In a recently published article, the author of this blog and Baudouin Heuninckx investigate “Small and Medium-size Enterprises and EU Defence Procurement Law: The Soft Impact of Recommendation 2018/624/EU” (2023) 32 Public Procurement Law Review 115-140. The analysis of this article still includes the UK.
Background: Large defence companies operate only in large EU Member States, but Europe’s 2,000 defence sector SME are active across the entire Union. This imbalance between larger and smaller Member States represents an obstacle to the establishment of an Internal Market for defence goods. Since most of their defence companies can be classified as SMEs, the opportunities of defence SME, and thus their survival, is a crucial issue for Member States such as The Netherlands or Czechia. Their concern is that French or German competition, operating with often largely domestic supply chains, will simply push their SME out of the market. Their reaction might be to take measures to favour or even protect their SME thereby undermining the Internal Market.
Research question and methodology: The European Commission issued the non-binding Recommendation 2018/624/EU of 20 April 2018 on cross-border market access for sub-suppliers and Small and Medium Sized Enterprises in the defence sector, it’s first SME-specific instrument for the armaments market. The research question of the article introduced in this blog is whether the SME-friendly measures suggested in the Recommendation had an impact. Firstly, a comparative analysis with pre-existing legal sources determined the possible added value of the new instrument. Secondly, empirical evidence collected from Member State ministries of defence (MoD) aimed to discover any change of practice after the Recommendation.
Results: The analysis shows that the SME-friendly soft law regime for defence procurement provided by the Commission in Recommendation 2018/624/EU had no detectable impact: it did not change the relevant legal framework and does not appear to have altered the practices of the Member States. Based on the analysis of the various recommendations in the Commission instrument, it is argued that this is due to seven main reasons.
Not binding: First, Recommendation 2018/624/EU is not legally binding. Therefore, there are no ‘teeth’, no litigation risk or other enforcement when MoD do not follow the recommendations of the instrument. This makes it easy to ignore thus compromising its impact from the start.
Repetition: Second, Recommendation 2018/624/EU repeats provisions that are already in the binding Defence Directive 2009/81/EC and duplicates many suggestions of the SME Guidelines of the European Defence Agency (EDA). The purpose of repeating provisions of binding secondary EU law in a non-binding Recommendation could be simply to draw the attention of the contracting authorities to the benefits of using these provisions, or maybe to make the substance of the Recommendation appear more substantial that it is. These duplications risk undermining its credibility among MoD and implies that the Commission has few or no original ideas.
Consistency: Third, Recommendation 2018/624/EU attempts to ensure consistency between the EU defence procurement regime and the Public Sector Directive 2014/24/EU. This is connected to the two previous points: rather than amending the legally binding Defence Directive, which is left untouched, the Commission introduces some of the SME-friendly measures inspired by the 2014 reform of the Directives (division into lots, turnover requirement, European Single Procurement Document, direct payments to subcontractors) on a soft law basis. Thus, in contrast to Directive 2014/24/EU the provisions are not legally binding, did not have any visible impact, and do not achieve the desired level of consistency between the regimes.
Appropriate? Fourth, some of the suggestions of Recommendation 2018/624/EU are redundant and not considered appropriate for the defence sector, in particular the division into lots. It is argued that this undermines the credibility of the instrument among MoD thereby contributing to its lack of impact.
Burden: Fifth, certain suggestions of Recommendation 2018/624/EU impose a disproportionate burden on MoD without a clear benefit (translations, short items of information). If this was legally binding it would alienate the MoD, since it is not it is simply ignored.
Nothing new: Sixth, Recommendation 2018/624/EU makes many suggestions, especially regarding communication and capacity building, regarding SME-friendly measures that have been practiced by MoD for years before 2018. When something is already happening then no impact can be expected from recommending it. Moreover, it could be misconstrued as an attempt to generate ‘fake’ impact, the Recommendation does not even acknowledge pre-existing practices.
High value contracts: Finally, as an EU instrument, Recommendation 2018/624/EU covers primarily the application of the rules of the Defence Directive. However, this Directive applies only to public contracts of a value above 431.000€. From the point of view of SME, this can be high, and only larger SME would consider bidding alone for contracts above this threshold. Smaller SME, which are those needing the most measures to gain access to the defence and security market, would, in many cases, not even consider bidding for contracts published at the EU level. The Recommendation would therefore have no direct impact on their participation and would only benefit larger or highly specialised SME, which probably have sufficient resources to insert themselves in the market already.
Conclusions: The article discussed in this blog shows that Recommendation 2018/624/EU is in many ways wanting, does not add to existing initiatives particularly of EDA, has not had and will not have any tangible impact, and thus does not suffice to create an EU defence procurement market including Member States without large defence companies. While the soft-law nature of the regime could not be discussed in detail within the confines of the article introduced here, it is unlikely to help its impact. SME participation is constantly mentioned as an important objective in Commission documents, not least in the 2016 Review of the Defence Directive. But in practice the Recommendation will bring little to SME. When the Commission used non-binding instruments before, they were mostly intended to explain and interpret binding legislation, not least with respect to the Defence Directive. A rather isolated example is a 2006 Communication on contracts below the thresholds of the Directives where the Commission is again interpreting CJEU case law in an area where binding legislation would not be appropriate. Using non-binding instruments in an area where binding legislation is possible by the only institution that can initiate binding legislation set a concerning, if recurring, precedent. Moreover, repeatedly professing to want to facilitate SME participation in defence procurement and in the end producing a lukewarm, partly plagiarised, and ineffective instrument is questionable. The Commission should either have acted on its promises to SME, initiate legislation, and then dare the Member States to reject it in Council. Alternatively, it could admit that there is nothing to be done for SME in defence procurement beyond the soft law EDA Guidelines and leave addressing SME concerns to EDA and the Member States.
References
Recommendation 2018/624/EU of 20 April 2018 on cross-border market access for sub-suppliers and SMEs in the defence sector [2018] OJ L102/87-94
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
Directive 2009/81/EC of the European Parliament and of the of 13 July 2009 on the coordination of procedures for the award of certain works contracts, supply contracts and service contracts by contracting authorities or entities in the fields of defence and security, and amending Directives 2004/17/EC and 2004/18/EC [2009] OJ L216/76-136
Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement and repealing Directive 2004/18/EC [2014] OJ L94/65
Commission interpretative communication on the Community law applicable to contract awards not or not fully subject to the provisions of the Public Procurement Directives, OJ C 179, 1.8.2006, p. 2–7