Wednesday

29th Jun 2022

EU defence contracts to become more transparent

A code of conduct coming into force on Wednesday (1 July) in 25 EU member states and Norway is to bring more transparency in defence procurement contracts. But experts question its effectiveness as long as it is a non-binding agreement.

To be implemented by the European Defence Agency (EDA), the EU's intergovernmental co-operation body on military procurements, the code will set standards for side-deals made by national governments when they sign defence contracts.

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  • Soldiers in Afghanistan: the European Defence Agency wants to see fewer side-deals attached to military contracts (Photo: army.mil)

In a classic example of a so-called "offset" deal, when Hungary bought 14 fighter jets from Swedish firm Saab for around €600 million, it asked for other Swedish investments worth 110 percent of the contract value. In one of the offsets, Swedish firm Electrolux built a new €65 million fridge factory in the country.

Offset distortions are normally illegal under EU single market law. But defence contracts enjoy a "national security" exemption, even if they concern materials such as soldier's boots.

"We are aware that offsets are a market distortion - in a real European defence market, offsets should not exist," EDA chief Alexander Weis told journalists at a briefing on Tuesday.

The new code will not do away with offsets altogether, but aims to "mitigate [their] adverse impact on the market" by channeling the side-investments into research and technology projects in the defence industry and by capping offsets to 100 percent of the value of the contract.

Participating countries will have until October 2010 to adapt their national legislation to this end.

Some countries, such as Austria, ask for offsets of as much as 300 percent of the contract value, Nick Witney, the former head of the EDA and currently an analyst at the London-based European Council on Foreign Relations, told EUobserver.

"In that sort of transaction the defence equipment you're buying becomes almost unimportant. So people are going around at the moment in Europe, buying the wrong equipment, for the wrong reasons, simply because someone is offering to build a factory in that country or buy 100,000 pairs of shoes," he said.

Since the code is non-binding, monitoring and implementation will depend on the goodwill of the 26 states,

"It's a first step in the right direction, but still very weak, as it is voluntary and doesn't ask too much from member states," Giovanni Gasparini, a defence expert with the Rome-based Institute for Foreign Affairs, said.

He added that the problem with non-mandatory codes is that they "could go on forever" without actually getting rid of offsets, since there is "no phase-out deadline" in place.

Clara Marina O'Donnell from the Centre for European Reform, a British think-tank, also noted the "wide gap between what EU rules say and what member-states do in the defence sector."

"Much will depend on how far member-states choose to play the game – particularly for the code of conduct on offsets," she wrote in a policy brief.

Two EU states are not taking part in the effort at all – Denmark (which has opted out of EU's security and defence policies) and Romania, which is an EDA member but declined to sign up to the code due to internal political battles in 2008.

Industry welcome

The Brussels-based Aerospace and Defence Industries Association of Europe (ASD) has said in a statement that it "welcomes the effort undertaken by EU member states ...to bring more transparency to offset practices linked to their national defence procurements."

"However, ASD would like to underline that presently it is the general lack of coordinated investments in defence technology more than the practice of offsets that endangers the future of the European defence technological and industrial base," it added.

Barney O'Kelly, a spokesman for the British defence and aerospace company BAE Systems, said that introducing a 100 percent cap on offsets "made perfect sense" because it brought more consistency in the various rules throughout the EU.

"We welcome anything that will increase transparency in the industrial participation," he explained.

Mr O'Kelly added that governments currently have very different requirements, depending on their economic priorities,. In some countries BAE Systems is required to participate in socio-economic programmes, such as the construction of schools.

"Obviously it is not the company itself doing the construction work, we would use our contacts in various industries and sectors," he said.

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