPVs under the civil regime still occur, albeit to a lesser extent than in the past.

A total of 4 084 contract award notices, related to defence procurement was published under the civil procurement Directives between 2004 and 2015. As presented in Figure 11, such publications have been increasing since 2006 (with just 94 contract award notices) to reach a peak in 2012 (610 notices) and then decrease slightly.

Figure 11: Contract award notices covered by defence-related CPVs and published under the civil procurement Directives, by year [number of notices]

Source: OJ/TED, manual corrections by DG GROW

This overall rising trend could be interpreted as if the mere discussion about the proposal of the Directive had translated into higher levels of publications of defence related purchases under the legal instruments available at that time. After 2012 the publication numbers started to fall, probably due to the fact that authorities had at their disposal a sector-specific Directive that was better fit for the procurement of defence related goods and services.

With regards to data corresponding to years 2008-2010, the totals provided in Figure 11 above differ from those presented in the Baseline Study for the same years (415, 447 and 686 in 2008-2010) 77 . The observed discrepancies can be explained by the fact that the selection of notices identified as defence contracts was based on different assumptions. The list of CPV codes (provided in Annex III) which have been used to filter notices was the same as the one used in the Baseline Study, but the data manipulations that followed diverged significantly 78 . At the same time, the current methodology aims at being more rigorous and leaves less room for interpretations that non-defence contracts could have been erroneously captured.

An overview of publications across countries is provided below ( Figure 12 ). As can be seen from the graph, out of the total of 4 084 notices, the highest number of defence-related contracts published under the civil procurement Directives originated from the French contracting authorities and entities (780 notices in total), followed by Germany (651), Italy (462), Poland (431) and the UK (345).

Figure 12: Contract award notices covered by defence-related CPVs and published under the civil procurement Directives in 2004-2015, by country [number of notices]

Source: OJ/TED, manual corrections by DG GROW

Interestingly, all countries which have not awarded contracts under the Directive since 2011 (see: Section 5.3.1.1), did so under the civil regime i.e.: Cyprus, Greece, Ireland, Malta, Luxembourg and Spain, also in the years following its adoption ( Table 49 in Annex IV). In fact, many of the remaining countries have also continued to publish some of their defence and security procurement under the civil rules after the Directive has been effectively transposed to their legal systems.

Finally, the value of the above publications of contracts in OJ/TED under the civil procurement Directives with CPVs related to defence or security accounted for nearly 13 billion EUR over the last decade ( Table 16 below).

Table 16: Contract award notices covered by defence-related CPVs and published under the civil procurement Directives, by year [value in million EUR]

Source: OJ/TED, manual corrections by DG GROW

During the last five years when the civil procurement Directives co-existed with the newly enacted (defence procurement) Directive, the value of publications concerning these contracts was roughly 8 billion EUR (hence nearly 1.6 billion EUR annually).

The scope of application of the (defence procurement) Directive and that of the civil procurement Directives are mutually exclusive. Contracts that fall within the scope of the Directive according to Article 2 have to be awarded under it, and cannot be awarded under the civil procurement Directives. This means that contracting authorities/entities have, in each individual procurement case, to make a decision on whether a given contract fall within the scope of the Directive or within that one of the civil procurement Directives. As pointed out by certain Member States’ authorities in the consultations, there may be at times borderline cases where the identification of the applicable regime is not straightforward (see: Section 6.4.1.1).

The significant number of procurement still published under the civil procurement Directives may be explained by a combination of two factors: first, procurement with defence or security related CPV may still, from a legal point of view, fall within the scope of the civil procurement Directives; second, contracting authorities / entities may have erroneously decided (especially in “borderline cases”) to publish under the civil procurement Directives contracts that would have actually fallen within the scope of the (defence procurement) Directive. Recognising that both legal regimes (civil and defence) are based on the same Treaty principles of transparency and equal treatment, the available data on publications in OJ/TED shall be interpreted, for the purposes of this evaluation, as complementary information - altogether they account for procurement governed by open and competitive EU rules.

6.Answers to the evaluation questions

6.1.Effectiveness

The evaluation questions related to the effectiveness of the Directive, as defined in Section 3, will be analysed based on the data on its use and on the results of the online survey and of the meetings with stakeholders.

6.1.1.Competition, transparency and non-discrimination

In order to address the first evaluation question the report will start with referring to the baseline situation and data referring to the period before the adoption of the Directive.

6.1.1.1.    EU-wide publication of business opportunities

As discussed in Section 5.3, the total value of contract award notices published in OJ/TED since the entry into force of the Directive was around 30.85 billion EUR (2011-2015). The value of these notices equalled just 22 million EUR in 2011 and increased more than ten times between 2012 and 2015, from 1.4 billion EUR to 19 billion EUR per year (Section 5.3.1.1 and Figure 13 below). As noted in the previous sections, the increase in 2015 as compared to 2014 was mainly driven by one large contract awarded by the UK. However, significant year-to-year changes in the total value of defence contracts are somehow inherent in the sector, as purchases of major items usually occur irregularly and over longer time-spans.

Figure 13: Contract award notices published under the Directive, by year [number of notices, value in million EUR]

Source: OJ/TED, manual corrections by DG GROW

The increasing number of publications in OJ/TED confirms that the Directive has been gradually adopted by the public buyers as a tool for addressing their needs in defence and security procurement. Additionally, as described in Section 5.3.2, an important number of publications related to defence and security purchases has been also observed under the civil procurement Directives.

Recognising that both legal regimes (civil and defence) are based on the same Treaty principles of transparency and equal treatment, the total value of defence related contract award notices published under the civil procurement Directives is presented alongside the contract award notices published under the Directive ( Figure 14 below), as the total procurement governed by EU rules.

Figure 14: Comparison between the contract award notices published under the civil procurement Directives and the Directive [value in million EUR]

Source: OJ/TED, manual corrections by DG GROW

As illustrated by the graph above, in 2011-2015, the value of procurement carried out under the two EU legal instruments accounted for roughly 38.85 billion EUR in total. The decrease in the value publication contracts awarded under the civil procurement Directives after 2013 could mean a simple substitution of some publications under the civil procurement Directive by the (defence procurement) Directive without a net gain in transparency. It is however is impossible to verify the above conjunction only by analysing the available dataset. Nevertheless, these hypothetical “transfers” between the civil and defence legal instruments, if any, have happened in the general context of increasing publication rates and improved transparency in the defence and security procuring using all available EU legal instruments.

To conclude, a significant increase in the value of publications in OJ/TED (using civil and defence legal instruments) has been observed over the last years. A rise from 700 million EUR in 2011 to 21 billion EUR in 2015 confirms that more and more defence procurement has been awarded following open and transparent EU rules.

However, as far as the Directive is concerned (and as discussed in Section 5.3.1), the majority of contract award notices published under the defence legislation were of relatively small values. Overall, nearly 90% of observations related to procurement of less than 10 million EUR, 95% to less than 21 million EUR. The average contract value was around 10 million EUR while the median was around 1 million EUR. An overview of contracts below 10 million EUR is presented in Figure 15 below.

Figure 15: Contract award notices with values below 10 million EUR published under the Directive in 2011-2015 [frequency by value of notices]

Source: OJ/TED, manual corrections by DG GROW

As shown on the graph, the distribution of the contract award notices is positively skewed, showing high concentration around low-value contracts and a long tail as the value increases. The red lines on the figure mark the threshold values 79 above which the Directive shall apply – 414 thousand EUR and 5.186 million EUR. It is clear that many of the published contract award notices have reported total contract values even falling under the lower threshold for supplies and services of 414 thousand EUR.

Along with the relatively small average contract values being advertised under the Directive, an overview of publications by Member States (as detailed in Section 5.3.1) shows also significant differences across the EU, which cannot be easily explained by such factors as the available defence budgets or the size of economy. Several countries have not published any contract award notices under the Directive in the analysed period of time 80 (notably Cyprus, Greece, Ireland, Malta, Luxembourg and Spain). For the countries which have used the Directive, the difference in the value of contracts published, especially when compared with the available budgets, as presented in Table 17 below, were also significant.

Table 17: Comparison between the average annual 81 values of contract award notices published under the Directive (OJ/TED) and general government procurement expenditure on military defence (COFOG), by country [value in million EUR, %]

Source: OJ/TED, manual corrections by DG GROW; Eurostat, general government expenditure by function (COFOG) [gov_10a_exp]
Note: the annual averages are based on the number of years since the first publication in OJ/TED e.g. the total value of contract award notices published by Austrian authorities was 23.68 million EUR, but the first publication occurred in 2012, therefore the average is calculated based on four year time span (23.68 million EUR /4=5.92 million EUR); to compare, the first publication from Bulgaria occurred in 2011 hence 153.54 million EUR/5=30.71 million EUR while Norway started publishing in 2014 and the average is calculated as follows: 195.16 million EUR/2=97.58 million EUR; the percentage for Romania was not provided due to the ambiguity of data available in COFOG.

As presented in the Table above, the average yearly value of contracts awarded under the Directive would therefore be between 6.2 and 6.9 billion EUR 82 , which equalled roughly between 7.6% to 8.5% of the total value of general government procurement expenditure on military defence of EU-28 and EEA-2 countries (81.5 billion EUR on average). If the value of defence and security procurement carried out under the civil procurement Directives (around 8 billion EUR in total in 2011-2015, hence circa 1.6 billion EUR annually) was to be added to the procurement under the Directive, the reported percentage of procurement covered by transparent EU rules would increase to 9.5% 83 . To compare, the publication rate in terms of percentage of total expenditure in the civil sector ranged between and 16.5% and 17.8% from 2012 to 2014 84 .

Looking at the data from a different perspective, the procurement of goods under the Directive can be also compared with the budgets spent on defence equipment discussed in Section 2.1.2 (

Figure 2 ). According to EDA, the national and collaborative defence equipment procurement in 2014 for the Agency participating countries 85 was estimated at 25.9 billion EUR. The total value of supply contracts awarded under the Directive in 2011-2015 was 6.2 billion EUR, hence roughly 1.3 billion EUR per year. This would indicate that not more than 4.8 % of the value of equipment procurement reported by EDA was carried out through the Directive.

To conclude, although the general trend in the publication of defence and security contracts is unquestionably positive, the value of procurement awarded under the Directives (in both cases - raw and imputed totals) still seems to be relatively small when compared to overall defence procurement expenditure which was at the discretion of Member States in the analysed period of time.

The relatively small overall volume of procurement carried out under the Directive (when compared with the available defence budgets) as well as the dominance of small value contracts, may suggest that the Directive was used to a very limited extent for the procurement of strategic equipment (i.e. complex systems) which would be manifested by much higher average or median contract values and by a larger share in procurement expenditure.

A recent study had come to a similar conclusion: “The Directive 2009/81/EC is today favoured for contracts dealing with services, the acquisition of equipment deemed to be of a low strategic value, and sub-systems. Over the past three years, all of the major military equipment contracts, thus those that have had a structural effect on the DTIB, were notified without going via the Directive.” 86 However, the conclusions of this evaluation are more nuanced on this point since some significant military equipment contracts have been awarded under the Directive.

This situation contrasts with the operational objective of the Directive, as set out in the Impact Assessment, that the majority of contracts in the fields of defence and security should be awarded on the basis of EU procurement rules.

In the perception of industry, the Directive improved market access and business opportunities only to a limited extent. 36% of companies or business associations that replied to the online survey considered there is “no difference” compared to the situation before, 21% deemed that the situation “improved”, and 12% responded that it “deteriorated” or “significantly deteriorated”.

In its reply to the online survey, ASD 87 noted the “increase in publications of contract notices in recent years, but also huge differences in publication rates between Member States” and emphasised that “such uneven application of the Directive throughout the EU clearly has a negative impact on the level playing field”. Similar comments were made by several other companies and businesses associations responding to the online survey. Overall, these stakeholders emphasised the importance of focusing on consistent application of the Directive and achieving more effective enforcement of its provisions. Industry representatives made the same points during stakeholder consultation meetings 88 .

Transparency International emphasised that the publication of longer-term purchasing plans by Member States, beyond the obligations under the Directive, would be an important contribution to a more transparent market.

To summarise, the value of defence and security contracts published EU-wide and awarded, in competition, under rules based on transparency and equal treatment has significantly increased. However, a very significant share of defence procurement expenditure is still done outside the Directive, especially for the procurement of high-value, strategic, complex equipment. This is in line with the feedback received from stakeholders.

This is probably due to a number of factors such as the relatively short time (2-3 years) between actual transposition by Member States and the last year covered in the evaluation (2015) and a still too broad interpretation of possible exemptions, including under Article 346 TFEU, which are probably relied on especially for the procurement of strategic equipment.

6.1.1.2.    Cross-border awards

In the analysed period of time (2011-2015), direct cross-border procurement (i.e. contract won by companies located in a country different from the one of the contracting authority and bidding directly from abroad) accounted for approximately 10% of awarded contracts in terms of their number, as well as value. The total value of contracts awarded directly to foreign economic operators accounted for 3.1 billion EUR (hence around 620 million EUR annually) out of the total of 30.36 billion EUR 89 which was extracted from contract award notices that included total final values of procurement at the level of separate awards.

Figure 16: Contracts awarded directly to foreign companies under the Directive in 2011-2015 [%]

Source: OJ/TED, manual corrections by DG GROW

As shown in Figure 16 , 6% of direct cross-border contract awarded under the Directive were won by companies from other EU Member States and 4% by companies located outside the EU. The levels of cross-border procurement were roughly the same in terms of the value of all awards. In civil procurement in 2007-2009, the level of direct cross-border equalled 3.5% of the contract value and 1.6% in terms of the number of contracts 90 .

The differences in the percentage of contracts awarded directly to foreign companies (intra-EU and non-EU combined) across Member States are shown in Figure 17.

Figure 17: Contracts awarded directly to foreign companies under the Directive in 2011-2015, by country in number and value [fraction]

Source: OJ/TED, manual corrections by DG GROW

The graph above marks significant differences between countries that can, from an economic viewpoint, be partially explained by the size of the industrial base in respective countries and their need (or not) to source procurement from abroad. A detailed overview of cross-border penetration by country in terms of value, number and their respective shares is provided in Table 50 in Annex IV.

Table 18: Contracts awarded directly to foreign companies under the Directive in 2011-2015, by contract type [%]

Source: OJ/TED, manual corrections by DG GROW

An overview of cross-border procurement by contract types ( Table 18 ) shows that supply contracts have been more frequently won by foreign bidders than service or works contracts. The percentage of supply cross-border awards was 14% in terms of number and 34% in value. This is to be expected, given the fact that goods are typically more tradable than services (or works). The shares of cross-border procurement by selected categories of CPV nomenclature are provided in

Table 51 in Annex IV. Finally, a detailed overview of contracts awarded under the Directive in 2011-2015 and broken down by the country of contracting authorities and economic operators is provided in Table 52 (the number of contracts) and Table 53 (in value terms) in Annex IV.

The Impact Assessment noted that, in general terms, EU-wide publication of contract opportunities should enhance companies’ chances to win cross-border contracts 91 . When comparing the above findings with the baseline (despite some methodological discrepancies), it appears that the level of direct cross-border procurement in EU has remained at similar levels since the entry into force of the Directive. According to the Baseline Study, the value of cross-border procurement advertised in OJ/TED and EBB was estimated at around 2.26 billion EUR in 2008-2010 92 , hence roughly 753 million EUR per year. Since the entry into force of the Directive, contracts worth roughly 3.1 billion EUR were awarded directly to firms located in a country other than the one of the contracting authority (circa 620 million EUR per year). Additionally, defence and security contracts worth around 692 million EUR 93 were awarded to foreign bidders under the civil procurement Directives in 2011-2015 (hence roughly 138 million EUR annually on average). The two figures combined would equal around 758 million EUR annually, representing the mean average value of defence and security procurement covered by transparent EU rules and awarded directly cross-border in 2011-2015.

When comparing the above totals with the value of defence procurement expenditure which was at the disposal of EU governments in the respective periods of time, it seems that, since the Directive became applicable, direct cross-border procurement in EU has remained at similar levels - according to the Baseline Study, the cross-border procurement announced via OJ/TED and EBB equalled roughly 0.85% 94 while the same percentage in the evaluated time span would account for 0.93% 95 of the defence procurement expenditure. Although both figures are very close (on average around 750 million EUR annually and both accounting for less than 1% of defence procurement expenditure), it should be underlined that the two estimates are difficult to compare, as they are based on different methodologies (e.g. the Baseline Study used a broader definition of defence procurement than the current evaluation, hence the current estimate would have been probably higher if it was calculated using the baseline methodology).

The above estimates all referred to the so-called direct cross-border procurement which occurs when firms operating from their home market bid and win contracts for invitations to tender launched in another Member State. However, cross-border procurement can also occur indirectly through subsidiaries (e.g. a foreign affiliate bids for tenders launched by authorities of a country different from the home country of the firm’s headquarters or where the parent company is located).

In order to provide an estimate of the second form of cross-border procurement, the firms that have won contracts under the Directive were compared with the names of companies listed in the SIPRI Top100-arms producing and military services 96 ranking. As the SIPRI list includes the country of the parent company, the approximate share of indirect cross-border procurement could be estimated.

As shown in Table 19 , which provides an overview of indirect cross-border procurement calculated for a sample of large firms, amongst all contracts awarded under the Directive, 474 were won by the foreign subsidiaries of firms listed in SIPRI Top 100 ranking. Around 66% of these contracts were awarded to the European companies, while the following 26% have been won by companies from the US. Companies captured by the above method could have acted as stand-alone businesses or in consortia.

Table 19: Contracts published under the Directive in 2011-2015 and awarded to foreign subsidiaries of companies listed on the SIPRI Top 100 ranking, by country [number of contracts, value in million EUR]

Source: OJ/TED, manual corrections by DG GROW; The SIPRI Top 100 arms-producing and military services companies in the world excluding China, December 2015.

The total value of indirect cross-border awards in 2011-2015 equalled 12.44 billion EUR, hence roughly 40% of the total value of contracts awarded under the Directive.

The contracts won by companies originating from the US accounted for the highest share of the total value of awarded contracts (81%). However it is important to underline that this result was to a large extent influenced by the previously mentioned service contract worth 6 billion GBP awarded by the UK Government to a subsidiary of a US company. If this outlier was removed from the dataset, the order on the list would have changed with the winning firms from the EU moving at the top (the share of intra-EU awards in the value of contract would increase to 55% of the remaining observations and the US would follow with 44%).

Finally, the main drawback of the above estimation is the fact that it is solely based on the list of 100 largest companies worldwide (i.e. refers only to a subset of contracts won by these largest companies) while the subsidiaries of companies with lower value of arms sales are not included in the ranking. As a result, the number and value of indirect cross-border contracts in practice could be larger as the indirect cross-border wins of smaller international companies were not captured by the above estimation method.

Based on the replies to the online survey, stakeholders’ perception of the impact of the Directive on cross-border access to defence and security procurement in EU countries is rather positive (39% of respondents among both contracting authorities and businesses), but with a significant share of respondents seeing no impact (30% among contracting authorities, and 24% among businesses). The respondents seeing a negative impact are a sizeable minority among businesses (21%) and a rather marginal share among contracting authorities (6%).

An additional factor, which is relevant in connection with the issue of cross-border awards, is whether the Directive increases the number of cross-border bids, including from new entrants in the market. To assess this aspect, contracting authorities were asked in the online survey how often the Directive resulted in offers/expression of interests coming from a more diverse, wider range of suppliers from other EU Member States. The replies were rather mixed: 33% consider this has been the case “occasionally” or “frequently”, whilst 30% think it happened “rarely” or “never”.

In a stakeholder’s consultation meeting 97 , a defence company explained that before making a decision to bid they make a case-by-case assessment. They need to be confident that they are well-placed to win and that it is worth preparing an offer.

To conclude, the increased use of EU public procurement rules based on transparency, competition and equal treatment naturally leads to enhanced cross-border opportunities for companies. However, it has not resulted in an increase in direct cross-border awards. As stakeholders pointed out, an important contributing factor is that cross-border bidding is by nature more difficult due to language and other non-regulatory barriers, higher costs and insufficient knowledge of the foreign market.

6.1.1.3.    Competition

The average number of offers received when launching procurement under the Directive was 3.4, which is somehow lower than what is observed in the civil sector (5.4 98 bids per procedure), but can be explained by the structure of the defence sector with fewer but more specialised suppliers. However, nearly 33% of contract awards published in OJ/TED and containing information about the number of bids 99 received just one offer ( Figure 18 ). This means that for 1/3 of the calls for tender there was actually no competition 100 .

Figure 18: Number of offers per contracts awarded under the Directive in 2011-2015 [fraction]

Source: OJ/TED, manual corrections by DG GROW

The same analysis can be carried out at a country level, showing that there are significant differences in the levels of competition across Member States.

Figure 19: Number of offers per contracts awarded under the Directive in 2011-2015, by country 101 [fraction]

Source: OJ/TED, manual corrections by DG GROW

In particular in countries such as Bulgaria, Finland, Hungary, Italy, the Netherlands, Romania and Slovenia (with spikes after “0”) nearly 60% of contracts or more were awarded following the reception of a single offer.

Finally, the competition levels can also be broken down by the type of contract that was used for procurement (Figure 20). The histogram below clearly shows that 40% of service contracts received just one offer, while single-bidder awards accounted for nearly 30% of supply contracts. In contrast, works procurement shows a much more balanced picture with less than 1/10 of such awards, it should be however kept in mind that the latter was based on a much smaller dataset 102 .

Figure 20: Number of offers per contracts awarded under the Directive in 2011-2015, by contract type [fraction]

Source: OJ/TED, manual corrections by DG GROW

The number of offers received is closely linked with the type of procedure chosen by the contracting authority. Non-transparent procedures, such as the negotiated procedure without publication of a contract notice will typically involve just one bidder.

Table 20: Contract award notices published under the Directive in 2011-2015, by transparency 103 of procedures [number of notices, %]

Source: OJ/TED, manual corrections by DG GROW

As presented in Table 20 , the fraction of contract award notices where the procedures used in procurement were not transparent was almost 2/5. However, contracts awarded without publishing a call for tender accounted for lower share in terms of the total value of awards (23%), meaning that high value contracts were more frequently awarded following transparent procedures (Table 21).

Table 21: Contract award notices published under the Directive in 2011-2015, by transparency 104 of procedures [value in million EUR, %]

Source: OJ/TED, manual corrections by DG GROW

As it can be seen from the graph below, the differences across countries in the use of non-transparent procedures were significant, also exposing different proportions depending on whether the share in terms of number or value is analysed. These differences may be due to some extent to different practices of contracting authorities in the application of the conditions for the use of the negotiated procedure without publication of a contract notice.

Figure 21: Contract award notices published under the Directive where non-transparent procedures were used, by country 105 [fraction]

Source: OJ/TED, manual corrections by DG GROW

Austria and Latvia are not shown on the graph, as in these countries all awards were based on transparent procedures. In Portugal the opposite was true (although in the latter case, the calculation was based on only eight contract award notices reported by Portugal in 2011-2015). Obtaining a corresponding result for Sweden in terms of the value of contracts was impossible due to lack of price data.

The results of the online survey show that the perception of contracting authorities about the impact of the Directive on competition (in terms of number of offers received) is positive. 45% of contracting authorities’ respondents considered that the situation “improved” with the Directive. 15% see no difference, and only 6% replied that the situation “deteriorated” or “significantly deteriorated” compared to before the Directive.

Similarly positive are the contracting authorities’ responses on a related aspect, i.e. the impact of the Directive on their capacity to achieve best value for money. 33% of contracting authorities that replied to the survey consider that this aspect improved compared to the situation before the Directive, while 18% see no difference. Only 6% think that the situation deteriorated.

At a meeting on the evaluation 106 , some Member States’ experts confirmed the perception that the Directive helped achieving best value for money, while many affirmed that it is still too early to draw definite conclusions. They pointed out that getting best value for money does not only depend on the rules of the Directive, but also on the degree of competition and the structure of the market. Some Member States experts clarified that even before the Directive some form of competitive procurement aimed at best value for money was normally used.

In conclusion, the fact that the average number of offers is somehow lower than in civil procurement can probably be explained by the structure of the defence sector with fewer but more specialised suppliers. Overall, as it is confirmed by stakeholders’ feedback, the Directive had a generally positive impact on competition.

6.1.1.4. The practice of industrial return requirements

The Impact Assessment addressed the issue of offsets/industrial return requirements. It concluded that this issue should/could not be explicitly regulated by the Directive, but needed to be addressed in the light of Treaty principles. As explained in Section 5, the Commission departments therefore engaged, since 2010, with Member States to make sure that offsets regulations were abolished or revised in the context of the process of transposition of the Directive. In addition to the revision of offsets regulations, it is appropriate to assess whether changes concerning offsets/industrial return requirements have taken place in the concrete public procurement practice of Member States.

No official data on Member States’ practices concerning offsets/industrial return requirements exist at EU level. If some individual Member States collect such data in relation to their own national defence procurement or defence exports, they have no reporting obligation towards the Commission. No such data were obtained via consultation activities either.

The Bureau of Industry and Security (BIS) of the US Department of Commerce publishes an annual report on “Offsets in Defense Trade” 107 . The BIS collects data annually from the US firms involved in defence exports with associated offset agreements. These annual report provide data on offsets agreements and transactions reported by US firms exporting defence equipment abroad; only the globally aggregated data are provided, with no breakdown by (offset recipient) country or geographical area. The twentieth report, published in March 2016, provides, for the first time, data concerning the EU. In 2014, the US firms reported entering into nine new offsets agreements with EU Member States. The value of these agreements is 1.68 billion USD. As proportion of all the new offsets agreements entered into by the US firms in the same year, those with EU Member States represent 18% by number and 12.9% by value 108 .

This data confirms that Member States in 2014 still used offsets requirements when purchasing defence equipment from abroad, presumably based on Article 346 TFEU. However, since similar BIS data from previous or later years is not available, it is impossible to make a comparison in order to assess whether – and to what extent – changes in the practice of offsets/industrial return requirements have taken place.

An element to assess this issue is the perception of stakeholders, and in particular of defence companies which are confronted with such requirements.

Businesses’ replies to the online survey show that the perception is that of a reduction, albeit to a very limited degree, in the frequency of industrial return requirements after the Directive. While the amount of businesses replying that they have been confronted “very often” or “often” with these requirements before or after the Directive is the same (48%), the proportion of those replying “very often” goes from 33% (before the Directive) to 24% (after the Directive). In the same direction, the percentage of companies that replied “never” goes from 9% (before the Directive) to 12% (after the Directive).

In its reply to the online survey, ASD pointed out that “the uncertainties concerning the use of offset requirements that came along with the Directive is a particular concern for defence industries in smaller Member States” and that these uncertainties also create legal and financial risks “for bidders for contracts where such offsets are required”. In this context, they argued that “legal certainty would benefit from further clarification of the conditions for requests for industrial participation”. One defence company that responded to the online survey also confirmed that there are still uncertainties in terms of offsets practices, and argued that the situation is more unclear and less transparent than before the Directive. This point was also made by another industry representative in a stakeholder consultation meeting 109 .

At the same meeting, another industry representative mentioned that formal offsets requirements have definitely changed or are now removed. However, there are still cases of offsets requirements based on essential security interests under Article 346 TFEU. He added that there remains a significant informal desire and expectation in customer countries to build industrial links with supplier companies and for them to establish local collaboration.

Several participants at the above-mentioned meeting stated that there is a clear trend to move away from indirect non-military offsets. It was pointed out, however, that direct military offsets can also have detrimental effects as they can lead to defence industrial duplications in Europe.

To conclude, it seems that Member States still use to some extent (presumably relying on Article 346 TFEU) offsets/industrial return requirements. However, the frequency of these requirements appears to have marginally decreased. Finally, there seems to be a trend to move away from indirect non-military offsets.

6.1.1.5. Other aspects of procurement procedures

By introducing coordinated procurement rules based on competition, transparency and equal treatment, the Directive sought to improve a number of aspects such as: fairness or procedures, legal certainty, and bidders’ access to review procedures.

The Directive lays down a detailed set of provisions designed to ensure that the principle of equal treatment is respected throughout the contract award procedure. In addition, it establishes a specific review system that constitutes an additional guarantee to ensure compliance with the rules. Finally, it coordinates national rules thereby reducing regulatory fragmentation across Member States and improving legal certainty.

As to the effects of the Directive on fairness of procedures, businesses’ replies to the online survey indicate a mixed perception, with moderately positive signs. 30% of companies’ respondents do not see any difference compared to the situation before the Directive, 21% consider that it “improved”, and 15% think that the situation “deteriorated” or “significantly deteriorated”. 42% have “some doubts” that a contracting authority in another Member State would give fair consideration to their bid under the Directive, while 21% are “reasonably confident”, “confident” or “very confident” that this would be the case.

One defence and security company, in its written contribution to the open public consultation, mentioned that discriminatory technical specifications, tailor-made requirements, as well as national standards, are used in some Member States. This company argued that this constitutes a major problem in the application of the Directive and a barrier to the functioning of the internal market.

Another aspect related to the fair and non-discriminatory conduct of procedures, is the proper application of exclusion grounds. In this respect, Transparency International considers that the mandatory exclusion of tenderers takes place extremely rarely. Furthermore, the derogation from the mandatory exclusion is too broad and vague. A self-cleaning mechanism (currently not foreseen in the Directive) could encourage companies to implement effective anti-corruption policies. The application of discretionary exclusions is also too rare. They suggest a coordination of the exclusion systems of the Member States so as to follow a uniform approach and avoid the granting of special advantages to companies with political influence. Implementation guidance on the topic would also be welcome. In that context, Transparency International points at the electronic databases of the US government and of the World Bank which contain a list of excluded entities. These databases must be checked by the procurement authorities and are also to a certain extent publicly available. They recommend a similar mechanism for the EU.

With regard to legal certainty, contracting authorities consider that the Directive had a positive impact, while businesses’ perception is rather mixed. Among the contracting authorities that replied to the online survey, 48% think that the Directive “improved” or “significantly improved” legal certainty, 12% see no difference, and 12% think that the situation “deteriorated” or “significantly deteriorated”. The relative majority (30%) of businesses see no difference with regard to legal certainty, while 21% considers that the situation “deteriorated” and 15% that it “improved” or “significantly improved”. With one exception, all Member States experts who intervened on this issue pointed out that the Directive improved legal certainty 110 .

In terms of access to review procedures, 36% of businesses’ respondents think that the Directive made no difference, 15% consider that it “improved” or “significantly improved” the situation, and 9% see a negative impact (“deteriorated” or “significantly deteriorated”).

The significant rate of businesses’ replies indicating that the Directive has made no difference on these aspects is consistent with their feedback about the still limited uptake of the Directive and the need for more widespread and consistent application.

In a stakeholders’ consultation meeting 111 , a number of defence companies pointed out there should not be high expectations that they would use access to review procedures in the defence sector. Since they only have one customer in each country, they prefer not to antagonise them if it can be avoided. Other factors that discourage the use of legal challenges in front of national courts are costs and time-limits. In this context, they emphasised that enforcement to ensure the correct application of the Directive cannot rely only on complaints from economic operators.

Transparency International, in its reply to the online survey, notes that in some situations the oversight institutions, such as the parliaments or the courts of audit, might be lacking the necessary information about specific defence and security procurement procedures, due to e.g. strict data secrecy laws. Transparency International also pointed out that the appeal or complaints mechanisms might be ineffective or insufficiently proactive in some Member States which makes it more difficult to report irregularities or corruption. Very often national legislations also fall short of offering adequate sanctions for corruption. In addition, the levels of prosecutions for corruption are very low and the proceedings often last very long and result in court settlements.

Transparency International also called for the application of an anti-corruption policy for subcontractors and third parties as well as the use of appropriate contract clauses. In this context, they specifically mention integrity pacts.

To conclude, when contracts are awarded under the Directive, aspects such as the fairness of procedures and access to reviews are improved. However, the extent to which these improvements take place depends on the degree of application of the Directive. The mixed stakeholders’ perception on some of these aspects appears to be due to the still limited uptake of the Directive.

6.1.2.Use of exemptions

As recalled in Section 2.2.3 above, according to the Impact Assessment, the operational objective of the Directive was to limit the use of exemptions, in particular Article 346 TFEU, to exceptional cases. This implied that “the majority of contracts in the fields of defence and security, including those for the procurement of arms, munitions and war material, should thus be awarded on the basis of EU rules” 112 .

Member States have no notification or reporting obligations concerning their decisions to rely on Article 346 TFEU, on other Treaty-based exemptions, or on one of the exclusions from the Directive (Articles 12 and 13) in order to conduct procurement outside the Directive. There are, therefore, no official statistical data or information on the extent to which these exemptions have been applied.

Under these circumstances, four elements have been relied upon in order to address this issue:

(a)changes in the extent to which EU procurement rules (defence and civil) are used for the award of defence and security contracts, as compared to the defence procurement expenditure;

(b)the volume of defence equipment procurement (upper/lower range) carried out outside the Directive;

(c)examples of major excluded contracts;

(d)Member States and stakeholders’ perceptions about the use of exemptions.

The results of analysis carried out under the four above mentioned approaches, along with methodological constraints (e.g. caused by limited access to comparable data), are presented in the following sections.

6.1.2.1. Comparison with defence procurement budgets

The first and most important element to look at in order to understand whether changes in the use of exemptions have occurred, are the changes in the use of the Directive. An increase in the application of EU procurement rules would be in itself clear, albeit indirect, evidence of a decrease in the use of exemptions.

As presented in Section 6.1.1.1 above, after the deadline for transposition, the uptake of the Directive was almost immediate and has shown a clear upward trend.

The comparison with the baseline situation shows an increase in the use of EU procurement rules for the award of defence and security contracts. As explained in Section 2.3.2 above, the total value of contracts published EU-wide (OJ/TED and EBB) in the period 2008-2010 amounted to an average yearly value of 2.9 billion EUR. The total value of these contracts was equivalent to 3.3% of the EU’s total defence procurement expenditure in the same period.

The reported value of contract award notices published under the Directive in 2011-2015 was around 6.2 billion EUR annually, hence circa 7.6% of the total value of general government procurement expenditure on military defence of EU-28 and EEA-2 countries (or 6.9 billion EUR and 8.5% respectively, if the estimated value was used, see: Table 17). Additionally, defence and security contracts were awarded under the civil procurement Directives in 2011-2015 (on average 1.6 billion EUR annually). Consequently, on average circa 7.8 billion EUR was published annually under transparent EU rules in 2011-2015, equalling 9.5% of the defence procurement expenditure available to EU governments in the reference period.

This shows that, compared with the baseline situation, there has been a more than twofold increase in the award of defence and security contracts under transparent and competitive procurement rules (from 3.3% to at least 7.6%) in terms of the average yearly value of awarded contracts and as the proportion of defence and security procurement compared to defence procurement expenditure.

Despite this improvement, it is also clear that a very significant share of defence procurement expenditure is still done outside the Directive and, more in general, outside EU public procurement rules. This share is likely to include procurement in which exemptions (Article 346 TFEU or exclusions provided for in the Directive) are used - whether or not in a legally correct manner – as well as procurement whose value is below the thresholds for the application of the Directive.

6.1.2.2. Major defence equipment procurement outside of the Directives – quantitative description

As already noted in Section 6.1.1.1 above, the total value of contract award notices published under the Directive in 2011-2015 ranged between 30.85 billion EUR and 34.55 billion EUR (reported and estimated value, respectively). However, when compared with the defence procurement budgets the share of procurement carried out under the Directive seems to be relatively small. Similarly, the dominance of relatively small value contracts ( Figure 15 ), may suggest that the Directive was not used to a significant degree for the procurement of strategic equipment (i.e. complex systems).