Legal framework

Relevant legislation

What statutes or regulations govern procurement of defence and security articles?

Procurement of defence and security works, equipment and services by contracting authorities in Italy is regulated by legislative decree 20 April 2016, No. 50, sections 159-163, (the Public Procurement Code (PPC)), enacting European Union public procurement directives 2014/23, 2014/24 and 2014/25/EU. The PPC, in principle, applies to all public procurement contracts, but carves out defence and security procurement falling under special legislation. Legislative decree 15 November 2011, No. 208, the Military Procurement Code (MPC), which enacted EU Directive 2009/81/EC, is considered a special set of procurement rules applicable to certain defence and security contracts that prevails over the general PPC rules. The MPC, however, mostly makes selective references to the general PPC rules, introducing minor deviations. There are defence and security contracts that may fall outside the scope of both the PPC and MPC and are only subject to general EU Treaty principles. The Italian Ministry of Defence has published two enactment regulations, one for contracts under MPC (presidential decree 13 March 2013, No. 49) and one for contracts under the PPC (presidential decree 15 November 2012, No. 236).

Identification

How are defence and security procurements identified as such and are they treated differently from civil procurements?

The subject matter of the contract - military or classified items; works, supply and services related to military and classified items; works and services aimed at specific military purposes - determines the application of the MPC to contracts above EU special thresholds (currently €387,000 for supply and services and €4,845,000 for works).

The MPC introduces a number of exceptions to the general PPC rules. Such exceptions are mostly aimed at guaranteeing the necessary level of protection for security and defence interests involved in defence and security contracts by ensuring that sensitive information is not divulged and is not handled by economic operators who have not obtained the necessary security clearances.

Conduct

How are defence and security procurements typically conducted?

General EU Treaty principles apply to all defence and security procurement. Three of the five types of tender procedure envisioned by civil procurement rules are provided for by the MPC (restricted, negotiated with or without a prior notice and competitive dialogue). A notice published or a request for offers is the usual start of the procedure, followed by the submission of documents showing the financial standing, technical capability and - where required - possession of security clearances by the candidates/tenderers. Such a pre-qualification phase may or may not be joint with the actual submission of technical and economic bids, with the most economically advantageous tender being the more frequent award criterion. Note, however, that contract terms and conditions are unilaterally drafted by contracting authorities and are almost invariably non-negotiable. As such, terms and conditions are advertised when soliciting requests for participation and bids and economic operators often can only decide whether they are willing to accept them and submit an offer or whether they would rather not participate in the tender. The assessment of bids is based on objective, transparent and non-discriminatory criteria. In particular, when the award follows a competitive bidding procedure, equality of treatment and transparency principles require that no substantial modification of the contract is permitted without a retender.

Proposed changes

Are there significant proposals pending to change the defence and security procurement process?

Major legislative initiatives are currently focused on redrafting the PPC and its enactment provisions. The EU Commission had opened an infringement procedure against Italy and other EU countries in early 2018, claiming that the number of direct awards of defence contracts was a source of concern. However, the procedure was closed in June 2019 mainly as a consequence of explanations provided by Italy.

Information technology

Are there different or additional procurement rules for information technology versus non-IT goods and services?

No. Information technology (IT) goods and services may fall under the PPC or MPC depending on the subject matter of the contract.

Relevant treaties

Are most defence and security procurements conducted in accordance with the GPA or other treaty-based procurement rules, or does this jurisdiction commonly use the national security exemption to procure them?

The MPC is based on EU Treaty principles and the number of contracts that do not fall under either the MPC or the PPC is limited. Italian courts consider the general exception provided by article 346 of the EU Treaty as an exception to be narrowly interpreted and affirm the applicability of EU Treaty principles to all defence and security procurement.

Disputes and risk allocation

Dispute resolution

How are disputes between the government and defence contractor resolved?

Disputes concerning the award procedure are reserved to administrative courts, which have general jurisdiction on the award of public procurement contracts. Disputes concerning contractual obligations are reserved for civil courts. Arbitration and out-of-court settlement procedures are permitted only in relation to contractual obligations.

To what extent is alternative dispute resolution used to resolve conflicts? What is typical for this jurisdiction?

There is no specific rule on alternative dispute resolution (ADR) in the MPC. ADR models (eg, arbitration and amicable settlement) are provided by the PPC and are applicable to defence and security contracts. Arbitration - which is admissible only if provided by the initial tender notice or invitation and authorised by the governing body of the contracting authority - is traditionally very common in works contracts and long-term supply and service contracts, and more frequent in disputes between contractors and subcontractors than between contracting authorities and prime contractors.

Arbitrators have to be registered with the Arbitration Chamber managed by the Public Procurement Authority (ANAC).

Indemnification

What limits exist on the government’s ability to indemnify the contractor in this jurisdiction and must the contractor indemnify the government in a defence procurement?

General rules on limitation of liability set out by the Italian Civil Code render invalid any limitations covering grossly negligent or wilful conduct. Contracting authorities are liable for their non-performance, but normally do not provide any indemnity for contractors. Contractors are usually required to indemnify the contracting authority in relation to a number of issues that may cause liability during contract performance, mainly resorting to insurance policies (eg, third-party claims, product liability or personnel protection).

Limits on liability

Can the government agree to limit the contractor’s liability under the contract? Are there limits to the contractor’s potential recovery against the government for breach?

Public contracts awarded by contracting authorities in general - including military and defence contracts - normally do not provide limitations of liability, and such limitations cannot be negotiated once the contract is awarded, as they would amount to an impermissible modification of the contract. There is no statutory limitation on the ability of the contractor to recover against a contracting authority for breach of contract, and in general the burden of proof when asserting government liability is less strict than the one applicable to private parties.

Risk of non-payment

Is there risk of non-payment when the government enters into a contract but does not ensure there are adequate funds to meet the contractual obligations?

The risk of non-payment exists as in any other public contract. However, normally defence and security procurement procedures are launched only after the necessary funds are secured by the relevant administration. There is no specific rule prioritising payments to prime contractors, while general procurement contracts rules make it possible for subcontractors to obtain payment directly from the contracting authority if the prime contractor fails to fulfil its obligations.

Parent guarantee

Under what circumstances must a contractor provide a parent guarantee?

The only guarantees that are required in relation to the performance of a public procurement contract are bank guarantees or insurance guarantees. The requirement of a parent company guarantee is not envisioned by PPC or MPC rules.

Defence procurement law fundamentals

Mandatory procurement clauses

Are there mandatory procurement clauses that must be included in a defence procurement contract or that will be read into the contract regardless of their actual inclusion?

The standard draft contract, which is set forth as an attachment to the contract notice, or the invitation to tender, is non-negotiable, but, pursuant to a general Civil Code principle, clauses declared mandatory by a statute have to be read into a contract regardless of their actual inclusion. There are no defence and security specific clauses, the inclusion of which, is required or automatic. In public procurement contracts in general, the most well-known mandatory clauses provided by national legislation are those concerning the traceability of payments (aimed at making every transfer of monies paid from the contracting authority traceable through the chain of subcontractors and suppliers of the prime contractor) and the clauses making it mandatory for successful tenderers to ensure employment continuity for personnel of past contractors (also known as ‘social’ clauses).

Cost allocation

How are costs allocated between the contractor and government within a contract?

Cost allocations between government and contractor is usually defined by the contract itself, preferably through a fixed or firm price mechanism.

Disclosures

What disclosures must the contractor make regarding its cost and pricing?

Cost and price assessments are common, with at least three main purposes.

Within a competitive tender procedure, they may be aimed at verifying whether a price/offer by a tenderer is reliable and sustainable, and has not been the result of optimistic assumptions or underestimated costs (abnormally low tenders). Such an assessment is also aimed at verifying whether mandatory costs have been factored into the price offered by a potential supplier (eg, minimum wages for the workforce, or costs that cannot be subject to rebates as those necessary to ensure compliance with rules on health and safety on the workplace).

Within a non-competitive negotiated procedure, a cost analysis based on information disclosed by the prospective contractor according to Ministry of Defence guidelines is aimed at establishing the price for the goods and services to be purchased.

During the execution of a procurement contract, they may be aimed at establishing new prices for unforeseen additional goods and services required by the contracting authority and price adjustments required by unforeseen circumstances.

Audits

How are audits of defence and security procurements conducted in this jurisdiction?

General PPC rules afford contracting authorities with wide powers to audit and inspect contractors’ activities to verify their performance. Cost and price assessments are also routinely carried out, especially in long-term contracts associated with military programmes. There is no limitation or timeline that can predict when audits or assessments will be carried out. ANAC - the anti-bribery independent authority, which also acts as the public procurement sector regulator and enforcer - also has supervisory powers and may request information and conduct inspections in relation to tender procedures and procurement contracts performance.

IP rights

Who gets the ownership rights to intellectual property created during performance of the contract? What licences are typically given and how?

There are no statutory rules allocating intellectual property rights created during the performance of a defence and security procurement contract differently from any other procurement contract. If the intellectual property is the result of contracted research and development activity it will be owned by the contracting authority. Otherwise, unless there are specific provisions in the contract, it will be owned by the contractor.

Economic zones

Are there economic zones or other special programmes in this jurisdiction commonly utilised by foreign defence and security contractors for financial or other procurement related benefits?

We are not aware of any such economic zones or programmes in Italy.

Forming legal entities

Describe the process for forming legal entities, including joint ventures, in this jurisdiction.

Joint ventures can be formed by mere contractual agreements, without creating a new entity, when parties enter into cooperation agreements. Corporate joint ventures can be created by incorporating a company pursuant to the Civil Code. In general, while contractual joint ventures can be created by the parties without resorting to a public notary, corporate joint ventures require the assistance of a public notary. The public notary takes care of validating the articles of association and the company by-laws, registering the new entity with the Company Register.

Access to government records

Are there statutes or regulations enabling access to copies of government records? How does it work? Can one obtain versions of previous contracts?

Access to public administration documents is generally allowed for interested parties by national legislation on transparency and on administrative procedures (law 7 August 1990, No. 241 and legislative decree 25 May 2016, No. 97). The PPC also provides specific rules granting access to public procurement procedures documents. Restrictions apply during the tender procedure, but after the award any information that is not covered by trade or commercial secret, or is not classified, can be disclosed upon request, including versions of previous contracts. A trend towards enhanced transparency in public contracts is under way, with recent legislation stating that most information on public contracts has to be published on contracting authorities’ websites and that any citizen may obtain information on public contracts without providing any specific reason or interest.

Supply chain management

What are the rules regarding eligible suppliers and supply chain management and anti-counterfeit parts for defence and security procurements?

Eligibility of suppliers in defence and procurement is subject to the same criteria provided by the PPC and EU procurement directives, with limited deviations. Contractors having people convicted of particular crimes, including terrorism, fraud, bribery and money laundering cannot participate in public tenders. Furthermore, financial, technical and professional requirements proportionate to the public tender subject matter can be set by the contracting authority to select eligible suppliers. Similar rules apply also to subcontractors. Technical and professional requirements may also refer to the supply chain characteristics.

International trade rules

Export controls

What export controls limit international trade in defence and security articles? Who administers them?

Pursuant to EU general rules on export of military and dual use items, national enactment legislation (law 9 July 1990, No. 185 for military items; legislative decree 15 December 2017, No. 221 for dual-use items) provides a licensing framework for exports and, in certain cases, for intra-EU transfer of controlled items and technology. Separate directorates of the Ministry of Foreign Affairs are responsible for the issue of export licences, while Italy’s customs and law enforcement agencies are responsible for policing and enforcement. Italy does not maintain national controlled items lists differing from the EU Military list and the Annexes to EU dual-use regulation (No. 428/2009).

Domestic preferences

What domestic preferences are applied to defence and security procurements? Can a foreign contractor bid on a procurement directly?

The PPC and MPC do not provide any domestic preference rules, but - as in other countries - when such rules do not apply, it is not uncommon that contracts are directly awarded to national contractors.

Favourable treatment

Are certain treaty partners treated more favourably?

Agreement on Government Procurement (GPA) signatories, EU members and countries that have bilateral treaties with Italy granting reciprocity of treatment are the only partners that may participate in defence and security procurement procedures launched by Italian contracting authorities.

Sanctions

Are there any boycotts, embargoes or other trade sanctions between this jurisdiction and others?

Italy has no boycott, embargo or trade sanctions in place other than those imposed by the EU pursuant to United Nations general positions. The responsibility for related policy measures lies with the Ministry of Foreign Affairs, while the Ministry of Economy is responsible for financial measures and enforcement.

Trade offsets

Are defence trade offsets part of this country’s defence and security procurement regime? How are they administered?

Offsets are part of the Italian defence and security procurement regime and were regulated by two Ministry of Defence directives of 2002 and 2012. Industrial compensation is, however, currently less frequent due to their inherent limited compatibility with EU rules.

Ethics and anti-corruption

Private sector appointments

When and how may former government employees take up appointments in the private sector and vice versa?

National civil service regulation (Legislative Decree 30 March 2001, No. 165) forbids employees leaving public service from accepting private employment in industries that are subject to the regulatory or supervisory powers of their former office for three years post termination of employment (the anti-pantouflage rule). In the event of an infringement both the ex-civil servant and the private employer risk serious penalties. There is no reverse prohibition, save for general rules aimed at preventing conflicts of interest.

Addressing corruption

How is domestic and foreign corruption addressed and what requirements are placed on contractors?

Bribery and international bribery are punished as criminal offences with incarceration and financial penalties by the Italian criminal code. Bribes can take the form of monetary payments or any other advantage. Giving, offering or agreeing to give a bribe is an offence, as is accepting, asking for or agreeing to accept a bribe.

Public administrations are bound to adopt procedures, ethics codes, and organisation models specifically aimed at preventing corruption, pursuant to law 6 November 2012, No. 190. ANAC - the national anti-bribery and public procurement independent regulatory authority - has anti-bribery enforcement powers and supervises the public procurement sector.

Lobbyists

What are the registration requirements for lobbyists or commercial agents?

Italy does not have specific legislation on lobbying. Minimal measures have been introduced in parliament regulations for lobbyists active in the rulemaking process, but a broader set of rules on lobbyists is being discussed by the current political majority and might be the subject of special legislation.

Limitations on agents

Are there limitations on the use of agents or representatives that earn a commission on the transaction?

There is no specific statutory limitation on the use of paid intermediaries, but the defence and security procurement system is devised to foster direct participation of undertakings in transparent and non-discriminatory tender procedures. As a result, resorting to local agents, especially for foreign bidders, is not as common as it might be in other jurisdictions, especially because intermediaries not possessing the necessary participation requirements would not be in a position to place bids or participate into tenders.

Aviation

Conversion of aircraft

How are aircraft converted from military to civil use, and vice versa?

While civil aircraft airworthiness is harmonised throughout the EU, subject to EU regulations and EASA policing, military aircraft airworthiness is largely left to each state. It is, therefore, quite complex to convert military aircraft to civil use, but it has been made several times (eg, helicopter EH101, originally designed as a military helicopter, was subsequently certified for civil use). For the same reasons, it might be easier to convert a civil aircraft to military use, even though the higher military requirements have to be met.

Drones

What restrictions are there on manufacture and trade of unmanned aircraft systems or drones?

National rules on drones complement EU regulations on unmanned aircraft systems (UAS) recently adopted and expected to enter into force in July 2020 (EU Regulation 2019/45 on unmanned aircraft systems and on third-country operators of UAS; EU Regulation 2019/947 on the rules and procedures for the operation of unmanned aircraft). The Italian civil aviation authority (ENAC) has since 2013 regulated UAS and has updated its regulation on 11 November 2019 to incorporate requirements provided by the new EU regulations (such as UAS operator registration and marking of individual UAS). Military UAS are subject to military items restrictions - a government licence is required to manufacture, sell, hold, maintain, import and export them. Military UAS are also considered strategic assets and make entities manufacturing or developing military UAS subject to foreign direct investment restriction provisions set forth by Law D ecree 12 January 2012, No. 21. Such provisions afford the government broad special power to impose conditions or veto transactions or corporate decisions affecting entities developing UAS technology or manufacturing UAS.

Miscellaneous

Employment law

Which domestic labour and employment rules apply to foreign defence contractors?

No specific rule applies only to foreign defence contractors. Italian labour legislation applies to any worker habitually working in Italy, irrespective of any choice of law made in the employment contract.

Defence contract rules

Are there any specific rules that contractors, foreign or domestic, are bound by in defence contracts?

The replies above describe the specific rules applicable to foreign and domestic defence contractors.

Do contractors avail themselves of these rules when they perform work exclusively outside of the jurisdiction?

Rules on defence contracts described above still apply even if the contractor performs its work outside the jurisdiction.

Personal information

Must directors, officers or employees of the contractor provide personal information or certify that they fulfil any particular requirements to contract with a government entity?

Yes. When participating in a tender or submitting a bid for entering into a public contract, directors, officers, sole shareholders or majority shareholders and even certain employees have to provide personal information, such as name, date and place of birth of themselves and of persons of legal age living in the same household, for the purpose of allowing anti-organised crime infiltration background checks. Furthermore, the same director, officers, employees, sole or majority shareholders have to file declarations attesting that they have not been convicted of crimes such as bribery, fraud, money laundering or terrorism. Finally, if contracts entail handling of classified information or items, security clearances need to be obtained through a process that requires disclosing personal information and provided to the contracting authority.

Licensing requirements

What registration or licensing requirements exist to operate in the defence and security sector in the jurisdiction?

To hold, manufacture, store, maintain, sell military items and technology in Italy, a licence issued by a provincial government office is required. Importing and exporting military items requires that an economic operator is registered in the national register of undertakings operating in the defence sector and that export licences are obtained prior to any import, export or intra-EU transfer transaction. Harsh criminal penalties, including incarceration, can be incurred in the case of infringement.

Environmental legislation

What environmental statutes or regulations must contractors comply with?

The Italian environmental code (Legislative Decree 3 April 2006, No. 152) sets forth emissions limits, licensing requirements, and rules on waste disposal that apply to any works, production or manufacturing process. Procurement contracts and tender selection rules can incorporate environmental purposes and require economic operators to meet environmental minimal criteria set out by ministerial decrees.

Must companies meet environmental targets? What are these initiatives and what agency determines compliance?

There are no special environmental targets set out by defence and security procurement rules. As stated above, environmental targets and criteria can be part of the procurement process. Furthermore, broader environmental targets may derive from general policies (eg, greenhouse gas reduction, renewable energy production increase) or by specific provisions of environmental authorisations, licences and management systems applying to the specific operations of an economic operator involved in the performance of defence and security procurement contracts.

Do ‘green’ solutions have an advantage in procurements?

Recent legislation on minimal environmental criteria in public procurement contracts allow contracting authorities to award premium points to bids containing environmental-friendly solutions with respect to production of goods and services and life cycle management. Minimal environmental criteria are set out in PPC enactment legislation and updated by the Ministry of Environment with reference to activity and product categories. Only contract-specific green solutions may grant advantages in the procurement process.

Updates & Trends

Key developments of the past year

What were the key cases, decisions, judgments and policy and legislative developments of the past year

Key developments of the past year 41 What were the key cases, decisions, judgments and policy and legislative developments of the past year?

New public procurement legislation has been under scrutiny since its entry into force in 2016 for not having brought about the simplification and streamlining of procurement processes that was expected. The attempt to confer wide, ‘soft’ regulatory powers to the ANAC has created a lot of new guidelines and regulations that have nevertheless failed to yield significant change. A new general enactment regulation, aimed at replacing ANAC guidelines is now in the process of being drafted, along with a number of amendments to the PPC.