Summary and implications

On 20 August 2009, the Council of Ministers formally adopted the new Defence Procurement Directive 2009/81 (the "Directive"). Member States have two years to implement the Directive into national law after its publication in the Official Journal (OJ 2009 L216/76). Following implementation of the Directive, procurement in the defence industry will broadly split into three categories:

  • non-military specific items (such as tyres for an armoured vehicle) will fall under the general procurement rules set down by Directive 2004/18/EC and implemented in the UK by the Public Contracts Regulations 2006 (SI 2006/5) 2006
  • military and security specific items (such as ammunition) that are not exempted under the "essential security test" will be subject to the Directive
  • highly sensitive military specific items will be exempted from the procurement rules under Article 296 of the EC Treaty.
     

Open defence procurement

The Directive will signal a shift in business practices in the defence industry over the next few years:

  • less scope for reliance on Article 296
  • more emphasis on confidentiality of information and security of supply
  • suppliers will need to have a greater understanding of the procurement rules for compliance purposes and to compete effectively in the market
  • UK suppliers will have opportunities to supply markets in Member States previously difficult to penetrate.

Fewer reasons to rely on Article 296

The Directive limits the scope for contracting authorities to avoid EU procurement rules by relying on Article 296 of the EC Treaty. Contracting authorities will only be able to exempt defence and security contracts from the application of the Directive if necessary to protect their "essential security interests". The Directive will therefore lead to an increase in the number of defence and security contracts that are advertised and put out to tender.

Procurement procedures

Contracting authorities will be able to use any of the four procurement procedures including:

  • the open procedure
  • the restricted procedure
  • competitive dialogue
  •  the negotiated procedure.
     

The negotiated procedure

The Directive allows contracting authorities to use the negotiated procedure notably without any justification. The negotiated procedure can be used with publication of a contract notice and in some exceptional circumstance without publication. Contracting authorities will therefore have the flexibility to consult and negotiate all aspects of the contract directly with their chosen suppliers, allaying concerns about confidentiality of information and security of supply when negotiating sensitive, complex contracts.

Confidentiality of information

In order to guarantee confidentiality of information, contracting authorities may impose confidentiality clauses requiring commitments from suppliers and sub-contractors to protect sensitive information during and after the contract.

Security of supply

The Directive entitles contracting authorities to seek reassurances regarding security of supply including:

  •  the impact of any export controls or security arrangements
  • a commitment to licence the production of spare parts, components, specific fittings and specific tests for equipment
    Tenderers will need to be aware of the potential requirement to disclose designs, know-how and other confidential information
  • a requirement for the tenderer to inform the contracting authority about any change in its organisation or supply chain that may affect its obligations under the contract
  • an obligation to modernise, maintain and adapt supplies
  • an obligation to maintain the capacity required to increase production if necessary in times of crisis.

Subcontracting

The Directive promotes the use of subcontracting as a means of facilitating the free movement of goods and services within the EU. Member states may permit or even oblige contracting authorities to require successful tenderers to subcontract up to a maximum of 30% of the contract.

R&D

One of the perceived negative effects of the Directive stems from the requirement for R&D contracts to be separated out from production contracts. The Directive requires that the production element of the contract is re-tendered, so there is no guarantee for firms pursuing R&D activity that they will get a return on their investment via the production contract.

A combined R&D and production contract would have to be tendered at the outset by the contracting authority.

R&D is defined in the Directive but does not include certain issues normally considered to be R&D, such as prototypes.

Next Steps

The government has two years to implement the Directive into UK law; the deadline is 21 August 2011. Industry participants should now start gearing up for the changes, assessing the impact on current business practice and taking the opportunity to influence the implementation process.